1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
VF Corporation
We have audited the accompanying consolidated balance sheets of VF Corporation
as of January 4, 1997 and December 30, 1995, and the related consolidated
statements of income, cash flows, and common shareholders' equity for the years
then ended. 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. The financial statements of VF Corporation for
the year ended December 31, 1994 were audited by other auditors, whose report
dated February 8, 1995 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VF Corporation at
January 4, 1997 and December 30, 1995, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Philadelphia, Pennsylvania
February 6, 1997
2
VF CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 4 DECEMBER 30
In thousands 1997 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 270,629 $ 84,075
Accounts receivable, less allowances of
$40,253 in 1996 and $34,621 in 1995 592,942 629,506
Inventories 730,823 841,907
Deferred income taxes 90,556 84,952
Other current assets 21,376 27,197
----------- -----------
Total current assets 1,706,326 1,667,637
PROPERTY, PLANT AND EQUIPMENT 721,524 749,880
INTANGIBLE ASSETS 863,930 887,606
OTHER ASSETS 157,755 141,948
----------- -----------
$ 3,449,535 $ 3,447,071
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 17,528 $ 229,945
Current portion of long-term debt 1,298 2,715
Accounts payable 320,056 276,598
Accrued liabilities 427,385 359,062
----------- -----------
Total current liabilities 766,267 868,320
LONG-TERM DEBT 519,058 614,217
OTHER LIABILITIES 164,077 169,392
REDEEMABLE PREFERRED STOCK 58,092 60,667
DEFERRED CONTRIBUTIONS TO EMPLOYEE STOCK OWNERSHIP PLAN (31,698) (37,031)
----------- -----------
26,394 23,636
COMMON SHAREHOLDERS' EQUITY
Common Stock, stated value $1; shares authorized 150,000,000;
shares outstanding, 63,907,874 in 1996 and 63,438,933 in 1995 63,908 63,439
Additional paid-in capital 668,554 593,976
Foreign currency translation 6,428 20,483
Retained earnings 1,234,849 1,093,608
----------- -----------
1,973,739 1,771,506
----------- -----------
$ 3,449,535 $ 3,447,071
=========== ===========
See notes to consolidated financial statements.
3
VF CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED
-------------------------------------------
JANUARY 4 DECEMBER 30 DECEMBER 31
In thousands, except per share amounts 1997 1995 1994
----------- ----------- -----------
NET SALES $ 5,137,178 $ 5,062,299 $ 4,971,713
COSTS AND OPERATING EXPENSES
Cost of products sold 3,458,166 3,577,555 3,387,295
Marketing, administrative and general expenses 1,122,076 1,131,290 1,045,615
Other operating expense (income) (347) 6,064 8,297
----------- ----------- -----------
4,579,895 4,714,909 4,441,207
----------- ----------- -----------
OPERATING INCOME 557,283 347,390 530,506
OTHER INCOME (EXPENSE)
Interest income 13,406 11,085 9,296
Interest expense (62,793) (77,302) (80,280)
Miscellaneous, net 512 2,962 (3,861)
----------- ----------- -----------
(48,875) (63,255) (74,845)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 508,408 284,135 455,661
INCOME TAXES 208,884 126,844 181,125
----------- ----------- -----------
NET INCOME $ 299,524 $ 157,291 $ 274,536
=========== =========== ===========
EARNINGS PER COMMON SHARE
Primary $ 4.64 $ 2.41 $ 4.20
Fully diluted 4.54 2.37 4.10
CASH DIVIDENDS PER COMMON SHARE $ 1.46 $ 1.38 $ 1.30
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 63,646 63,743 64,620
See notes to consolidated financial statements.
