Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires that we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures. These estimates and assumptions are based
on historical and other factors believed to be reasonable under the
circumstances. We evaluate these estimates and assumptions on an ongoing basis
and may retain outside consultants to assist in our evaluation. Actual results
may differ from these estimates.
We have chosen accounting policies that we believe are appropriate to accurately
and fairly report the Company's operating results and financial position, and we
apply those accounting policies in a consistent manner. The significant
accounting policies are summarized in Note A to the consolidated financial
statements.
We believe the following accounting policies involve the most
significant management judgments and estimates used in preparation of our
consolidated financial statements:
- - Restructuring charges - We have provided restructuring charges as we
have reduced our manufacturing, marketing and administrative cost
structure and exited underperforming businesses. Principal costs relate
to workforce reduction and consolidation and elimination of facilities
as we continue to move more production to offshore locations. Severance
and related charges are accrued based on an estimate of amounts that
will be paid to affected employees. Asset impairment charges related to
the consolidation or closure of manufacturing or distribution
facilities are based on an estimate of expected sales prices for the
real estate and equipment. Plans to exit facilities may result in
charges for lease termination and losses anticipated from sublease
agreements, net of estimated future sublease income. Losses may also
result from termination of existing contracts.
We reassess the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to
differ from original estimates, adjustments are recorded in the period of
change. Restructuring charges, and adjustments of those charges, are
summarized in Note O to the consolidated financial statements.
- - Pension obligations - The Company sponsors defined benefit pension plans as
a key retirement benefit for most domestic employees. Since pension
obligations will ultimately be settled far in the future, determination of
annual pension expense is subject to assumptions and estimation. The
principal assumptions are summarized in Note K. We review these assumptions
annually and modify them based on current rates and trends. Actual results
may vary from the actuarial assumptions used.
One of the critical assumptions used in the actuarial model is the
discount rate. The rate we use is based on market interest rates for high
quality corporate debt instruments at our annual September 30th valuation
date. The discount rate is used to estimate the present value of our future
benefit obligations at the valuation date. A lower discount rate in 2002
resulted in a higher present value of benefit obligations at the end of
2002 and in a higher pension expense for 2003. Based on current market
rates and all other factors being equal, a .25% change in the discount rate
would result in a $6 million change in the following year's pension
expense.
Another critical assumption is the expected long-term rate of return on
the plan's investment assets. This rate is determined in consultation with
our independent actuary and is based on several factors, including the
plan's mix of investment assets (currently 70% equities and 30% fixed
income), historic market returns on those assets and current market
conditions. We have used an 8.75% return assumption in each of the last
three years, and we plan to use this rate for 2003 because our actual
compounded annual return over the last 15 years has exceeded that rate. A
1.0% change in the estimated rate of return, all other factors being equal,
would result in a change in pension expense of approximately $5 million per
year.
Differences between actual results and actuarial assumptions are
accumulated and amortized over future periods. During the last two years,
actual results have differed significantly from actuarial assumptions, as
our pension plan assets have declined as a result of the overall decline in
the securities markets and our pension plan liabilities have increased as a
result of the decline in the discount rate. Accordingly, at our 2002
valuation date, we had $265.4 million of accumulated net unrecognized
losses. Pension expense is expected to increase by $34 million in 2003
primarily due to amortization of these deferred losses, as well as the
impact of reduced investment assets and a lower discount rate at our 2002
valuation date.
Our estimated accumulated benefit obligations exceeded the fair value
of plan assets at our most recent valuation date. Accordingly, we have
recorded a minimum pension liability of $177.6 million. The amount of the
liability, along with the related charge to Common Shareholders' Equity,
could change significantly in future years depending on market fluctuations
affecting actual earnings of the pension plan assets, interest rates and
the level of Company contributions to the plan. To improve the funded
status of the plan, the Company made a $75.0 million contribution to the
plan in February 2003.
- Long-lived assets - Our depreciation policies reflect judgments on
the estimated economic lives of our property, plant and equipment assets.
We review our property, plant and equipment for possible impairment
whenever events or circumstances indicate that the carrying amount of an
asset may not be fully recoverable. We measure recoverability of the
carrying value of these assets by comparison with undiscounted cash flows
expected to be generated by those assets. These evaluations have not
resulted in any significant impairment adjustments to property, plant and
equipment during the past three years, except for those made in conjunction
with restructuring actions.
In connection with our adoption of FASB Statement No. 142, Goodwill and
Other Intangible Assets, as of the beginning of 2002, we performed a review
of our goodwill for possible impairment. The review required that we
estimate the fair value of our business units having goodwill. Fair value
was based on the present value of expected future cash flows, which
required judgment and estimation about future market conditions, future
sales and profitability, and a discount rate commensurate with the risk
inherent in each business unit. We engaged an independent valuation firm to
review the fair value of the Company's business units. The write-down
resulting from this review was recorded as the cumulative effect of a
change in accounting policy as of the beginning of 2002.
This Statement also requires us to reevaluate goodwill in all business
units at least annually, or more frequently if there is an indication of
possible impairment. We performed this annual review during the fourth
quarter of 2002. For most of the Company's remaining goodwill, the
indicated fair value of the goodwill in the respective business units
substantially exceeded the carrying amount of that goodwill, and no further
evaluation was necessary in 2002. For one smaller business unit, we
determined that $2.3 million of goodwill was impaired and, accordingly
recorded an impairment charge in the fourth quarter of 2002.
- Inventories - Our inventories are stated at the lower of cost or market
value. We review all of our inventory each quarter on the basis of
individual style-size-color stockkeeping units (SKUs) to identify excess or
slow moving products, discontinued and to-be-discontinued product lines,
and off-quality merchandise. This review covers inventory on hand, as well
as current production or purchase commitments. For those units in inventory
that are so identified, we estimate their market value based on current
realization trends. The evaluation, performed using a systematic and
consistent methodology, requires forecasts of future demand, market
conditions and selling prices. If the forecasted market value is less than
cost, we provide an allowance to reflect the lower value of that inventory.
This methodology recognizes forecasted inventory losses at the time such
losses are evident rather than at the time goods are actually sold.
- - Income taxes - The Company's income tax returns are regularly examined by
federal, state and foreign tax authorities. These audits may result in
proposed adjustments. The Internal Revenue Service has proposed various
income tax adjustments for the Company's 1995 to 1997 tax years. Our
outside advisers and we believe that our tax positions comply with
applicable tax law, and the Company is defending its positions vigorously.
We have accrued amounts that reflect our best estimate of the probable
outcome related to these matters, as well as our other tax positions, and
do not anticipate any material impact on earnings from their ultimate
resolution.
We have recorded deferred income tax assets related to operating loss
carryforwards. We have recorded valuation allowances to reduce the amount
of certain of those deferred tax assets, based on an evaluation of the
income tax benefits expected to be ultimately realized. An adjustment to
income tax expense would be required in a future period if we determine
that the amount of deferred tax assets to be realized differs from the net
recorded amount.
We have not provided United States income taxes on a portion of our
foreign subsidiaries' undistributed earnings because we intend to invest
those earnings indefinitely. If we were to decide to remit those earnings
to the United States in a future period, our provision for income taxes
could increase in that period.
DISCONTINUED OPERATIONS
During the fourth quarter of 2001, we decided to exit two business units having
total sales of approximately $300 million. Liquidation of the Private Label
knitwear business unit began in
late 2001 and was substantially completed during the third quarter of 2002.
Trademarks and certain other operating assets of the Jantzen(R) swimwear
business unit were sold to Perry Ellis International, Inc. in March 2002 for
$24.0 million, with the Company retaining inventories, other working capital and
real estate. Liquidation of the remaining Jantzen working capital was
substantially completed during the third quarter of 2002. Because the Company
has exited those businesses, the operating results, assets, liabilities and cash
flows of the businesses are separately presented in 2002 as discontinued
operations in the consolidated financial statements, and amounts for prior
periods have been similarly reclassified.
During 2002, these businesses contributed net income of $8.3 million
($.07 per share, with all per share amounts presented on a diluted basis),
including $9.3 million of pretax gains on disposition of real estate and a $1.4
million gain on the sale of the Jantzen business. Operating results during 2002
for the two discontinued businesses were better than expected due to favorable
consumer response to the 2002 Jantzen(R) swimwear line and expense control
during the liquidation period. During 2001, these businesses generated a net
loss of $79.4 million ($.69 per share), which included a charge of $111.4
million ($.70 per share) for the estimated loss on disposition. During 2000,
these businesses contributed net income of $1.2 million ($.01 per share).
See Note B to the consolidated financial statements for further details
about the discontinued operations. Unless otherwise stated, the remaining
sections of this discussion and analysis of operations and financial condition
relate to continuing operations.
ANALYSIS OF RESULTS OF CONTINUING OPERATIONS
RESTRUCTURING CHARGES
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. Cost
reduction initiatives related specifically to closure of manufacturing plants,
consolidation of distribution centers and reduction of administrative functions.
(As discussed in the preceding section, the business exits are now being
accounted for as discontinued operations.) These actions were designed to get
the Company on track to achieve our long-term targets of a 14% operating margin
and a 17% return on capital.
Under the Strategic Repositioning Program, the Company recorded pretax
charges of $125.4 million in the fourth quarter of 2001 and an additional $46.0
million during 2002.
Partially offsetting these restructuring costs, the Company recorded adjustments
totaling $14.8 million during 2002 to reduce previously accrued restructuring
liabilities due to changes in circumstances arising during 2002. These
adjustments resulted from reduced severance and benefits (as employees at
several plants worked longer than originally planned during the 60 day notice
periods required by law), favorable lease and contract settlements, and other
unforeseen developments. Also during 2002, the Company recognized $4.9 million
of gains on disposal of plants closed under the restructuring actions. No
write-downs in asset values had been recognized for these plants. Restructuring
charges, net of reversals and gains on sale of assets, totaled $26.3 million
($.14 per share) during 2002. Also affecting the comparisons, earnings in 2001
include $10.9 million relating to reversal of 2000 restructuring costs
(discussed below), primarily resulting from favorable settlement of a contract
during 2001.
Total cash expenses related to the 2001 and 2002 charges will
approximate $90 million. We expect that asset sales, plus proceeds from
liquidation of the two businesses accounted for as discontinued operations, will
generate more than $80 million of cash proceeds, leaving a net cash outflow of
less than $10 million. This net amount represents a substantial improvement from
the $40 million net cash outflow projected a year ago because of better than
expected performance of the discontinued businesses during the shutdown periods
and higher proceeds received on asset sales. Future payments required in
connection with these restructuring charges are not expected to have a
significant effect on the Company's liquidity.
As part of the Strategic Repositioning Program, we have closed 30
higher cost North American manufacturing plants to reduce overall manufacturing
capacity and to continue our move toward lower cost, more flexible global
sourcing. Finally, we have consolidated certain distribution centers and reduced
our administrative functions and staffing in the United States, Europe and Latin
America. We originally stated that the Strategic Repositioning Program would
result in $100 million of cost reduction in 2002 and an additional $30 million
of savings to be achieved in 2003. We believe that these actions resulted in
cost reductions exceeding $100 million in 2002, and we now anticipate more than
$30 million of additional savings to be achieved in 2003.
In 2000, the Company recorded total restructuring charges of $116.6
million ($.63 per share). This included a loss in transferring our Wrangler
business in Japan to a licensee, costs of exiting certain business units and
product lines determined to have limited potential, costs of closing higher cost
manufacturing facilities and costs of closing or consolidating distribution
centers and administrative offices and functions.
See Note O to the consolidated financial statements for more
information on the 2001/2002 and the 2000 restructuring charges.
CONSOLIDATED STATEMENTS OF INCOME
Income from continuing operations before the cumulative effect of a change in
accounting policy for goodwill was $364.4 million ($3.24 per share) for 2002,
compared with $217.3 million ($1.89 per share) for 2001. Income in 2002
benefited by $33.2 million ($.30 per share) because goodwill amortization is no
longer required under the new accounting policy. Income from continuing
operations increased 68%, while the corresponding earnings per share increased
71%, reflecting the benefit of the Company's share repurchase program. Our
return on capital, a key measure of our financial performance, jumped to 16.9%
in 2002, effectively reaching our long-term target of 17%. For 2000, income from
continuing operations was $266.0 million ($2.26 per share). In translating
foreign currencies into the U.S. dollar, the weaker U.S. dollar had a $.04
favorable impact on earnings per share in 2002 compared with the prior year,
while a stronger U.S. dollar had a $.02 negative impact in 2001 compared with
the prior year. The acquisitions of The North Face, Eastpak and H.I.S businesses
in 2000 had a $.09 per share positive impact on 2001 results relative to 2000.
The operating results of continuing operations include the costs of the
2001/2002 Strategic Repositioning Program and of the 2000 restructuring actions
discussed above. These operating results also include the reversal of certain
restructuring liabilities no longer required due to changes in circumstances and
include gains on sale of closed facilities. In our internal evaluation of our
operating results, including information presented to our Board of Directors, we
present the restructuring charges incurred, along with adjustments and gains
directly related to those restructuring actions, separately from the operating
results of our individual business units. Operating results presented exclusive
of net restructuring charges is a measurement of financial performance that is
not intended as an alternative to generally accepted accounting principles.
However, we believe that exclusion of these net restructuring costs provides
useful information for comparing historical results for the periods presented
and a basis for comparison with future periods.