4
VF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-------------------------------------
JANUARY 4 DECEMBER 30 DECEMBER 31
In thousands 1997 1995 1994
--------- --------- ---------
OPERATIONS
Net income $ 299,524 $ 157,291 $ 274,536
Adjustments to reconcile net income
to cash provided by operations:
Depreciation 132,440 134,039 126,902
Amortization of intangible assets 28,138 33,682 31,609
Other, net (18,239) (15,048) (4,973)
Changes in current assets and liabilities:
Accounts receivable 25,270 (2,045) (45,519)
Inventories 110,807 (31,881) 72,061
Accounts payable 43,196 (18,623) 14,559
Other, net 90,318 66,241 10,226
--------- --------- ---------
Cash provided by operations 711,454 323,656 479,401
INVESTMENTS
Capital expenditures (138,747) (155,206) (132,908)
Business acquisitions (24,284) (12,004) (494,751)
Other, net 36,887 4,216 1,053
--------- --------- ---------
Cash invested (126,144) (162,994) (626,606)
FINANCING
Increase (decrease) in short-term borrowings (213,746) (92,655) 282,739
Proceeds from long-term debt 15,556 98,718 99,207
Payment of long-term debt (111,522) (3,123) (222,718)
Purchase of Common Stock (61,483) (86,251) (27,878)
Cash dividends paid (97,036) (92,038) (88,223)
Proceeds from issuance of stock 67,819 36,015 8,277
Other, net 1,656 3,005 3,979
--------- --------- ---------
Cash provided (used) by financing (398,756) (136,329) 55,383
--------- --------- ---------
NET CHANGE IN CASH AND EQUIVALENTS 186,554 24,333 (91,822)
CASH AND EQUIVALENTS - BEGINNING OF YEAR 84,075 59,742 151,564
--------- --------- ---------
CASH AND EQUIVALENTS - END OF YEAR $ 270,629 $ 84,075 $ 59,742
========= ========= =========
See notes to consolidated financial statements.
5
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
ADDITIONAL FOREIGN
COMMON PAID-IN CURRENCY RETAINED
In thousands STOCK CAPITAL TRANSLATION EARNINGS
------- --------- ----------- -----------
BALANCE JANUARY 1, 1994 $64,489 $543,165 $(12,865) $ 952,611
Net income - - - 274,536
Cash dividends:
Common Stock - - - (83,994)
Series B Preferred Stock - - - (4,229)
Tax benefit from Preferred Stock dividends - - - 1,082
Redemption of Preferred Stock - - - (284)
Purchase of treasury shares (588) - - (27,290)
Exercise of stock options,
net of shares surrendered 264 9,762 - (72)
Foreign currency translation, net of
$9,381 deferred income taxes - - 17,422 -
------- -------- -------- ----------
BALANCE DECEMBER 31, 1994 64,165 552,927 4,557 1,112,360
Net income - - - 157,291
Cash dividends:
Common Stock - - - (87,907)
Series B Preferred Stock - - - (4,131)
Tax benefit from Preferred Stock dividends - - - 955
Redemption of Preferred Stock - - - (507)
Restricted stock 5 (230) - 248
Purchase of treasury shares (1,720) - - (84,531)
Exercise of stock options,
net of shares surrendered 989 41,279 - (170)
Foreign currency translation, net of
$8,576 deferred income taxes - - 15,926 -
------- -------- -------- ----------
BALANCE DECEMBER 30, 1995 63,439 593,976 20,483 1,093,608
Net income - - - 299,524
Cash dividends:
Common Stock - - - (93,020)
Series B Preferred Stock - - - (4,016)
Tax benefit from Preferred Stock dividends - - - 827
Redemption of Preferred Stock - - - (1,218)
Restricted stock - 23 - -
Purchase of treasury shares (1,015) - - (60,468)
Exercise of stock options,
net of shares surrendered 1,484 74,555 - (388)
Foreign currency translation, net of
$7,568 deferred income taxes - - (14,055) -
------- -------- -------- ----------
BALANCE JANUARY 4, 1997 $63,908 $668,554 $ 6,428 $1,234,849
======= ======== ======== ==========
See notes to consolidated financial statements.
6
VF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 4, 1997
VF Corporation's principal business is designing, manufacturing and marketing
high quality branded jeanswear, knitwear, intimate apparel, children's playwear
and other apparel. Jeanswear and related products represent over one-half of
consolidated sales and earnings and approximately one-half of total assets. The
Company's customers are primarily department, discount and specialty stores
throughout the world. One domestic discount store group comprises 10.3% of
consolidated sales in 1996 and 10.5% in 1995.
NOTE A - ACCOUNTING POLICIES
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.
INVENTORIES are stated at the lower of cost or market. Inventories stated on the
last-in, first-out basis represent 29% of total 1996 inventories and 33% in
1995. 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 by the straight-line method over the estimated useful
lives of the assets, ranging up to 40 years for buildings and 10 years for
machinery and equipment.
INTANGIBLE ASSETS represent the excess of costs over the fair value of net
tangible assets of businesses acquired, less accumulated amortization of $224.5
million and $208.4 million in 1996 and 1995. These assets are amortized on the
straight-line method over five to forty years.
The Company's policy is to evaluate intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. This evaluation is based on a number of
factors, including a business unit's expectations for operating income and
undiscounted cash flows that will result from the use of such assets.
ADVERTISING COSTS are expensed as incurred and were $271.4 million in 1996,
$230.6 million in 1995 and $218.9 million in 1994.
EARNINGS PER SHARE: Primary earnings per share are computed by dividing net
income, after deducting preferred dividends, by the weighted average number of
common shares outstanding. Fully diluted earnings per share assume the
conversion of Preferred Stock and the exercise of stock options that have a
dilutive effect.
STOCK-BASED EMPLOYEE BENEFIT PLANS: Compensation expense is not recorded for
stock options granted at fair market value. For grants of restricted stock,
compensation equal to the market value of shares at the date of grant is
deferred and amortized to expense over the vesting period.
7
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 - ACQUISITIONS
In August 1996, the Company acquired a manufacturer and marketer of flame
retardant apparel for $20.8 million. Intangible assets related to this
acquisition totaled $18.1 million. During 1995 and 1996, the Company paid a
total of $15.5 million for a company that manufactures and markets Lee branded
products in Mexico. In January 1994, the Company acquired the common stock of
H.H. Cutler Company for a total consideration of $154.7 million and the common
stock of Nutmeg Industries, Inc. for a total consideration of $352.2 million, of
which $349.1 million related to intangible assets of these companies. Both
companies manufacture and market licensed apparel.
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 allocated to intangible assets and is being
amortized primarily over 40 years. Operating results of these companies have
been included in the consolidated financial statements since the dates of
acquisition.
NOTE C - INVENTORIES
1996 1995
-------- --------
(In thousands)
Finished products $394,962 $514,688
Work in process 168,774 139,721
Materials and supplies 167,087 187,498
-------- --------
$730,823 $841,907
======== ========
The current cost of inventories stated on the last-in, first-out method (see
Note A) is not significantly different from their value determined under the
first-in, first-out method.
8
NOTE D - PROPERTY, PLANT AND EQUIPMENT
1996 1995
---------- ----------
(In thousands)
Land $ 44,244 $ 42,605
Buildings 402,635 389,135
Machinery and equipment 1,096,472 1,058,644
---------- ----------
1,543,351 1,490,384
Less accumulated depreciation 821,827 740,504
---------- ----------
$ 721,524 $ 749,880
========== ==========
NOTE E - SHORT-TERM BORROWINGS
1996 1995
---------- ----------
(In thousands)
Commercial paper $ 143,070
Banks $ 17,528 86,875
---------- ----------
$ 17,528 $ 229,945
The weighted average interest rate was 12.6% at the end of 1996 and 6.6% at the
end of 1995.
The Company maintains an unsecured 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 1999, requires a .12% facility fee per year and contains various financial
covenants, including minimum net worth and debt ratio requirements. At January
4, 1997, there were no borrowings under the agreement.