Excluding the effects of these net restructuring costs, income from
continuing operations was $380.9 million ($3.38 per share) in 2002, compared
with $298.6 million ($2.60 per share) in 2001 and $339.3 million ($2.89 per
share) in 2000. The items related to these restructuring actions, and the income
statement lines affected by their inclusion, are as follows:
2002 2001 2000
------------------------- ----------------------- -----------------------
In thousands, except per PRETAX PRETAX PRETAX
share amounts AMOUNT EPS AMOUNT EPS AMOUNT EPS
--------- --------- ----------- ------- ---------- -------
Earnings per share from
continuing operations,
excluding restructuring
and related items $ 3.38 $ 2.60 $ 2.89
Restructuring and related items:
Restructuring charges $ (46,012) (0.25) $ (125,365) (0.77) $ (116,565) (0.63)
Reversal of prior years'
restructuring charges 14,787 0.08 10,947 0.06 -
Gains on sale of closed
facilities 4,883 0.03 - -
--------- ------- -------
Earnings per share from
continuing operations,
as reported $ 3.24 $ 1.89 $ 2.26
========= ======= =======
Restructuring charges:
Cost of products sold $ (32,089) $ (72,694) $ (53,645)
Marketing, administrative
and general expenses (13,923) (48,708) (36,089)
Other operating
expense, net - (3,963) (26,831)
--------- ----------- ----------
$ (46,012) $ (125,365) $ (116,565)
========= =========== ==========
Reversal of prior years'
restructuring charges:
Cost of products sold $ 9,358 $ 8,951
Marketing, administrative
and general expenses 5,429 1,996
--------- -----------
$ 14,787 $ 10,947
========= ===========
Gains on sale of closed
facilities:
Cost of products sold $ 4,883
=========
Consolidated net sales in 2002 declined 3% to $5,083 million.
Approximately two-thirds of the sales decline was due to a decrease in unit
sales and one-third was due to price reductions and changes in product mix. Net
sales in 2002 benefited from the 53rd week in the fiscal year, compared with 52
weeks in the prior two years. Net sales in 2001 declined 3% from 2000. Affecting
the 2001 comparison was the loss of $78 million of sales from businesses exited
at the end of 2000 and an increase of $218 million resulting from a full year of
sales in 2001 at The North Face, Eastpak and H.I.S businesses acquired during
2000. Accordingly, excluding the impact of businesses exited and acquired, unit
sales and dollars in 2001 declined by 6%. The weaker U.S. dollar increased 2002
sales comparisons by $7 million relative to the prior year, whereas a stronger
U.S. dollar reduced 2001 sales comparisons by $31 million relative to 2000.
Gross margins were 36.0% of sales in 2002, compared with 32.9% in 2001
and 33.9% in 2000. Excluding net restructuring charges included in cost of
products sold, as detailed in the above table, gross margins were 36.3% in 2002,
34.1% in 2001 and 34.9% in 2000. Gross margins in 2002 and to a lesser extent in
2001 benefited from the continuing shift to lower cost sourcing, lower raw
material costs and increased operating efficiencies. Offsetting these
improvements in 2002 were costs totaling .3% of sales for higher incentive
compensation earned due to the Company's improved financial performance.
Offsetting improvements in 2001 were $44 million of manufacturing downtime costs
(.8% of sales), primarily in domestic jeanswear, as well as normal wage and
benefit inflation in both years.
Over the last three years, the amount of domestic sales derived from
products manufactured in lower cost locations outside the United States has
increased each year to where 85% was obtained from international locations
during 2002. Once the Strategic Repositioning Program restructuring actions have
been completed by early-2003, approximately 5 - 10% of our United States sales
will be obtained from products manufactured in our domestic plants, 45% will be
manufactured in our facilities in Mexico and the Caribbean Basin and 45%
manufactured by contractors primarily in Mexico, the Caribbean Basin or Asia.
Similarly, to support our sales in foreign markets, in prior years we had
significantly shifted our sourcing from higher cost owned plants located
primarily in Western Europe to lower cost owned and contracted production in
locations outside of Western Europe. Today, approximately 80% of our sales in
Western Europe are obtained from products sourced from owned plants or
contractors located outside of Western Europe.
Marketing, administrative and general expenses were 24.2% of sales in
2002, compared with 23.9% in 2001 and 23.7% in 2000. Excluding restructuring
charges, as detailed in the
above table, expenses were 24.0% of sales in 2002, 23.0% in 2001 and 23.1% in
2000. Benefits of the Strategic Repositioning Program are being realized through
lower distribution and administrative expenses. Advertising spending increased
by $24.1 million to 4.8% of sales in 2002 from 4.2% in 2001, with the increase
focused on the Company's Lee(R), Wrangler(R), Vanity Fair(R), Vassarette(R) and
The North Face(R) brands. Expenses as a percent of sales also increased by .5%
in 2002 due to higher incentive compensation earned due to the Company's
improved financial performance.
Other operating income and expense consists primarily of net royalty
income earned for use of the Company's trademarks for the sale of products by
our licensees. Included in 2002 is a charge of $2.3 million for write-off of
goodwill; see Note F. Included in 2001 and 2000 is $33.9 million of amortization
of goodwill, which is no longer required under FASB Statement No. 142, as
discussed in Note A to the consolidated financial statements. This caption also
included $4.0 million in 2001 for the write-off of intangible assets of a
business exited and $26.8 million in 2000 for the loss on disposal, primarily
the write-off of intangible assets, of the Wrangler business in Japan.
Net interest expense decreased in 2002 due to lower average borrowings.
Net interest expense increased in 2001 due to higher average borrowings related
to the 2000 business acquisitions and, to a lesser extent, higher overall
interest rates on the Company's debt.
The effective income tax rate for continuing operations was 35.1% in
2002, compared with 41.2% in 2001 and 37.8% in 2000. The effective rate declined
in 2002 relative to the prior two years due to elimination of nondeductible
goodwill amortization expense, lower foreign operating losses with no related
tax benefit and a lower effective tax rate on foreign earnings. The effective
rate benefited in 2000 by higher United States tax credits recognized in that
year.
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 ($4.69 per share). See
Note A to the consolidated financial statements for additional details.
Including the effect of this accounting change and the discontinued operations
discussed in the previous section, the Company reported a net loss of $154.5
million ($1.38 per share) in 2002, compared with net income of $137.8 million
($1.19 per share) in 2001 and $260.3 million ($2.21 per share) in 2000.
INFORMATION BY BUSINESS SEGMENT
The Consumer Apparel segment consists of our jeanswear, women's intimate apparel
and children's apparel businesses. Overall, segment sales declined by 3% in 2002
and by 4% in 2001. Domestic jeanswear sales declined 4% in 2002 and 5% in 2001
reflecting selected price reductions, changes in product mix, softness in
overall retail apparel sales and pressure from lower priced private label goods,
particularly in the mass channel. In European jeanswear, sales increased 8% in
2002, with one-half of the increase due to favorable effects of foreign currency
translation. Sales in Europe increased 15% in 2001 due to the full year of sales
of H.I.S acquired in late 2000 and growth in the Lee, Wrangler and mass market
businesses. In international markets outside of Europe, jeanswear sales
decreased in 2002 due to the devaluation of the currency in Argentina and
recessionary economic conditions in Latin America and decreased in 2001 due to
the exit of the Wrangler business in Japan and recessionary conditions in Latin
America. Domestic intimate apparel sales declined 4% in 2002 and 1% in 2001, as
increases in department store brands were more than offset by a lack of new
private label programs and by a reduction in Vassarette(R) brand sales in the
mass channel. Sales declined in childrenswear in both 2002 and 2001 due to
competitive factors in the department store channel of distribution. Excluding
net restructuring charges of $19.9 million in 2002, $69.4 million in 2001 and
$70.9 million in 2000, segment profit advanced 8% in 2002, following a 17%
decline in 2001. The profit increase in 2002 was across all business units, with
the exception of children's playwear, and was due largely to cost reduction
benefits realized from the Strategic Repositioning Program. The profit decline
in 2001 was due to lower sales in domestic jeanswear and playwear, to expenses
related to downtime in domestic jeanswear manufacturing facilities to maintain
inventories in line with demand and to operating losses incurred in Latin
America.
To strengthen its business portfolio, the Company has divested certain
underperforming and nonstrategic businesses during the last two years.
Considering the factors impacting the children's playwear business, the Company
has decided to explore strategic options for its childrenswear business unit,
including its possible sale. This business unit had 2002 sales of $175 million
of Healthtex(R) and licensed Nike(R) branded products. Any effect on the
Company's financial position or operating results as a result of actions taken
in conjunction with this process would not be significant.
The Occupational Apparel segment includes the Company's industrial,
career and safety apparel businesses. Sales decreased 8% in 2002 and 19% in 2001
due to (1) workforce reductions in the United States manufacturing sector that
has impacted overall workwear uniform sales and (2) the ongoing consolidation of
our industrial laundry customers and those customers
placing greater reliance on their in-house manufacturing. During 2002, new
uniform programs with major corporate and governmental customers helped to
offset declines in the basic workwear business. Excluding net restructuring
costs of $4.9 million in 2002, $23.2 million in 2001 and $34.6 million in 2000,
segment profit advanced strongly in 2002 from the level of 2001 and 2000 due to
cost reduction benefits resulting from the Strategic Repositioning Program. The
profit increase resulted from higher margins earned on reduced sales volume and,
in 2001, elimination of operating losses on product lines discontinued in the
prior year.
The Outdoor Apparel and Equipment segment consists of the Company's
outdoor-related businesses represented by The North Face(R) branded products
(outerwear and equipment) and the JanSport(R) and Eastpak(R) brands (backpacks
and daypacks). Sales increased 3% in 2002 and increased 34% in 2001, as that was
the first full year of operating results of The North Face and Eastpak
businesses acquired in May 2000. During 2002, an increase of 22% in first
quality sales of The North Face(R) branded products and an 11% increase in
international Outdoor sales were partially offset by lower domestic sales of
JanSport(R) and Eastpak(R) brand daypacks. Segment profit, excluding
restructuring charges of $1.3 million in 2002, $3.7 million in 2001 and $1.0
million in 2000, increased 19% in 2002 with increased profitability at The North
Face in both the United States and Europe. Profit increased significantly in
2001 due to increased margins earned at the acquired businesses and at JanSport.
The All Other segment includes the Company's licensed sportswear and
distributor knitwear businesses. Sales increased 11% and segment profit
increased 20% in 2002 over the level of the prior two years. This was primarily
due to sales of licensed apparel products under an agreement with the National
Football League, offset in part by declines in the distributor knitwear
business.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEETS
Accounts receivable is flat in 2002 on slightly higher days' sales outstanding.
The allowance for bad debts declined in 2002 from the use of allowances that
were provided to cover the expected write-down of the balance owed by one of our
five largest customers, Kmart Corporation, which filed for bankruptcy in early
2002.
Inventories have declined by over $200 million over the last two years
through more efficient sales forecasting and production planning techniques and
cautious planning in the
uncertain retail environment. First quality inventories represent a higher
portion of total inventories at the end of 2002 compared with 2001. We expect
that the level of inventories going forward could increase proportionate to
sales.
Property, plant and equipment declined during 2002 as a result of the
write-down of assets related to the 2002 restructuring actions and to
depreciation expense exceeding capital spending during the year.
The decrease in goodwill during 2002 resulted from the adoption of FASB
Statement No. 142 at the beginning of 2002. See Notes A and F to the
consolidated financial statements.
Accounts payable increased in 2002 as inventory purchases were higher
near the end of 2002 compared with the prior year. The increase in other accrued
liabilities in 2002 results from the current portion of the minimum pension
liability (discussed in the following paragraph) and higher accruals for
incentive compensation, offset in part by a reduction in accrued restructuring
costs.
In the Company's defined benefit pension plans, accumulated benefit
liabilities exceeded the fair value of plan assets by $220.3 million at our
plans' latest September 30 valuation date. Accordingly, the Company recorded a
minimum pension liability of $177.6 million and a related charge, net of income
taxes, to Accumulated Other Comprehensive Income at the end of 2002. Of the
total liability, $75.0 million was recorded as a current liability based on the
Company's funding plan for 2003 and $102.6 million was recorded as a long-term
liability. This compares with a minimum pension liability of $10.0 million at
the end of 2001.
Long-term debt was reduced by over $300 million during 2002 by the
early retirement of notes due in 2003, 2004 and 2022. In addition, short-term
borrowings, all in international businesses, were reduced by $17.0 million
during the year.
LIQUIDITY AND CASH FLOWS
In managing its capital structure, management's goal is to maintain a debt to
capital ratio of less than 40%, providing flexibility to pursue investment
opportunities that may become available. Our debt to capital ratio remains below
these guidelines: 28.6% at the end of 2002 and 31.7% at the end of 2001. Net of
cash, our debt to capital ratio at the end of 2002 was 9.2%.
Working capital was $1,199.7 million and the current ratio was 2.4 to 1
at the end of
2002, compared with $1,217.6 million and 2.5 to 1 at the end of 2001.
The primary source of liquidity is the Company's strong cash flow
provided by continuing operations, which was $645.6 million in 2002, $600.6
million in 2001 and $434.4 million in 2000. Cash flow from continuing operations
was at a higher than normal level in the last two years due to inventory and
accounts receivable reductions in both years and, in 2002, the higher level of
income (exclusive of the accounting change) and lower income tax payments in
that year. In addition, cash flow from discontinued operations totaled $69.9
million in 2002 and $81.9 million in 2001 from liquidation of working capital
and, in 2002, from sale of the Jantzen business and other assets.