NOTE F - ACCRUED LIABILITIES
1996 1995
---------- ----------
(In thousands)
Income taxes $ 81,419 $ 44,182
Compensation 87,027 49,583
Insurance 64,247 50,805
Special charges (Note M) 16,218 66,277
Other 178,474 148,215
---------- ----------
$ 427,385 $ 359,062
========== ==========
9
NOTE G - LONG-TERM DEBT
1996 1995
---------- ----------
(In thousands)
9.50% notes, due 1999 $ 100,000
9.50% notes, due 2001 $ 100,000 100,000
6.63% notes, due 2003 100,000 100,000
7.60% notes, due 2004 100,000 100,000
6.75% notes, due 2005 100,000 100,000
9.25% debentures, due 2022 100,000 100,000
Capital leases and other 20,356 16,932
---------- ----------
520,356 616,932
Less current portion 1,298 2,715
---------- ----------
$ 519,058 $ 614,217
========== ==========
The scheduled payments of long-term debt are $.6 million in each of 1998, 1999
and 2000 and $116.5 million in 2001. The Company paid interest of $62.6 million
in 1996, $74.4 million in 1995 and $83.1 million in 1994.
NOTE H - OTHER LIABILITIES
1996 1995
---------- ----------
(In thousands)
Deferred income taxes $ 43,131 $ 59,191
Deferred compensation 84,617 76,834
Other 36,329 33,367
---------- ----------
$ 164,077 $ 169,392
========== ==========
NOTE I - BENEFIT PLANS
The Company sponsors a noncontributory defined benefit pension plan covering
substantially all full-time domestic employees. Benefits are based on employees'
compensation and years of service. The Company annually contributes amounts, as
determined by an actuary, that provide the plan with sufficient assets to meet
future benefit payments. Plan assets consist principally of common stocks, U.S.
government obligations and corporate obligations.
10
The effect of the defined benefit plan on income is as follows:
1996 1995 1994
----------- ----------- -----------
(In thousands)
Service cost - benefits earned during the year $ 17,160 $ 14,660 $ 16,230
Interest cost on projected benefit obligation 31,060 26,409 25,639
Actual return on plan assets (38,049) (68,659) (5,193)
Net amortization and deferral 7,711 44,606 (18,124)
----------- ----------- -----------
Pension expense $ 17,882 $ 17,016 $ 18,552
=========== =========== ===========
The funded status of the defined benefit plan, based on a September 30 valuation
date, is as follows:
1996 1995
----------- -----------
(In thousands)
Present value of vested benefits $ 326,185 $ 307,952
=========== ===========
Present value of accumulated benefits $ 372,183 $ 333,846
=========== ===========
Plan assets at fair value $ 405,000 $ 358,051
Present value of projected benefits 411,295 392,112
----------- -----------
Funded status (6,295) (34,061)
Unrecognized net loss 12,387 31,526
Unrecognized net asset (7,446) (11,824)
Unrecognized prior service cost 18,208 23,195
----------- -----------
Pension asset recorded in Other Assets $ 16,854 $ 8,836
=========== ===========
The projected benefit obligation was determined using an assumed discount rate
of 8.0% in 1996, 7.8% in 1995 and 8.3% in 1994. The assumption for compensation
increases was 4.5% in 1996 and 5.0% in 1995 and 1994, and the assumption for
return on plan assets was 8.8% in each year.
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 $5.5 million in 1996, $5.8
million in 1995 and $5.6 million in 1994. Plan expense was $5.7 million in 1996,
$6.2 million in 1995 and $6.4 million in 1994, after giving effect to
tax-deductible dividends on the Series B Preferred Stock of $4.0 million in
1996, $4.1 million in 1995 and $4.2 million in 1994.
The Company sponsors other savings and retirement plans for certain domestic and
foreign employees. Expense for these plans totaled $9.6 million in 1996, $13.3
million in 1995 and $9.7 million in 1994.
11
NOTE J - CAPITAL
Common shares outstanding are net of shares held in treasury of 2,399,323 in
1996, 1,376,976 in 1995 and 2,358,675 in 1994. During 1995, 2,700,000 treasury
shares were retired.
There are 25,000,000 authorized shares of Preferred Stock, $1 par value. As of
January 4, 1997, 2,000,000 shares are designated as Series A Preferred Stock, of
which none have been issued. In addition, 2,105,263 shares are designated as
6.75% Series B Preferred Stock, which were purchased by the ESOP.
There were 1,881,515 shares of Series B Preferred Stock outstanding at January
4, 1997, 1,964,942 shares outstanding at December 30, 1995 and 2,014,427 shares
outstanding at December 31, 1994, after share redemptions.