VF maintains a $750.0 million unsecured committed bank facility that
expires in July 2004. This bank facility supports a $750.0 million commercial
paper program. Any issuance of commercial paper would reduce the amount
available under the bank facility. At the end of 2002, there were no commercial
paper or bank borrowings against this facility. Further, under a Registration
Statement filed in 1994 with the Securities and Exchange Commission, the Company
has the ability to offer, on a delayed or continuous basis, up to $300.0 million
of additional debt, equity or other securities as market opportunities present
themselves.
In February 2003, Standard & Poors confirmed its 'A minus' long-term
corporate credit and senior unsecured debt ratings for VF, as well as its 'A-2'
short-term credit and commercial paper ratings. Their ratings outlook is
"stable." In June 2002, Moody's Investors Service confirmed its ratings of 'A2'
for VF's senior unsecured debt and 'Prime-1' for commercial paper based on the
value of VF's brands, its strong market share in the jeans business and the
strength of its systems which allow the Company to effectively manage inventory
risks. While Moody's confirmed the Company's ratings, they did revise their
rating outlook from "stable" to "negative" based on declines in sales volume at
the domestic jeanswear business and reductions in the level of operating
profitability. Based on current conditions, we believe that a negative rating
change by Moody's, if one were to occur, from 'A2' to 'A3" for senior debt and
from 'Prime-1' to 'Prime-2' for commercial paper would not have a material
impact on the Company's financial results or on the ability to issue commercial
paper. Existing debt agreements do not contain acceleration of maturity clauses
based on changes in credit ratings.
Capital expenditures were $64.5 million in 2002, compared with $78.3
million and $118.6 million in 2001 and 2000, respectively. Capital expenditures
in 2002 generally relate to maintenance spending in our worldwide manufacturing
and other facilities. We expect that
capital spending could reach $100 million in 2003, with the increase over the
last two years due to completion of spending on lower cost jeanswear capacity in
Mexico and a distribution center in Europe. Capital spending in 2003 will be
funded by cash flow from operations.
As discussed in the previous section, accumulated benefit obligations
in the Company's defined benefit pension plans exceeded the fair value of plan
assets by $220.3 million at the plans' latest valuation date. We believe that
retirement benefits are important for our associates, and accordingly we are
committed to maintaining a well-funded pension plan. Although the Company will
not be required by applicable law to make any funding contribution to the
qualified pension plan trust in 2003, we made a $75.0 million cash contribution
to the plan in February 2003. This contribution was significantly higher than
our average annual contribution of $20 million over the last two years and
addresses a significant portion of the underfunded status. Based on current
circumstances, this $75.0 million contribution should result in a reduction of
the same amount in the minimum pension liability and the charge to Other
Comprehensive Income at the end of 2003. We will continue to monitor the funded
status of the plan and evaluate future funding levels. The Company has adequate
liquidity to meet future funding requirements.
By early 2002, all of the Series B ESOP Convertible Preferred Stock had
been allocated to participant accounts in the 401 (k) savings plan. Accordingly,
Company matching contributions to the savings plan are now made in cash instead
of Preferred Stock. This change will not have a significant effect on the
Company's liquidity.
During 2002, the Company purchased 3.0 million shares of its Common
Stock in open market transactions at a cost of $124.6 million and in 2001
purchased 4.0 million shares at a cost of $146.6 million. Under its current
authorization from the Board of Directors, the Company may purchase up to an
additional 7.0 million shares. We intend to purchase approximately one million
shares per quarter during 2003, although this rate may be adjusted depending on
acquisition opportunities that may arise.
Cash dividends totaled $.97 per common share in 2002, compared with
$.93 in 2001 and $.89 in 2000. The dividend payout rate was 30% in 2002 based on
income from continuing operations, compared with payout rates of 49% in 2001 and
39% in 2000. The current annual dividend rate for 2003 is $1.00 per share. The
Company has paid dividends on its Common Stock annually since 1941, and we
intend to maintain a long-term payout rate of 30%.
Management believes that the Company's cash balances and funds provided
by operations, as well as unused credit lines, additional borrowing capacity and
access to equity markets, taken as a whole, provide liquidity to meet all of its
obligations when due and flexibility to meet investment opportunities that may
arise. Following is a summary of the Company's fixed obligations at the end of
2002 that will require the use of funds:
Payments Due by Period
-------------------------------------------------------------------------------
In thousands Total 2003 2004-2005 2006-2007 Thereafter
--------- -------- --------- --------- ----------
Long-term debt $ 603,065 $ 778 $ 400,597 $ 667 $ 201,023
Operating leases 272,970 60,950 89,961 52,267 69,792
Minimum royalty payments 74,391 21,585 30,104 22,702 -
--------- -------- --------- --------- ----------
Total $ 950,426 $ 83,313 $ 520,662 $ 75,636 $ 270,815
========= ======== ========= ========= ==========
We have other financial commitments at the end of 2002 that may require the use
of funds under certain circumstances:
- - Shares of the Company's Series B Convertible Preferred Stock have been
issued to participants as matching contributions under the Employee Stock
Ownership Plan. If requested by the trustee of the ESOP, the Company has an
obligation to redeem Preferred Stock held in participant accounts and to
pay each participant the value of their account. The amounts of these
redemptions vary based on the conversion value of the Preferred Stock.
Payments made for redemption of Preferred Stock have averaged $6.8 million
per year over the last three years.
- - The Company has entered into $81.3 million of surety bonds and standby
letters of credit representing contingent guarantees of performance under
self-insurance and other programs. These commitments would only be drawn
upon if the Company were to fail to meet its claims obligations.
OUTLOOK FOR 2003
- - We expect our sales to increase by 1% in 2003. More specifically, we expect
that sales in our international jeanswear, intimate apparel and outdoor
businesses will post mid-single digit increases. In our Imagewear
coalition, consisting of our occupational apparel, licensed sportswear and
distributor knitwear business units, we expect sales to be flat. Domestic
jeanswear sales are expected to decline overall by 3%, reflecting growth in
the mid-single
digit range for both our Lee and westerm specialty businesses, offset by a
decline of 9% in our mass channel business. The competitive challenges in
the mass channel include the announced entry of Levi Strauss & Co. in that
channel and the announced closing of additional stores by Kmart
Corporation, one of our largest customers currently operating under
bankruptcy protection.
- - Actions taken under the Strategic Repositioning Program should result in
more than $30 million of cost reduction over the level achieved during
2002.
- - We increased our marketing spending on our leading brands by 11% during
2002 and expect to continue spending at the 2002 level during 2003. Labor
and benefit costs will increase during 2003. Specifically, pension expense
is expected to increase by $34 million in 2003.
- - On an overall basis, operating margins for ongoing businesses should reach
13% of sales.
- - Net interest expense should decline $10 million from the 2002 level.
- - Earnings per share should advance 5 - 10% in 2003.
- - Considering the contribution of $75.0 million to our pension plan already
made in 2003, we expect cash flow from operations to approximate $400
million. This is down from the high level of the last two years and more in
line with historical levels.
- - For the first quarter of 2003, sales are expected to be up slightly, and
earnings per share are expected to be up approximately 10%.
RISK MANAGEMENT
The Company is exposed to a variety of market risks in the ordinary course of
business. We regularly assess these potential risks and manage the Company's
exposures to these risks through its operating and financing activities and,
when appropriate, by utilizing natural hedges and by creating offsetting
positions through the use of derivative financial instruments. We do not use
derivative financial instruments for trading or speculative purposes.
We limit the risk of interest rate fluctuations on net income and cash
flows by managing the Company's mix of fixed and variable interest rate debt. In
addition, although we did not do so during 2002, we may also use derivative
financial instruments to minimize our interest rate risk. Since our long-term
debt has fixed interest rates, our primary interest rate exposure relates to
changes in interest rates on short-term borrowings, which averaged $72 million
during 2002. However, any change in interest rates would also affect interest
income earned on the Company's cash equivalents on deposit. Based on average
amounts of short-term borrowings and of cash on deposit during 2002, the effect
of a hypothetical 1% change in interest rates on reported net income would not
be material.
The Company has foreign businesses that operate in functional
currencies other than the United States dollar (except in Turkey and Argentina,
where we use the United States dollar because of their high inflation
economies). Assets and liabilities in these foreign businesses are subject to
fluctuations in foreign currency exchange rates. Investments in these primarily
European and Latin American businesses are considered to be long-term
investments, and accordingly, foreign currency translation effects on those net
assets are included as a component of Accumulated Other Comprehensive Income in
Common Shareholders' Equity. We do not hedge these net investments and do not
hedge the translation of foreign currency operating results into the United
States dollar.
A growing percentage of the total product needs to support our domestic
and European businesses are manufactured in our plants in foreign countries or
by foreign contractors. We monitor net foreign currency market exposures and may
in the ordinary course of business enter into foreign currency forward exchange
contracts to hedge specific foreign currency transactions or anticipated cash
flows. 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. Our
practice during 2002 and 2001 was to hedge a portion of our significant net
foreign currency cash flows, by buying or selling United States dollar contracts
against various currencies, relating to cross-border inventory purchases and
production costs, product sales and intercompany royalty payments anticipated
for the following 12 months. Hedging was not significant during 2000.
If there were a hypothetical adverse change in foreign currency
exchange rates of 10% relative to the United States dollar, the expected effect
on the fair value of the hedging contracts outstanding at January 4, 2003 would
be approximately $14 million. Based on changes in the timing and amount of
foreign currency exchange rate movements, actual gains and losses could differ.
The Company has various nonqualified deferred compensation plans in
which liabilities accrued for the plans' participants are based on market values
of investment funds that are selected by participants. The risk of changes in
the market values of the participants' underlying investment selections is
hedged by the Company's investments in a portfolio of securities, including
variable life insurance contracts, that substantially mirror the investment
selections underlying the deferred compensation liabilities. These Company-owned
investment securities are held in irrevocable trusts. Increases and decreases in
deferred compensation liabilities are substantially offset by corresponding
increases and decreases in the market value of the
Company's investments, resulting in a negligible net exposure to the Company's
operating results and financial position.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, we may make oral or written statements, including statements
in this Annual 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 achieve the anticipated cost savings from the recent
restructuring initiatives; the availability of new acquisitions that increase
shareholder value and our ability to integrate new acquisitions successfully;
any outbreak of hostilities or additional terrorist actions; and the impact of
economic and political factors in the markets where the Company competes, such
as recession or changes in interest rates, currency exchange rates, price
levels, capital market valuations and other factors over which we have no
control.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
VF Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, cash flows and common
shareholders' equity present fairly, in all material respects, the financial
position of VF Corporation and its subsidiaries at January 4, 2003 and December
29, 2001, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended January 4, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note A to the consolidated financial statements, the Company
changed its accounting policy for goodwill amortization in 2002.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 6, 2003
VF CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 4 DECEMBER 29
In thousands, except share amounts 2003 2001
---------- -----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 496,367 $ 332,049
Accounts receivable, less allowances of $48,227 in 2002
and $60,449 in 2001 587,859 572,012
Inventories 830,518 866,565
Deferred income taxes 117,214 134,842
Other current assets 37,299 25,873
Current assets of discontinued operations 5,283 100,079
----------- -----------
Total current assets 2,074,540 2,031,420
PROPERTY, PLANT AND EQUIPMENT 566,546 642,337
GOODWILL 473,355 998,046
OTHER ASSETS 386,204 400,310
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS 2,506 30,903
----------- -----------
$ 3,503,151 $ 4,103,016
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 60,918 $ 77,900
Current portion of long-term debt 778 696
Accounts payable 298,456 240,292
Accrued liabilities 502,057 440,307
Current liabilities of discontinued operations 12,635 54,638
----------- -----------
Total current liabilities 874,844 813,833
LONG-TERM DEBT 602,287 904,035
OTHER LIABILITIES 331,270 228,501
REDEEMABLE PREFERRED STOCK 36,902 45,631
DEFERRED CONTRIBUTIONS TO EMPLOYEE STOCK OWNERSHIP PLAN - (1,780)
----------- -----------
36,902 43,851
COMMON SHAREHOLDERS' EQUITY
Common Stock, stated value $1; shares authorized, 300,000,000;
shares outstanding, 108,525,368 in 2002 and 109,998,190 in 2001 108,525 109,998
Additional paid-in capital 930,132 884,638
Accumulated other comprehensive income (loss) (214,141) (103,040)
Retained earnings 833,332 1,221,200
----------- -----------
Total common shareholders' equity 1,657,848 2,112,796
----------- -----------
$ 3,503,151 $ 4,103,016
=========== ===========
See notes to consolidated financial statements.
2
VF CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED
------------------------------------------
JANUARY 4 DECEMBER 29 DECEMBER 30
In thousands, except per share amounts 2003 2001 2000
----------- ----------- -----------
NET SALES $ 5,083,523 $ 5,220,417 $ 5,403,123
COSTS AND OPERATING EXPENSES
Cost of products sold 3,254,008 3,504,233 3,572,871
Marketing, administrative and general expenses 1,229,902 1,247,000 1,282,281
Other operating (income) expense, net (22,311) 14,757 42,413
----------- ----------- -----------
4,461,599 4,765,990 4,897,565
----------- ----------- -----------
OPERATING INCOME 621,924 454,427 505,558
OTHER INCOME (EXPENSE)
Interest income 7,397 6,807 7,669
Interest expense (71,325) (93,364) (88,511)
Miscellaneous, net 3,732 1,515 2,602
----------- ----------- -----------
(60,196) (85,042) (78,240)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 561,728 369,385 427,318
INCOME TAXES 197,300 152,107 161,367
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 364,428 217,278 265,951
DISCONTINUED OPERATIONS 8,283 (79,448) 1,165
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICIES (527,254) - (6,782)
----------- ----------- -----------
NET INCOME (LOSS) $ (154,543) $ 137,830 $ 260,334
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income from continuing operations $ 3.26 $ 1.90 $ 2.29
Discontinued operations 0.08 (0.71) 0.01
Cumulative effect of change in accounting policies (4.83) - (0.06)
Net income (loss) (1.49) 1.19 2.25
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income from continuing operations $ 3.24 $ 1.89 $ 2.26
Discontinued operations 0.07 (0.69) 0.01
Cumulative effect of change in accounting policies (4.69) - (0.06)
Net income (loss) (1.38) 1.19 2.21
CASH DIVIDENDS PER COMMON SHARE $ 0.97 $ 0.93 $ 0.89
See notes to consolidated financial statements.
3
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 4 DECEMBER 29 DECEMBER 30
In thousands 2003 2001 2000
----------- ----------- -----------
NET INCOME (LOSS) $ (154,543) $ 137,830 $ 260,334
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation:
Amount arising during year 40,693 (24,340) (36,758)
Less income tax effect (15,252) 6,317 12,049
Reclassification to net income from
disposal of foreign subsidiaries - - 2,030
Less income tax effect - - (711)
Minimum pension liability adjustment:
Amount arising during year (205,080) (2,504) -
Less income tax effect 78,239 851 -
Foreign exchange hedging contracts:
Amount arising during year (15,802) 14,161 -
Less income tax effect 6,168 (5,693) -
Reclassification to net income for
(gains) losses realized 280 (7,151) -
Less income tax effect (107) 2,875 -
Unrealized gains and losses on marketable securities:
Amount arising during year (3,184) (952) (1,176)
Less income tax effect 1,255 373 431
Reclassification to net income for
losses realized 2,763 1,502 1,613
Less income tax effect (1,074) (604) (597)
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (265,644) $ 122,665 $ 237,215
=========== =========== ===========
See notes to consolidated financial statements.
4
VF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 4 DECEMBER 29 DECEMBER 30
In thousands 2003 2001 2000
----------- ----------- -----------
OPERATIONS
Net income (loss) $ (154,543) $ 137,830 $ 260,334
Adjustments to reconcile net income (loss)
to cash provided by operations:
Discontinued operations (8,283) 79,448 (1,165)
Cumulative effect of accounting change 527,254 - 6,782
Restructuring costs 26,342 108,740 114,427
Depreciation 107,398 121,752 125,386
Goodwill amortization and other 2,276 33,850 34,220
Deferred income taxes 70,849 (14,750) (8,033)
Other, net 25,000 (30,370) 13,403
Changes in current assets and liabilities:
Accounts receivable 6,953 90,136 3,678
Inventories 43,253 170,554 (70,408)
Accounts payable 54,123 (70,422) (30,564)
Other, net (55,038) (26,212) (13,679)
----------- ----------- -----------
Cash provided by operating activities
of continuing operations 645,584 600,556 434,381
INVESTMENTS
Capital expenditures (64,503) (78,320) (118,620)
Business acquisitions (1,342) (5,057) (308,062)
Other, net 21,265 (7,456) (9,953)
----------- ----------- -----------
Cash used by investing activities of
continuing operations (44,580) (90,833) (436,635)
FINANCING
Decrease in short-term borrowings (16,586) (61,850) (244,041)
Proceeds from long-term debt - - 495,185
Payment of long-term debt (301,564) (114,302) (5,058)
Purchase of Common Stock (124,623) (146,592) (105,723)
Cash dividends paid (108,773) (106,864) (104,920)
Proceeds from issuance of Common Stock 39,753 44,632 1,317
Other, net (8,290) 7,193 4,493
----------- ----------- -----------
Cash used by financing activities of
continuing operations (520,083) (377,783) 41,253
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 69,899 81,876 2,329
EFFECT OF FOREIGN CURRENCY RATE CHANGES ON CASH 13,498 (658) (2,298)
----------- ----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS 164,318 213,158 39,030
CASH AND EQUIVALENTS - BEGINNING OF YEAR 332,049 118,891 79,861
----------- ----------- -----------
CASH AND EQUIVALENTS - END OF YEAR $ 496,367 $ 332,049 $ 118,891
=========== =========== ===========
See notes to consolidated financial statements.
5
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
In thousands STOCK CAPITAL INCOME (LOSS) EARNINGS
----------- ----------- ------------- -----------
BALANCE JANUARY 1, 2000 $ 116,205 $ 831,054 $ (64,756) $ 1,281,315
Net income - - - 260,334
Cash dividends:
Common Stock - - - (101,584)
Series B Convertible Preferred Stock - - - (3,336)
Tax benefit from Preferred Stock dividends - - - 280
Redemption of Preferred Stock - - - (1,102)
Purchase of treasury shares (4,000) - - (101,723)
Stock compensation plans, net 59 2,387 - (163)
Common Stock held in trust for
deferred compensation plans (5) - - (33)
Foreign currency translation - - (23,390) -
Unrealized gains on investment securities - - 271 -
----------- ----------- ------------- -----------
BALANCE DECEMBER 30, 2000 112,259 833,441 (87,875) 1,333,988
Net income - - - 137,830
Cash dividends:
Common Stock - - - (103,717)
Series B Convertible Preferred Stock - - - (3,147)
Tax benefit from Preferred Stock dividends - - - 132
Redemption of Preferred Stock - - - (2,571)
Purchase of treasury shares (4,000) - - (142,592)
Stock compensation plans, net 1,694 51,197 - (124)
Common Stock held in trust for
deferred compensation plans 45 - - 1,401
Foreign currency translation - - (18,023) -
Minimum pension liability adjustment - - (1,653) -
Foreign exchange hedging contracts - - 4,192 -
Unrealized gains on investment securities - - 319 -
----------- ----------- ------------- -----------
BALANCE DECEMBER 29, 2001 $ 109,998 $ 884,638 $ (103,040) $ 1,221,200
(continued)
6
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(continued)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
In thousands STOCK CAPITAL INCOME (LOSS) EARNINGS
----------- ----------- ------------- -----------
BALANCE DECEMBER 29, 2001 $ 109,998 $ 884,638 $ (103,040) $ 1,221,200
Net loss - - - (154,543)
Cash dividends:
Common Stock - - - (106,018)
Series B Convertible Preferred Stock - - - (2,755)
Tax benefit from Preferred Stock dividends - - - 12
Redemption of Preferred Stock - - - (5,780)
Conversion of Preferred Stock 182 - - 3,332
Purchase of treasury shares (3,000) - - (121,623)
Stock compensation plans, net 1,345 45,494 - (381)
Common Stock held in trust for
deferred compensation plans - - - (112)
Foreign currency translation - - 25,441 -
Minimum pension liability adjustment - - (126,841)
Foreign exchange hedging contracts - - (9,461) -
Unrealized losses on marketable securities - - (240) -
----------- ----------- ------------- -----------
BALANCE JANUARY 4, 2003 $ 108,525 $ 930,132 $ (214,141) $ 833,332
=========== =========== ============= ===========
See notes to consolidated financial statements.
7
VF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 4, 2003
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The financial position, results of operations and cash
flows of two businesses that were disposed of during 2002 have been presented as
discontinued operations for all periods. See Note B.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of VF Corporation and all majority-owned subsidiaries after elimination
of intercompany transactions and profits.
CASH AND EQUIVALENTS includes demand deposits and temporary investments that are
readily convertible into cash and have an original maturity of three months or
less.
INVENTORIES are stated at the lower of cost or market. Inventories stated on the
last-in, first-out method represent 45% of total 2002 inventories and 48% in
2001. Remaining inventories are valued using the first-in, first-out method.
PROPERTY AND DEPRECIATION: Property, plant and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging up to 40 years for buildings and ranging
from 3 to 10 years for machinery and equipment.
The Company's policy is to evaluate property for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. An impairment loss will be recorded if
undiscounted future cash flows are not expected to be adequate to recover the
assets' carrying value.
GOODWILL represents the excess of costs over the fair value of net tangible
assets and identifiable intangible assets of businesses acquired, less
accumulated amortization of $315.3 million in 2001. Through 2001, goodwill was
amortized using the straight-line method over 10 to 40 years. Effective at the
beginning 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 are not
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
are 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 at the beginning
of 2002.
In adopting the Statement, the Company estimated the fair value of its
individual business reporting units on a discounted cash flow basis. The Company
engaged an independent valuation firm to review the fair value of its business
units and, where there was an indication that the recorded amount of goodwill
might be greater than its fair value, to determine the amount of the possible
write-down in value. This evaluation indicated that recorded goodwill exceeded
its fair value at several business units where performance had not met
management's expectations at the time of their acquisition. 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
this Statement. The amount of write-down, and the business units accounting for
the charges, are summarized by reportable segment as follows:
8
Business Segment Amount Business Unit
- ---------------- ------ -------------
In thousands
Consumer Apparel $ 232,126 European intimate apparel, children's apparel and
Latin American jeanswear
Occupational Apparel 109,543 Workwear
All Other 185,585 Licensed knitwear
Accordingly, the Company recorded a noncash charge of $527.3 million ($4.69 per
diluted 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.
Also under the new Statement, goodwill amortization is no longer
required. The following presents adjusted net income and earnings per share as
if goodwill had not been required to be amortized in prior years:
2001 2000
----------- ------------
In thousands, except per share amounts
Net income, as reported $ 137,830 $ 260,334
Add back goodwill amortization, net of income taxes 33,153 33,581
----------- ------------
Adjusted net income $ 170,983 $ 293,915
=========== ============
Earnings per share:
Basic - as reported $ 1.19 $ 2.25
Add back goodwill amortization, net of income taxes 0.30 0.30
----------- ------------
Basic - as adjusted $ 1.49 $ 2.55
=========== ============
Diluted - as reported $ 1.19 $ 2.21
Add back goodwill amortization, net of income taxes 0.30 0.30
----------- ------------
Diluted - as adjusted $ 1.49 $ 2.51
=========== ============
REVENUE RECOGNITION: Sales are recognized when the risk and rewards of ownership
have been transferred, which is when the product is received by the customer.
Allowances for estimated returns, discounts and sales incentives are recognized
as reductions of sales when the sales are recorded. Such allowances are based on
historical customer claim rates and specific product circumstances.
During the fourth quarter of 2000, the Company changed its accounting
policy for recognizing sales in accordance with the SEC's Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements. The cumulative
effect of this change in policy for periods prior to the beginning of the year
2000 of $6.8 million (net of income taxes of $4.1 million), or $.06 per diluted
share, is shown in the Consolidated Statements of Income for the year 2000.
ADVERTISING COSTS are expensed as incurred and were $244.7 million in 2002,
$220.6 million in 2001 and $234.0 million in 2000.
SHIPPING COSTS to customers are included in Marketing, Administrative and
General Expenses and were $47.9 million in 2002, $52.1 million in 2001 and $53.8
million in 2000.
9
STOCK-BASED COMPENSATION is accounted for under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees. For
stock option grants, compensation expense is not required, as all options have
an exercise price equal to the market value of the underlying common stock at
the date of grant. For grants of stock awards, compensation expense equal to the
market value of the shares to be issued is recognized over the performance
period being measured. For restricted stock grants, compensation expense equal
to the market value of the shares at the date of grant is recognized over the
vesting period. The following table presents the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to all stock-based employee compensation:
2002 2001 2000
----------- ------------- ----------
In thousands, except per share amounts
Net income (loss), as reported $ (154,543) $ 137,830 $ 260,334
Add employee compensation expense for restricted stock
grants and stock awards included in reported net income,
net of income taxes 627 852 1,491
Less total stock-based employee compensation expense
determined under the fair value-based method,
net of income taxes (15,512) (16,210) (12,058)
----------- ------------- ----------
Pro forma net income (loss) $ (169,428) $ 122,472 $ 249,767
=========== ============= ==========
Earnings (loss) per share:
Basic - as reported $ (1.49) $ 1.19 $ 2.25
Basic - pro forma (1.63) 1.05 2.16
Diluted - as reported $ (1.38) $ 1.19 $ 2.21
Diluted - pro forma (1.52) 1.05 2.12
Details of the stock compensation plan and of the fair value assumptions for
stock options used above are described in Note N.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company adopted FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, and related
amendments at the beginning of 2001. This Statement requires that all
derivatives be recognized as assets or liabilities in the Consolidated Balance
Sheets and measured at their fair value. Changes in the fair value of
derivatives are recognized in either Net Income or in Other Comprehensive
Income, depending on the designated purpose of the derivative. The cumulative
effect of adopting this Statement at the beginning of 2001 was not significant.
FISCAL YEAR: The Company uses a 52/53 week fiscal year ending on the Saturday
closest to December 31. Fiscal year 2002 ended on January 4, 2003 and included
53 weeks. Fiscal years 2001 and 2000 each consisted of 52 weeks.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
with the 2002 presentation.
10
NEW ACCOUNTING PRONOUNCEMENT: In 2002, the FASB issued Statement No. 146,
Accounting for Costs Associated with Exit and Disposal Activities. This
Statement is effective for exit or disposal activities that are initiated after
December 31, 2002. Under this Statement, a cost related to an exit or disposal
activity is recognized when the liability is incurred, instead of when
management commits to an exit plan as required under previous accounting
principles. Adoption of this Statement may affect the timing of recognition of
future exit or disposal costs. The Company will adopt this Statement at the
beginning of 2003.
USE OF ESTIMATES: In preparing financial statements in accordance with generally
accepted accounting principles, management makes estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
NOTE B - DISCONTINUED OPERATIONS
As part of the Strategic Repositioning Program in the fourth quarter of 2001
(see Note O), management announced a plan to exit the Private Label knitwear
business unit, which was a vertically integrated textile business that
manufactured and marketed fleece and T-shirts to domestic customers. Management
also decided to exit the Jantzen swimwear business. During that quarter, the
Company recorded a pretax charge for disposition of these businesses of $111.4
million, of which $33.5 million related to the write-off of intangible assets.
Liquidation of the Private Label knitwear business began in late 2001
and was substantially completed during the third quarter of 2002. The Jantzen
trademarks and certain other assets of this swimwear business were sold to Perry
Ellis International, Inc. in March 2002 for $24.0 million, resulting in a gain
of $1.4 million. Liquidation of the remaining inventories of Jantzen products
and other assets was substantially completed during the third quarter of 2002.
Both the Private Label knitwear and the Jantzen businesses are accounted for as
discontinued operations in accordance with FASB Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which the Company adopted
in 2001. Accordingly, the results of operations, assets, liabilities and cash
flows of these businesses are separately presented as discontinued operations in
the accompanying 2002 financial statements, and amounts for prior years have
been similarly reclassified.
Summarized operating results for these discontinued businesses are as
follows:
2002 2001 2000
------------ -------------- ------------
In thousands
Net sales $ 97,981 $ 298,388 $ 344,756
============ ============== ============
Income (loss) before income taxes, including
gain (loss) on disposal $ 13,470 $ (106,584) $ 4,215
Income taxes (benefit) 5,187 (27,136) 3,050
------------ -------------- ------------
Income (loss) from discontinued operations $ 8,283 $ (79,448) $ 1,165
============ ============== ============
Summarized assets and liabilities of the discontinued operations presented in
the Consolidated Balance Sheets are as follows:
11
2002 2001
---------- ---------
In thousands
Accounts receivable, net $ 2,273 $ 30,322
Inventories - 46,489
Other current assets, primarily deferred income taxes 3,010 23,268
---------- ---------
Current assets of discontinued operations $ 5,283 $ 100,079
========== =========
Property, plant and equipment, net $ 2,500 $ 12,355
Goodwill - 17,737
Other assets 6 811
---------- ---------
Noncurrent assets of discontinued operations $ 2,506 $ 30,903
========== =========
Accounts payable $ 133 $ 11,296
Accrued liabilities 12,502 43,342
---------- ---------
Current liabilities of discontinued operations $ 12,635 $ 54,638
========== =========
NOTE C - ACQUISITIONS
During 2000, the Company acquired the common stock of The North Face, Inc., the
Eastpak backpack and daypack business and 85% of the common stock of H.I.S
sportswear AG. The Company also acquired the trademark rights to the Chic and
Gitano brands. The aggregate cost for these businesses was $206.5 million, plus
repayment of $107.7 million of indebtedness. Goodwill related to these
acquisitions totaled $171.2 million. The Company acquired the remaining shares
of H.I.S sportswear AG during 2001 and 2002 for a total cost of $6.4 million.
All acquisitions have been accounted for as purchases, and accordingly,
the purchase prices have been allocated to the net assets acquired based on fair
values at the dates of acquisition. The excess of cost over fair value of the
purchased businesses has been recorded as Goodwill. Operating results of these
businesses have been included in the consolidated financial statements since the
dates of acquisition.
The Company accrued various restructuring charges in connection with
these acquisitions. The charges relate to severance, closure of manufacturing
and distribution facilities, and lease and contract termination costs. Remaining
cash payments related to these actions will be substantially completed during
2003. Activity in the restructuring accruals is summarized as follows:
12
FACILITIES LEASE AND
EXIT CONTRACT
SEVERANCE COSTS TERMINATION TOTAL
------------- ---------- ----------- -------------
In thousands
Accrual for 2000 acquisitions $ 9,426 $ 2,026 $ 1,044 $ 12,496
Cash payments (4,789) (267) (18) (5,074)
------------- ---------- ------------ -------------
Balance December 30, 2000 4,637 1,759 1,026 7,422
Additional accrual 400 1,020 2,400 3,820
Cash payments (2,859) (2,684) (113) (5,656)
------------- ---------- ------------ -------------
Balance December 29, 2001 2,178 95 3,313 5,586
Adjustments to acquisition costs (137) - (516) (653)
Cash payments (1,980) (95) (1,345) (3,420)
------------- ---------- ------------ -------------
Balance January 4, 2003 $ 61 $ - $ 1,452 $ 1,513
============= ========== ============ =============
NOTE D - INVENTORIES
2002 2001
-------------- ----------
In thousands
Finished products $ 587,954 $ 621,055
Work in process 110,383 116,864
Materials and supplies 132,181 128,646
-------------- ---------
$ 830,518 $ 866,565
============== =========
The current cost of inventories stated on the last-in, first-out method is not
significantly different from the value determined under the first-in, first-out
method.
NOTE E - PROPERTY, PLANT AND EQUIPMENT
2002 2001
-------------- ----------
In thousands
Land $ 48,566 $ 52,801
Buildings 462,792 472,659
Machinery and equipment 1,027,911 1,117,908
-------------- ----------
1,539,269 1,643,368
Less accumulated depreciation 972,723 1,001,031
-------------- ----------
$ 566,546 $ 642,337
============== ==========
13
NOTE F - GOODWILL
Activity in the goodwill accounts is summarized by business segment as follows:
OCCUPA- OUTDOOR
CONSUMER TIONAL APPAREL AND ALL
APPAREL APPAREL EQUIPMENT OTHER TOTAL
--------- ----------- ------------- ---------- --------------
Balance December 30, 2000 $ 560,175 $ 149,400 $ 123,001 $ 218,300 $ 1,050,876
Amortization (19,647) (4,381) (3,242) (6,580) (33,850)
Purchase price adjustments 11,595 (1,402) (9,723) - 470
Write-off of closed business - (3,963) - - (3,963)
Currency translation (15,487) - - - (15,487)
--------- --------- ---------- ----------- -------------
Balance December 29, 2001 536,636 139,654 110,036 211,720 998,046
Change in accounting policy
(Note A) (232,126) (109,543) - (185,585) (527,254)
Purchase price adjustments (275) - (924) - (1,199)
Impairment loss (2,276) - - - (2,276)
Currency translation 6,038 - - - 6,038
--------- --------- ---------- ----------- -------------
Balance January 4, 2003 $ 307,997 $ 30,111 $ 109,112 $ 26,135 $ 473,355
========= ========= ========== =========== =============
An impairment loss for goodwill related to the children's
apparel reporting unit was recognized in Other Operating Expense in 2002 based
on its forecast of profits and cash flows.
NOTE G - SHORT-TERM BORROWINGS
The weighted average interest rate for short-term borrowings from foreign banks
was 8.0% at the end of 2002 and 8.6% at the end of 2001.
The Company maintains an unsecured committed revolving credit agreement
with a group of banks for $750.0 million that supports commercial paper
borrowings and is otherwise available for general corporate purposes. The
agreement, which extends to July 2004, requires an .08% facility fee per year
and contains various financial covenants, including a requirement that debt
cannot exceed two times Common Shareholders' Equity. At January 4, 2003, there
were no borrowings under the agreement.
14
NOTE H - ACCRUED LIABILITIES
2002 2001
---------- ------------
In thousands
Income taxes $ 61,315 $ 68,631
Compensation 114,132 85,435
Restructuring costs (Note O) 31,012 75,810
Minimum pension liability (Note K) 75,000 -
Other 220,598 210,431
---------- -------------
$ 502,057 $ 440,307
========== =============
NOTE I - LONG-TERM DEBT
2002 2001
----------- -----------
In thousands
6.63% notes, due 2003 $ - $ 100,000
7.60% notes, due 2004 - 100,000
6.75% notes, due 2005 100,000 100,000
8.10% notes, due 2005 300,000 300,000
8.50% notes, due 2010 200,000 200,000
9.25% debentures, due 2022 - 100,000
Other 3,065 4,731
----------- -----------
603,065 904,731
Less current portion 778 696
----------- -----------
$ 602,287 $ 904,035
=========== ===========
The scheduled payments of long-term debt are $.3 million in 2004, $400.3 million
in 2005, $.3 million in 2006 and $.3 million in 2007. The Company paid interest
of $72.2 million in 2002, $95.2 million in 2001 and $77.1 million in 2000.
NOTE J - OTHER LIABILITIES
2002 2001
---------- ---------
In thousands
Deferred compensation $ 159,750 $ 165,943
Minimum pension liability (Note K) 102,643 9,957
Other 68,877 52,601
---------- ---------
$ 331,270 $ 228,501
========== =========
15
NOTE K - BENEFIT PLANS
The Company sponsors a noncontributory defined benefit pension plan covering
substantially all full-time domestic employees. The Company makes contributions
to the plan sufficient to meet the minimum funding requirements under applicable
laws, plus additional amounts as recommended by the Company's independent
actuary. Assets in the trust fund for this plan consist of common stock, fixed
income and real estate investments. The Company also sponsors an unfunded
supplemental defined benefit pension plan for management employees. This
supplemental plan primarily covers pension benefits computed under the Company's
principal benefit plan that exceed payment limitations imposed by income tax
regulations. These defined benefit plans provide pension benefits based on
compensation levels and years of service. The effect of these plans on income is
as follows:
2002 2001 2000
----------- ---------- ------------
In thousands
Service cost - benefits earned during the year $ 18,240 $ 19,627 $ 20,863
Interest cost on projected benefit obligations 51,734 50,261 47,630
Expected return on plan assets (50,433) (62,477) (57,945)
Curtailment charge (Note O) 2,388 15,971 -
Amortization of:
Prior service cost 4,243 6,435 6,352
Actuarial (gain) loss 1,370 (9,528) (2,156)
----------- ---------- ------------
Total pension expense 27,542 20,289 14,744
Amount allocable to discontinued operations 1,317 4,784 1,479
----------- ---------- ------------
Pension expense - continuing operations $ 26,225 $ 15,505 $ 13,265
=========== ========== ============
The following provides a reconciliation of the changes in fair value of
the pension plans' assets and benefit obligations, based on a September 30
valuation date, plus the funded status at the end of each year:
16
2002 2001
--------- ---------
In thousands
Fair value of plan assets, beginning of year $ 591,831 $ 728,389
Actual return on plan assets (63,993) (129,402)
Company contributions 22,455 22,038
Benefits paid (31,280) (29,194)
--------- ---------
Fair value of plan assets, end of year 519,013 591,831
--------- ---------
Projected obligations, beginning of year 688,569 623,822
Service cost 18,240 19,627
Interest cost 51,734 50,261
Plan amendment - 1,755
Partial plan curtailment (8,404) (38,434)
Actuarial loss 78,314 60,732
Benefits paid (31,280) (29,194)
--------- ---------
Projected obligations, end of year 797,173 688,569
--------- ---------
Funded status, end of year (278,160) (96,738)
Unrecognized net actuarial loss 265,399 82,432
Unrecognized prior service cost 20,556 27,187
--------- ---------
Pension asset, net $ 7,795 $ 12,881
========= =========
Amounts included in Consolidated Balance Sheets:
Other assets $ 20,556 $ 56,993
Accrued liabilities (75,000) -
Other liabilities (145,345) (46,616)
Accumulated other comprehensive income (loss) 207,584 2,504
--------- ---------
$ 7,795 $ 12,881
========= =========
The projected benefit obligation was determined using an assumed
discount rate of 6.75% in 2002, 7.50% in 2001 and 8.00% in 2000. The actuarial
assumption used for return on plan assets was 8.75% in each year, and the
assumption used for compensation increases was 4.00% in each year. Differences
between actual results and amounts determined using actuarial assumptions are
deferred and will affect future years' pension expense. Net deferred gains and
losses totaling less than 10% of the lower of investment assets or projected
benefit obligations at the beginning of a year are not amortized. Net deferred
gains and losses that represent 10% to 20% of projected benefit obligations are
amortized over ten years, while those in excess of 20% of projected benefit
obligations are amortized over five years.
For the supplemental defined benefit plan, the Company has purchased
life insurance contracts and marketable securities to support pension benefit
liabilities. The cash value of life insurance and the market value of other
investments that support liabilities was $14.8 million in 2002 and $21.7 million
in 2001. These securities are held in irrevocable trusts and are included in
Other Assets.
17
Accumulated benefit obligations earned through the respective
measurement dates for these plans totaled $739.4 million in 2002 and $633.9
million in 2001. The Company has recorded a minimum pension liability of $177.6
million in 2002 and $10.0 million in 2001 related to the excess of accumulated
benefit obligations over the total fair value of plan assets and previously
accrued pension liabilities. The offset to this minimum pension liability is
recorded as a component of Other Comprehensive Income (Loss). At January 4,
2003, $75.0 million of the minimum pension liability is classified as a current
liability because the Company made a contribution to the pension plan of that
amount in early 2003.
The Company sponsors an Employee Stock Ownership Plan (ESOP) as part of
a 401(k) savings plan covering most domestic salaried employees. Contributions
made by the Company to the 401(k) plan are based on a specified percentage of
employee contributions. Cash contributions by the Company were $6.2 million in
2002, $7.1 million in 2001 and $7.2 million in 2000. Plan expense was $5.1
million in 2002, $3.8 million in 2001 and $4.7 million in 2000, after giving
effect to dividends on the Series B Convertible Preferred Stock of $2.7 million
in 2002, $3.2 million in 2001 and $3.3 million in 2000. (See Note M.)
The Company also sponsors other savings and retirement plans for
certain domestic and foreign employees. Expense for these plans totaled $7.7
million in 2002, $6.7 million in 2001 and $5.4 million in 2000.
NOTE L - CAPITAL
COMMON STOCK outstanding is net of shares held in treasury, and in substance
retired, of 32,233,996 in 2002, 29,141,452 in 2001 and 25,139,897 in 2000. The
excess of the cost of treasury shares acquired over the $1 per share stated
value of Common Stock is charged to Retained Earnings. In addition, 266,146
shares of VF Common Stock at the end of 2002, 266,203 shares at the end of 2001
and 311,608 shares at the end of 2000 are held in trust for deferred
compensation plans. These additional shares are treated for financial reporting
purposes as treasury shares at a cost of $9.3 million, $9.2 million and $10.6
million at the end of 2002, 2001 and 2000, respectively.
PREFERRED STOCK consists of 25,000,000 authorized shares at $1 par value.
Series A Preferred Stock: As of January 4, 2003, 2,000,000 shares are
designated as Series A Preferred Stock, of which none has been issued. Each
outstanding share of Common Stock has one Series A Preferred Stock purchase
right attached. The rights become exercisable ten days after an outside party
acquires, or makes an offer for, 15% or more of the Common Stock. Once
exercisable, each right will entitle its holder to buy 1/100 share of Series A
Preferred Stock for $175. If the Company is involved in a merger or other
business combination or an outside party acquires 15% or more of the Common
Stock, each right will be modified to entitle its holder (other than the
acquirer) to purchase common stock of the acquiring company or, in certain
circumstances, VF Common Stock having a market value of twice the exercise price
of the right. In some circumstances, rights other than those held by an acquirer
may be exchanged for one share of VF Common Stock. The rights, which expire in
January 2008, may be redeemed at $.01 per right prior to their becoming
exercisable.
Series B Preferred Stock: As of January 4, 2003, 2,105,263 shares are
designated as 6.75% Series B Convertible Preferred Stock, which were purchased
by the ESOP in 1990. (See Note M.) There were 1,195,199 shares of Series B
Preferred Stock outstanding at January 4, 2003, 1,477,930 outstanding at
December 29, 2001 and 1,570,301 outstanding at December 30, 2000, after
reflecting reductions resulting from share redemptions and conversions into
Common Stock.
Each share of Series B Preferred Stock has a redemption value of $30.88
plus cumulative accrued dividends, is convertible into 1.6 shares of Common
Stock and is entitled to two votes per share along with
18
the Common Stock. The trustee for the ESOP may convert the preferred shares to
Common Stock at any time or may cause the Company to redeem the preferred shares
under certain circumstances. The Series B Preferred Stock also has preference in
liquidation over all other stock issues.
ACCUMULATED OTHER COMPREHENSIVE INCOME: Other comprehensive income consists of
certain changes in assets and liabilities that are not included in net income
but are instead reported under generally accepted accounting principles within a
separate component of Common Shareholders' Equity. Items comprising Accumulated
Other Comprehensive Income in the Consolidated Balance Sheets are summarized,
net of related income taxes, as follows:
2002 2001
--------- ---------
In thousands
Foreign currency translation $ (80,728) $(106,169)
Minimum pension liability adjustment (128,494) (1,653)
Foreign exchange hedging contracts (5,269) 4,192
Unrealized gains on marketable securities 350 590
--------- ---------
$(214,141) $(103,040)
========= =========
NOTE M - REDEEMABLE PREFERRED STOCK
The Series B Convertible Preferred Stock (Note L) was purchased by the ESOP in
1990. The ESOP's purchase of the preferred shares was funded by a loan of $65.0
million from the Company; this loan was repaid through 2002. Interest income on
this loan was $.1 million in 2002, $.9 million in 2001 and $1.7 million in 2000.
Principal and interest obligations on the loan were satisfied as the Company
made contributions to the savings plan and dividends were paid on the Preferred
Stock. As principal payments were made on the loan, shares of Preferred Stock
were allocated to participating employees' accounts within the ESOP. By the end
of 2002, all shares of Preferred Stock had been allocated to participating
employees' accounts.
NOTE N - STOCK-BASED COMPENSATION
The Company may grant nonqualified stock options, stock awards and restricted
stock to officers, directors and key employees under a stock compensation plan
approved by shareholders.
Stock options are granted at prices not less than fair market value on
the date of grant. Options become exercisable generally one year after the date
of grant and expire ten years after the date of grant. Stock option activity is
summarized as follows:
19
SHARES UNDER WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------ ----------------
Balance January 1, 2000 6,631,496 $ 36.74
Options granted 2,213,025 26.20
Options exercised (51,130) 21.60
Options canceled (294,500) 34.46
--------- -------
Balance December 30, 2000 8,498,891 34.17
Options granted 2,419,090 35.59
Options exercised (1,699,860) 26.41
Options canceled (208,140) 40.33
--------- -------
Balance December 29, 2001 9,009,981 35.87
Options granted 2,453,000 40.90
Options exercised (1,326,026) 30.29
Options canceled (343,265) 41.16
--------- -------
Balance January 4, 2003 9,793,690 $ 37.70
=========
Stock options outstanding at January 4, 2003 are summarized as follows:
RANGE OF WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------- ----------- ---------------- --------------
$ 20 - 25 196,160 1.7 years $ 23.76
25 - 30 1,260,270 5.9 years 26.15
30 - 35 859,550 3.9 years 34.49
35 - 40 2,065,960 8.2 years 35.63
40 - 45 5,411,750 7.2 years 42.20
- ----------- --------- --------- ---------
$ 20 - 45 9,793,690 6.9 years $ 37.70
=========
Options to purchase 6,061,240 shares, 6,447,041 shares and 6,332,066 shares were
exercisable at the end of 2002, 2001 and 2000, respectively. There are 5,347,657
shares available for future grants of stock options and stock awards, of which
no more than 970,964 may be grants of restricted stock awards.
The Company has granted stock awards to certain key employees under a
long-term incentive compensation plan that replaced a portion of the cash
incentive compensation for those employees. The stock awards entitle the
participants to receive shares of VF Common Stock, with the number of shares to
be earned based on three year shareholder return comparisons of VF Common Stock
with a peer group of major apparel companies. Shares earned at the end of each
three year performance period are issued to participants in the following year,
unless they elect to defer receipt of the shares. A total of 56,819 shares and
39,923 shares of VF Common Stock were earned for the performance periods ended
in 2002 and 2000, respectively. At the end of 2002, there are 50,028 stock
awards outstanding for the performance period ending in 2003 and 45,231 for the
performance period ending in 2004. A total of 56,430 shares of Common Stock are
issuable in future years to participants who have elected to defer receipt of
their shares
20
earned. The Company has also granted to key employees 59,704 shares of
restricted stock that vest in 2005.
Compensation expense recognized in the Consolidated Statements of
Income for stock awards and restricted stock totaled $1.0 million in 2002, $1.4
million in 2001 and $2.4 million in 2000. Since all stock options are granted at
market value, compensation expense is not required. Note A presents pro forma
net income and earnings per share that would have resulted if compensation had
been recorded based on the fair value method for all stock-based compensation.
Fair value in Note A for stock options is estimated using the Black-Scholes
option-pricing model with the following assumptions: expected dividend yield of
2.7% in 2002 and 2.0% in 2001 and 2000; expected volatility of 36% in 2002, 37%
in 2001 and 36% in 2000; risk-free interest rates of 4.0% in 2002, 4.9% in 2001
and 6.8% in 2000; and expected average lives of 4 years. The resulting fair
value of stock options granted during 2002 was $10.51 per share, during 2001 was
$10.78 per share and during 2000 was $7.66 per share.
NOTE O - RESTRUCTURING COSTS
During the fourth quarter of 2001, management initiated a Strategic
Repositioning Program that represented a series of actions to aggressively
reduce the Company's overall cost structure. Major initiatives under the Program
included closing higher cost manufacturing plants, consolidating distribution
centers and reducing administrative functions. (This Program also covered the
exit of the two businesses now being accounted for as discontinued operations,
as discussed in Note B. Amounts discussed herein relate to continuing operations
only.) Most of these actions took place in the fourth quarter of 2001, with some
remaining actions carried out during 2002. The Company recorded pretax charges
for these actions of $125.4 million in the fourth quarter of 2001 and $46.0
million during 2002.
The 2001 and 2002 Strategic Repositioning Program costs relate to:
- - CLOSURE OF MANUFACTURING FACILITIES - $61.1 MILLION IN 2001 AND $29.2
MILLION IN 2002: The Company closed 30 higher cost North American
manufacturing facilities as part of its ongoing strategy of moving toward
lower cost, more flexible global sourcing.
- - CONSOLIDATION OF DISTRIBUTION AND ADMINISTRATIVE FUNCTIONS - $42.7 MILLION
IN 2001 AND $14.4 MILLION IN 2002: The Company closed certain distribution
centers and reduced administrative functions and staffing in the United
States, Europe and Latin America.
- - EXIT OF UNDERPERFORMING BUSINESS - $10.0 MILLION IN 2001: In addition to
the two businesses accounted for as discontinued operations (Note B), the
Company closed a specialty workwear apparel business having sales of $10.2
million in 2001. The write-down of goodwill related to this business unit
of $4.0 million was recognized in Other Operating Expense.
- - PENSION PLAN CURTAILMENT LOSSES - $11.6 MILLION IN 2001 AND $2.4 MILLION IN
2002: Personnel reductions resulted in curtailment and settlement losses in
the Company's domestic pension plans.
Of the total Program costs in 2002 and 2001, $75.4 million relates to
personnel reductions, including severance and related benefits. These actions
affected approximately 13,600 of the Company's employees. Of those employees,
approximately 3,800, all of whom have been notified, will work through the plant
closing transition periods that end in early 2003.
Activity in the 2001 and 2002 restructuring accruals is summarized as
follows:
21
FACILITIES OTHER LEASE AND
EXIT ASSET CONTRACT
SEVERANCE COSTS WRITE-DOWNS TERMINATION TOTAL
--------- ----- ----------- ----------- ---------
In thousands
Restructuring costs in 2001 $ 60,099 $ 28,123 $ 27,711 $ 9,432 $ 125,365
Noncash charges:
Inventories - - (11,254) - (11,254)
Goodwill - - (3,963) - (3,963)
Pension plan partial curtailment - - (11,631) - (11,631)
Other - (23,147) (863) - (24,010)
Cash payments (7,619) (35) - - (7,654)
--------- --------- --------- --------- ---------
Balance December 29, 2001 52,480 4,941 - 9,432 66,853
Restructuring costs in 2002 20,404 21,867 2,388 1,353 46,012
Noncash charges:
Pension plan partial curtailment - - (2,388) - (2,388)
Other - (21,228) - - (21,228)
Cash payments (44,708) (3,698) - (4,845) (53,251)
Reduction of accrual (5,135) (1,000) - (1,287) (7,422)
--------- --------- --------- --------- ---------
Balance January 4, 2003 $ 23,041 $ 882 $ - $ 4,653 $ 28,576
========= ========= ========= ========= =========
The restructuring liability reduction of $7.4 million during 2002
relates primarily to reduced severance, as employees at several plants worked
longer than originally planned. In addition, there were $2.8 million of
reductions in noncash allowances due primarily to a decision to continue to
occupy a leased administrative facility. These reductions in accruals and
allowances were credited to income during 2002. Finally, the Company recorded
gains of $4.9 million on disposal of closed plants related to the restructuring
actions.
In the fourth quarter of 2000, the Company recorded a total of $116.6
million of restructuring charges to exit certain unprofitable businesses and to
reduce its overall cost structure. Details of these actions follow:
- - EXIT OF UNDERPERFORMING BUSINESSES - $69.7 MILLION: The Company transferred
its Wrangler business in Japan to a licensee and recorded a loss on
disposition of $26.8 million, of which $23.8 million related to the
write-off of intangible assets. The Company discontinued certain small
business units and unprofitable product lines having limited profit and
growth potential. Sales of these businesses included in the consolidated
operating results were $101 million in 2000.
- - CLOSURE OF MANUFACTURING FACILITIES - $15.8 MILLION: Charges were incurred
to close six higher cost North American manufacturing facilities.
- - CONSOLIDATION OF DISTRIBUTION AND ADMINISTRATIVE FUNCTIONS - $31.1 MILLION:
The Company incurred charges to close distribution centers and consolidate
administrative offices and functions in the United States, Europe and Latin
America.
Activity in the 2000 restructuring accrual is summarized as follows:
22
FACILITIES OTHER LEASE AND
EXIT ASSET CONTRACT
SEVERANCE COSTS WRITE-DOWNS TERMINATION TOTAL
--------- ---------- ----------- ----------- ---------
In thousands
Total restructuring costs $ 21,487 $ 20,369 $ 59,746 $ 14,963 $ 116,565
Noncash charges:
Inventories - - (22,392) - (22,392)
Goodwill - - (23,819) - (23,819)
Other - (19,000) (13,535) - (32,535)
Cash payments (1,753) (8) - (154) (1,915)
--------- --------- ---------- ---------- ---------
Balance December 30, 2000 19,734 1,361 - 14,809 35,904
Cash payments (15,517) (912) - (3,450) (19,879)
Reduction of accrual (2,573) - - (4,495) (7,068)
--------- --------- ---------- ---------- ---------
Balance December 29, 2001 1,644 449 - 6,864 8,957
Cash payments (1,594) (282) - (3,397) (5,273)
Reduction of accrual (50) (167) - (1,031) (1,248)
--------- --------- ---------- ---------- ---------
Balance January 4, 2003 $ - $ - $ - $ 2,436 $ 2,436
========= ========= ========== ========== =========
The restructuring liability reduction of $1.2 million in 2002 relates
primarily to favorable settlements of leases and other contracts. Also in 2002,
there were $3.3 million of reductions in noncash allowances due to better than
planned realization on discontinued product lines. The restructuring liability
reductions of $7.1 million in 2001 relates primarily to a favorable settlement
of a contract. Also in 2001, there were $3.9 million of reductions in noncash
allowances due to lower losses on assets related to the integration of the
domestic intimate apparel business units.
Actions related to the Strategic Repositioning Program and the 2000
restructuring are proceeding as planned. The remaining Strategic Repositioning
Program and 2000 restructuring accruals are expected to be adequate to cover the
remaining costs. Severance and other cash payments will be made through 2003.
Net restructuring costs were recorded as follows:
2002 2001 2000
-------- -------- --------
In thousands
Cost of products sold $ 17,848 $ 63,743 $ 53,645
Marketing, administrative and general expenses 8,494 46,712 36,089
Other operating expense, net - 3,963 26,831
-------- -------- ---------
$ 26,342 $114,418 $ 116,565
======== ======== =========
23
NOTE P - INCOME TAXES
The provision for income taxes is computed based on the following amounts of
income from continuing operations before income taxes and cumulative effect of
change in accounting policies:
2002 2001 2000
-------- -------- --------
In thousands
Domestic $439,744 $322,375 $425,238
Foreign 121,984 47,010 2,080
-------- -------- --------
$561,728 $369,385 $427,318
======== ======== ========
The provision for income taxes for continuing operations consists of:
2002 2001 2000
--------- --------- ---------
In thousands
Current:
Federal $ 95,738 $ 137,927 $ 127,690
Foreign 28,935 18,628 23,957
State 1,778 10,302 17,753
--------- --------- ---------
126,451 166,857 169,400
Deferred, primarily federal 70,849 (14,750) (8,033)
--------- --------- ---------
$ 197,300 $ 152,107 $ 161,367
========= ========= =========
The reasons for the difference between income taxes computed by
applying the statutory federal income tax rate for continuing operations and
income tax expense in the financial statements are as follows:
2002 2001 2000
--------- --------- ---------
In thousands
Tax at federal statutory rate $ 196,605 $ 129,286 $ 149,562
State income taxes,
net of federal tax benefit 9,918 (1,424) 6,031
Amortization of goodwill - 8,535 8,404
Foreign operating losses
with no current benefit 7,531 17,253 20,613
Foreign rate differences (16,989) (3,770) (3,523)
Change in valuation allowance (6,115) (2,820) (4,951)
Other, net 6,350 5,047 (14,769)
--------- --------- ---------
$ 197,300 $ 152,107 $ 161,367
========= ========= =========
Deferred income tax assets and liabilities consist of the following:
24
2002 2001
--------- ---------
In thousands
Deferred income tax assets:
Employee benefits $ 31,153 $ 46,164
Inventories 14,686 17,884
Other accrued expenses 124,494 143,023
Minimum pension liability 79,090 1,007
Operating loss carryforwards 94,742 108,592
Discontinued operations 3,398 29,212
Foreign currency translation 48,396 52,510
--------- ---------
395,959 398,392
Valuation allowance (69,115) (68,905)
--------- ---------
Deferred income tax assets 326,844 329,487
--------- ---------
Deferred income tax liabilities:
Depreciation 33,422 32,494
Discontinued operations 412 5,944
Other 31,435 27,365
--------- ---------
Deferred income tax liabilities 65,269 65,803
--------- ---------
Net deferred income tax assets $ 261,575 $ 263,684
========= =========
Amounts included in Consolidated Balance Sheets:
Current assets $ 117,214 $ 134,842
Other assets 141,375 105,574
Discontinued operations 2,986 23,268
--------- ---------
$ 261,575 $ 263,684
========= =========
As of the end of 2002, the Company has not provided deferred United
States income taxes on $107.4 million of undistributed earnings of international
subsidiaries where such earnings are considered to be permanently invested. The
Company has undertaken initiatives resulting in income in one of the Company's
foreign subsidiaries being taxed at a reduced effective rate. The income tax
benefit from this tax status is $13.3 million ($.12 per diluted share) in 2002.
The tax status providing this benefit is scheduled to expire in 2010.
The Company has $194.8 million of foreign operating loss carryforwards
expiring at various dates; a valuation allowance has been provided where it is
more likely than not that the deferred tax assets relating to those loss
carryforwards will not be realized. Income taxes paid were $132.6 million in
2002, $132.5 million in 2001 and $183.4 million in 2000.
25
NOTE Q - BUSINESS SEGMENT INFORMATION
The Company designs and manufactures apparel products marketed primarily under
Company-owned brand names. Customers include department, discount and specialty
stores throughout the world. Sales to Wal-Mart Stores, Inc. comprise 16.2% of
consolidated sales in 2002, 15.1% in 2001 and 14.8% in 2000. Trade receivables
from this customer totaled $66.8 million at the end of 2002 and $59.0 million at
the end of 2001.
The Company manages its businesses through separate marketing companies
that support specific brands. Manufacturing and product sourcing needs are met
by groups that support individual or in some cases several different product
types. These operations have been aggregated into four reportable segments. The
"Consumer Apparel" segment includes jeanswear and related products, women's
intimate apparel and children's apparel, all having similar characteristics of
economic performance, product type, production process, method of distribution
and class of customer. The "Occupational Apparel" segment is distinguished from
the other segments because of a different class of customer. The "Outdoor
Apparel and Equipment" segment consists of the Company's outerwear and adventure
apparel, plus daypacks and technical equipment, and is therefore distinguished
from the other segments by type of products. The "All Other" segment consists
primarily of the Company's licensed sports apparel and distributor knitwear
operations. Prior years' information has been reclassified to present continuing
operations and to reflect a change in the basis of allocating certain Corporate
information systems expenses to the operating business units.
Management evaluates the operating performance of each of its marketing
companies based on their income from operations before interest, restructuring
charges and income taxes. Accounting policies used for segment reporting are
consistent with those stated in Note A, except that inventories are valued on a
first-in, first-out basis and amortization of goodwill is not allocated to
individual segments. Corporate and other expenses include expenses incurred in
and directed by the Corporate offices that are not allocated to specific
business units. Segment assets are those used directly in the operations of each
business unit, such as accounts receivable, inventories and property, plant and
equipment. Corporate assets include deferred income taxes, investments and
information systems. Financial information for the Company's reportable segments
is as follows:
2002 2001 2000
---------- ---------- ----------
In thousands
Net sales:
Consumer Apparel $3,803,790 $3,938,282 $4,116,719
Occupational Apparel 491,295 535,997 661,635
Outdoor Apparel and Equipment 508,020 492,614 368,101
All Other 280,418 253,524 256,668
---------- ---------- ----------
Consolidated net sales $5,083,523 $5,220,417 $5,403,123
========== ========== ==========
26
2002 2001 2000
----------- ----------- -----------
In thousands
Segment profit:
Consumer Apparel $ 589,377 $ 547,679 $ 660,976
Occupational Apparel 60,561 35,283 37,354
Outdoor Apparel and Equipment 72,697 61,099 23,939
All Other 34,841 29,130 33,271
----------- ----------- -----------
Total segment profit 757,476 673,191 755,540
Interest, net (63,928) (86,557) (81,047)
Goodwill (2,276) (33,850) (34,220)
Restructuring charges, net (26,342) (114,418) (116,565)
Corporate and other expenses (103,202) (68,981) (96,390)
----------- ----------- -----------
Consolidated income from continuing operations
before income taxes $ 561,728 $ 369,385 $ 427,318
=========== =========== ===========
Segment assets:
Consumer Apparel $ 1,464,402 $ 1,498,342 $ 1,730,102
Occupational Apparel 224,479 265,634 348,134
Outdoor Apparel and Equipment 147,990 134,311 172,306
All Other 130,367 109,895 182,582
----------- ----------- -----------
Total segment assets 1,967,238 2,008,182 2,433,124
Cash and equivalents 496,367 332,049 118,891
Goodwill 473,355 998,046 1,047,951
Discontinued operations 4,803 145,252 203,185
Corporate assets 561,388 619,487 555,005
----------- ----------- -----------
Consolidated assets $ 3,503,151 $ 4,103,016 $ 4,358,156
=========== =========== ===========
27
2002 2001 2000
-------- -------- --------
In thousands
Capital expenditures:
Consumer Apparel $ 41,350 $ 59,865 $ 67,511
Occupational Apparel 1,264 1,902 11,072
Outdoor Apparel and Equipment 5,318 3,278 3,474
All Other 4,248 3,579 5,446
Corporate 12,323 9,696 31,117
-------- -------- --------
Total $ 64,503 $ 78,320 $118,620
======== ======== ========
Depreciation expense:
Consumer Apparel $ 70,644 $ 79,609 $ 81,804
Occupational Apparel 10,292 14,158 15,515
Outdoor Apparel and Equipment 9,545 7,183 4,544
All Other 6,319 7,517 9,571
Corporate 10,598 13,285 13,952
-------- -------- --------
Total $107,398 $121,752 $125,386
======== ======== ========
Net restructuring costs (Note O) included in income from continuing
operations were incurred as follows:
2002 2001 2000
-------- -------- --------
In thousands
Consumer Apparel $ 19,853 $ 69,427 $ 70,950
Occupational Apparel 4,937 23,170 34,646
Outdoor Apparel and Equipment 1,250 3,725 1,000
All Other - 384 1,623
Corporate 302 17,712 8,346
-------- -------- --------
Total $ 26,342 $114,418 $116,565
======== ======== ========
Information by geographic area is presented below, with sales based on
the location of the customer:
28
2002 2001 2000
---------- ---------- ----------
In thousands
Net sales:
United States $4,078,385 $4,256,421 $4,459,116
Foreign, primarily Europe 1,005,138 963,996 944,007
---------- ---------- ----------
Total $5,083,523 $5,220,417 $5,403,123
========== ========== ==========
Property, plant and equipment:
United States $ 346,637 $ 409,688 $ 497,621
Mexico 125,525 141,235 148,401
Other foreign, primarily Europe 94,384 91,414 90,044
---------- ---------- ----------
Total $ 566,546 $ 642,337 $ 736,066
========== ========== ==========
Worldwide sales by product category are as follows:
2002 2001 2000
---------- ---------- ----------
In thousands
Jeanswear and related apparel $2,788,486 $2,873,530 $2,985,975
Intimate apparel 839,786 870,846 894,580
Occupational apparel 491,295 535,997 661,635
Knitwear 260,596 248,918 238,820
Other 703,360 691,126 622,113
---------- ---------- ----------
Total $5,083,523 $5,220,417 $5,403,123
========== ========== ==========
NOTE R - COMMITMENTS
The Company leases certain facilities and equipment under noncancelable
operating leases. Rental expense was $62.8 million in 2002, $63.7 million in
2001 and $63.8 million in 2000. Future minimum lease payments are $63.0 million,
$50.8 million, $40.9 million, $30.6 million and $21.9 million for the years 2003
through 2007 and $69.9 million thereafter.
The Company enters into licensing agreements that provide the Company
rights to market products under trademarks owned by other parties. Royalties
under these agreements are recognized in Cost of Products Sold in the
Consolidated Statements of Income. Certain of these agreements contain
provisions for the payment of minimum royalties on the Company's anticipated
sales of those products in future periods. Future minimum royalty payments are
$21.6 million, $18.5 million, $11.6 million, $11.8 million and $10.9 million for
the years 2003 through 2007.
The trustee of the Employee Stock Ownership Plan may require the
Company to redeem Series B Convertible Preferred Stock held in participant
accounts, and to pay each participant the value of their account, upon
retirement or withdrawal from the ESOP. The amounts of these redemptions vary
based on the conversion value of the Preferred Stock. Payments made for
redemption of Preferred Stock have averaged $6.8 million per year over the last
three years.
29
The Company has entered into $81.3 million of surety bonds and standby
letters of credit representing contingent guarantees of performance under
self-insurance and other programs. These commitments would only be drawn upon if
the Company were to fail to meet its claims obligations.
NOTE S - EARNINGS PER SHARE
2002 2001 2000
-------- -------- --------
In thousands, except per share amounts
Basic earnings per share:
Income from continuing operations $364,428 $217,278 $265,951
Less Preferred Stock dividends
and redemption premium 8,523 5,587 4,158
-------- -------- --------
Income available for Common Stock $355,905 $211,691 $261,793
======== ======== ========
Weighted average Common Stock outstanding 109,167 111,294 114,075
======== ======== ========
Basic earnings per share
from continuing operations $ 3.26 $ 1.90 $ 2.29
======== ======== ========
Diluted earnings per share:
Income from continuing operations $364,428 $217,278 $265,951
Increased ESOP expense if Preferred Stock
were converted to Common Stock 652 826 925
-------- -------- --------
Income available for Common Stock and
dilutive securities $363,776 $216,452 $265,026
======== ======== ========
Weighted average Common Stock outstanding 109,167 111,294 114,075
Additional Common Stock resulting from
dilutive securities:
Preferred Stock 2,103 2,417 2,561
Stock options and other 1,066 1,053 582
-------- -------- --------
Weighted average Common Stock
and dilutive securities outstanding 112,336 114,764 117,218
======== ======== ========
Diluted earnings per share
from continuing operations $ 3.24 $ 1.89 $ 2.26
======== ======== ========
Outstanding options to purchase 5.6 million shares of Common Stock have been
excluded from the computation of diluted earnings per share in 2002, 4.9 million
shares in 2001 and 6.5 million shares in 2000 because the option exercise prices
were greater than the average market price of the Common Stock. Earnings per
share for discontinued operations, for the cumulative effect of changes in
accounting policies and for net income (loss) are computed using the same
weighted average shares described above.
30
NOTE T - FINANCIAL INSTRUMENTS
The carrying amount and fair value of financial instrument assets and
(liabilities) are as follows:
2002 2001
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
In thousands
Short-term borrowings $ (60,918) $ (60,918) $ (77,900) $ (77,900)
Long-term debt (603,065) (695,395) (904,731) (949,521)
Series B Convertible Preferred Stock (36,902) (73,334) (45,631) (91,419)
Foreign currency exchange contracts (5,866) (5,866) 4,735 4,735
The fair value of the Company's short-term and long-term debt is
estimated based on quoted market prices or values of comparable borrowings. The
fair value of the Series B Convertible Preferred Stock is based on a valuation
by an independent financial consulting firm. The fair value of open foreign
currency exchange contracts is based on currency forward rates obtained from
financial institutions.
The Company monitors net foreign currency exposures and may in the
ordinary course of business enter into foreign currency forward exchange
contracts with major financial institutions. These contracts hedge against the
effects of exchange rate fluctuations on specific foreign currency transactions
or anticipated cash flows occurring within 12 months. Use of hedging contracts
allows the Company to reduce its overall exposure to exchange rate movements
since gains and losses on these contracts will offset losses and gains on the
transactions being hedged. The Company formally documents all hedged
transactions and hedging instruments, and assesses, both at the inception of the
contract and on an ongoing basis, whether the hedging instruments are effective
in offsetting changes in cash flows of the hedged transactions. The Company does
not use derivative financial instruments for trading or speculative purposes.
All contracts are reported at fair value, with changes in fair value
reported in earnings or deferred in Other Comprehensive Income, depending on the
nature and effectiveness of the hedged item or the underlying risk. Any
ineffectiveness in a hedging relationship is recognized immediately in earnings.
The Company recognizes the earnings impact of foreign currency forward exchange
contracts designated as cash flow hedges as an offset of the earnings impact of
the hedged transaction at the time in which the hedged transaction affects
operating earnings. These foreign currency cash flow hedges relate to a portion
of the Company's significant foreign currency cash flows for inventory purchases
and production costs, product sales and intercompany royalty payments
anticipated for the following 12 months. The earnings impact of foreign currency
forward exchange contracts designated as fair value hedges is recognized in
Miscellaneous Income during the terms of the contracts, which offsets the
earnings impact of the underlying hedged item. Foreign currency fair value
hedges relate to intercompany financing arrangements.
The following summarizes, by major currency, the net United States
dollar equivalent amount of the Company's foreign currency forward exchange
contracts:
31
2002 2001
--------------------------------- ---------------------------------
NOTIONAL FAIR NOTIONAL FAIR
VALUE - VALUE - VALUE - VALUE -
BOUGHT (SOLD) ASSET (LIABILITY) BOUGHT (SOLD) ASSET (LIABILITY)
------------- ----------------- ------------- -----------------
Mexican peso $ 64,202 $ (2,534) $ 71,298 $ 3,068
European euro (60,028) (3,323) (53,982) 1,052
Canadian dollar (11,014) (17) (28,938) 681
Other (16,878) 8 (19,274) (66)
-------- --------
$ (5,866) $ 4,735
======== ========
The Company recognized net pretax losses of $.3 million during 2002 and net
pretax gains of $7.2 million during 2001, primarily in Cost of Products Sold,
for hedging contracts that had matured. As of January 4, 2003, net pretax losses
of $8.5 million were deferred in Accumulated Other Comprehensive Income; these
net deferred losses are expected to be reclassified into earnings during 2003 at
the time the underlying hedged transactions are realized. Foreign exchange
contracts outstanding at the end of 2000, and related gains and losses during
2000, were not significant.
32
Quarterly Results of Operations (Unaudited)
In thousands,
except per share amounts
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- ------------ ----------- ------------ -----------
2002
Net sales $ 1,212,262 $ 1,160,256 $ 1,400,389 $ 1,310,616 $ 5,083,523
Gross profit 427,894 435,180 529,272 437,169 1,829,515
Income from continuing operations 77,047 88,480 128,564 70,337 * 364,428
Net income (loss) (448,258) 88,866 128,249 76,600 * (154,543)
Earnings (loss) per share
from continuing operations:
Basic $ 0.67 $ 0.79 $ 1.16 $ 0.64 * $ 3.26
Diluted 0.67 0.79 1.15 0.63 * 3.24
Dividends per common share $ 0.24 $ 0.24 $ 0.24 $ 0.25 $ 0.97
- ----------------------------------------------------------------------------------------------------------------
2001
Net sales $ 1,340,388 $ 1,239,644 $ 1,406,659 $ 1,233,726 $ 5,220,417
Gross profit 459,903 432,060 493,018 331,203 1,716,184
Income from continuing operations 75,609 71,129 103,209 (32,669) ** 217,278
Net income (loss) 77,486 69,381 103,560 (112,597) ** 137,830
Earnings (loss) per share
from continuing operations:
Basic $ 0.66 $ 0.63 $ 0.92 $ (0.31) ** $ 1.90
Diluted 0.65 0.62 0.90 (0.31) ** 1.89
Dividends per common share $ 0.23 $ 0.23 $ 0.23 $ 0.24 $ 0.93
- ----------------------------------------------------------------------------------------------------------------
2000
Net sales $ 1,269,763 $ 1,242,302 $ 1,518,150 $ 1,372,908 $ 5,403,123
Gross profit 437,494 441,067 525,188 426,503 1,830,252
Income from continuing operations 77,683 73,815 102,749 11,704 *** 265,951
Net income 71,069 75,745 103,361 10,159 *** 260,334
Earnings per share
from continuing operations:
Basic $ 0.66 $ 0.64 $ 0.89 $ 0.09 *** $ 2.29
Diluted 0.65 0.63 0.88 0.09 *** 2.26
Dividends per common share $ 0.22 $ 0.22 $ 0.22 $ 0.23 $ 0.89
- ----------------------------------------------------------------------------------------------------------------
* In the fourth quarter of 2002, restructuring charges reduced net income by
$14.0 million ($.13 per diluted share). See Note O to the consolidated
financial statements.
** In the fourth quarter of 2001, restructuring charges reduced net income by
$88.7 million ($.80 per diluted share). See Note O to the consolidated
financial statements.
*** In the fourth quarter of 2000, restructuring charges reduced net income by
$73.3 million ($.63 per diluted share). See Note O to the consolidated
financial statements.
VF CORPORATION FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts 2002 (6) 2001 (7) 2000 (8)
- ------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 5,083,523 $ 5,220,417 $ 5,403,123
Operating income 621,924 454,427 505,558
Income from continuing operations 364,428 217,278 265,951
Discontinued operations 8,283 (79,448) 1,165
Cumulative effect of change in accounting policy (527,254) - (6,782)
Net income (loss) (154,543) 137,830 260,334
- ------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic (1)
Income from continuing operations $ 3.26 $ 1.90 $ 2.29
Discontinued operations 0.08 (0.71) 0.01
Cumulative effect of change in accounting policy (4.83) - (0.06)
Net income (loss) (1.49) 1.19 2.25
Earnings (loss) per common share - diluted (1)
Income from continuing operations $ 3.24 $ 1.89 $ 2.26
Discontinued operations 0.07 (0.69) 0.01
Cumulative effect of change in accounting policy (4.69) - (0.06)
Net income (loss) (1.38) 1.19 2.21
Dividends per share .97 .93 .89
Average number of common shares outstanding 109,167 111,294 114,075
- ------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital $ 1,199,696 $ 1,217,587 $ 1,103,896
Current ratio 2.4 2.5 2.1
Total assets $ 3,503,151 $ 4,103,016 $ 4,358,156
Long-term debt 602,287 904,035 905,036
Redeemable preferred stock 36,902 45,631 48,483
Common shareholders' equity 1,657,848 2,112,796 2,191,813
Debt to capital ratio (2) 28.6% 31.7% 34.7%
- ------------------------------------------------------------------------------------------------------------
OTHER STATISTICS (4)
Operating margin 12.2% 8.7% 9.4%
Return on capital (2) (3) 16.9% 8.0% 9.6%
Income as % of average common shareholders' equity 22.1% 9.8% 12.1%
Income as % of average total assets 10.4% 5.0% 6.1%
Cash provided by operations $ 645,584 $ 600,556 $ 434,381
Purchase of Common Stock 124,623 146,592 105,723
Dividends 108,773 106,864 104,920
- ------------------------------------------------------------------------------------------------------------
MARKET DATA (4)
Market price range (1) $45.64 - 31.50 $42.70 - 28.15 $36.90 - 20.94
Book value per common share (1) 15.28 19.21 19.52
Price earnings ratio - high-low 14.1 - 9.7 22.6 - 14.9 16.3 - 9.3
Rate of payout (5) 29.8% 48.9% 38.9%
- ------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
In thousands, except per share amounts 1999 1998
- ----------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 5,193,747 $ 5,090,109
Operating income 638,422 670,090
Income from continuing operations 359,539 377,078
Discontinued operations 6,703 11,228
Cumulative effect of change in accounting policy - -
Net income (loss) 366,242 388,306
- ----------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic (1)
Income from continuing operations $ 2.98 $ 3.07
Discontinued operations 0.06 0.10
Cumulative effect of change in accounting policy - -
Net income (loss) 3.04 3.17
Earnings (loss) per common share - diluted (1)
Income from continuing operations $ 2.93 $ 3.01
Discontinued operations 0.06 0.09
Cumulative effect of change in accounting policy - -
Net income (loss) 2.99 3.10
Dividends per share .85 .81
Average number of common shares outstanding 118,538 120,744
- ----------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital $ 763,943 $ 815,146
Current ratio 1.7 1.8
Total assets $ 4,026,514 $ 3,836,666
Long-term debt 517,834 521,657
Redeemable preferred stock 51,544 54,344
Common shareholders' equity 2,163,818 2,066,308
Debt to capital ratio (2) 30.1% 27.1%
- ----------------------------------------------------------------------------------------------
OTHER STATISTICS (4)
Operating margin 12.3% 13.2%
Return on capital (2) (3) 12.9% 15.1%
Income as % of average common shareholders' equity 17.3% 19.7%
Income as % of average total assets 8.9% 10.2%
Cash provided by operations $ 383,759 $ 382,547
Purchase of Common Stock 149,075 147,398
Dividends 104,302 101,660
- ----------------------------------------------------------------------------------------------
MARKET DATA (4)
Market price range (1) $55.00 - 27.44 $54.69 - 33.44
Book value per common share (1) 18.62 17.30
Price earnings ratio - high-low 18.8 - 9.4 18.2 - 11.1
Rate of payout (5) 28.5% 26.4%
- ----------------------------------------------------------------------------------------------
(1) Per share computations and market price ranges have been adjusted to
reflect a two-for-one stock split in November 1997.
(2) Capital is defined as common shareholders' equity plus short-term and
long-term debt.
(3) Return on capital is based on operating income plus miscellaneous income
(expense), net of income taxes.
(4) Operating statistics and market data are based on continuing operations.
(5) Dividends per share divided by earnings per basic share.
(6) 2002 includes a $16.4 million ($.14 per diluted share) restructuring
charge.
(7) 2001 includes a $88.7 million ($.77 per diluted share) restructuring
charge.
(8) 2000 includes a $73.3 million ($.63 per diluted share) restructuring
charge.
INVESTOR INFORMATION
COMMON STOCK
Listed on the New York Stock Exchange and Pacific Exchange - trading symbol VFC.
SHAREHOLDERS OF RECORD
As of February 11, 2003, there were 6,022 shareholders of record.
DIVIDEND POLICY
Quarterly dividends on VF Corporation Common Stock, when declared, are paid on
or about the 20th day of March, June, September and December.
DIVIDEND REINVESTMENT PLAN
The Plan is offered to shareholders by EquiServe Trust Company, N.A. The Plan
provides for automatic dividend reinvestment and voluntary cash contributions
for the purchase of additional shares of VF Corporation Common Stock. Questions
concerning general Plan information should be directed to the Office of the Vice
President - Administration, General Counsel and Secretary of VF Corporation.
DIVIDEND DIRECT DEPOSIT
Shareholders may have their dividends deposited into their savings or checking
account at any bank that is a member of the Automated Clearing House (ACH)
system. A brochure describing this service may be obtained by contacting
EquiServe.
QUARTERLY COMMON STOCK PRICE INFORMATION
The high and low sales prices on a calendar quarter basis for the periods
indicated were as follows:
2002 2001 2000
High Low High Low High Low
First quarter $ 44.98 $ 39.00 $ 36.93 $ 32.79 $ 30.38 $ 20.94
Second quarter 45.64 38.20 42.70 34.21 31.25 22.88
Third quarter 43.07 33.88 39.95 28.30 27.81 21.81
Fourth quarter 39.35 31.50 41.00 28.15 36.90 22.50