Each outstanding share of Common Stock has one preferred stock purchase right
attached. The rights become exercisable ten days after an outside party
acquires, or makes an offer for, 20% or more of the Common Stock. Each right
entitles its holder to buy 1/100 share of Series A Preferred Stock for $100.
Once exercisable, if the Company is involved in a merger or other business
combination or an outside party acquires 20% or more of the Common Stock, each
right will be modified to entitle its holder (other than the acquiror) 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 acquiror may be exchanged
for one share of VF Common Stock or 1/100 share of Series A Preferred Stock. The
rights, which expire on January 13, 1998, may be redeemed at $.01 per right
prior to their becoming exercisable.
NOTE K - REDEEMABLE PREFERRED STOCK
Each share of Series B Preferred Stock has a redemption value of $30.88 plus
cumulative accrued dividends, is convertible into 8/10 share of Common Stock and
is entitled to one vote per share along with 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.
The ESOP's purchase of the preferred shares was funded by a loan of $65.0
million from the Company that bears interest at 9.80% and is payable in
increasing installments through 2003. Interest related to this loan was $4.4
million in 1996, $4.9 million in 1995 and $5.3 million in 1994. Principal and
interest obligations on the loan are satisfied as the Company makes
contributions to the savings plan and dividends are paid on the Preferred Stock.
As principal payments are made on the loan, shares of Preferred Stock are
allocated to participating employees' accounts within the ESOP.
NOTE L - STOCK OPTIONS
The Company has granted nonqualified stock options to officers, directors and
key employees under two stock option plans at prices not less than fair market
value on the date of grant. Options become exercisable one year after the date
of grant and expire ten years after the date of grant.
12
Activity in the stock option plans is summarized as follows:
SHARES WEIGHTED
UNDER AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Balance January 1, 1994 4,168,291 $ 44.61
Options granted 1,015,475 47.90
Options exercised (265,408) 31.57
Options canceled (178,870) 53.96
---------- ---------
Balance December 31, 1994 4,739,488 45.69
Options granted 1,088,775 52.00
Options exercised (992,710) 36.42
Options canceled (73,504) 50.83
---------- ---------
Balance December 30, 1995 4,762,049 48.99
Options granted 361,105 68.94
Options exercised (1,491,288) 45.74
Options canceled (171,225) 49.72
---------- ---------
Balance January 4, 1997 3,460,641 $ 52.43
==========
Stock options outstanding at January 4, 1997 are summarized as follows:
RANGE OF WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- -------- ----------- ---------------- --------------
$16-20 23,850 3.9 years $ 16.19
21-30 34,300 1.7 years 27.53
31-40 218,415 4.4 years 35.48
41-50 885,271 7.5 years 46.77
51-60 1,937,700 7.3 years 54.74
61-69 361,105 9.9 years 68.94
- ------ --------- --------- ------
$16-69 3,460,641 7.4 years $ 52.43
=========
All above options are exercisable except for those granted in 1996. There are
36,595 options available for future grants. In December 1996 the Board of
Directors adopted the 1996 Stock Compensation Plan, subject to shareholder
approval at the April 1997 Annual Meeting. Under the 1996 plan, there are an
additional 621,595 options that have been granted at $69.00 per share, subject
to shareholder approval of the new plan.
The Company has not recognized compensation expense in connection with stock
options grants under the plans. However, had compensation expense been
determined based on the fair value of the options on the grant dates, the
Company's pro forma net income and both primary and fully diluted earnings per
13
share for 1996 would have been reduced by $6.9 million or $.11 per share.
Because options are granted late in the year, the pro forma expense for 1995
would not be meaningful and is therefore not presented.
The fair value of options granted during 1996 was $15.95 per share and of
options granted during 1995 was $10.98 per share. Fair value is estimated based
on the Black-Scholes option-pricing model with the following assumptions for
grants in 1996 and 1995: dividend yield of 2.5%; expected volatility of 20%;
risk-free interest rates of 6.5% in 1996 and 5.4% in 1995; and expected lives of
5 years.
The Company has granted to a key employee 5,253 shares of restricted stock that
vest in the year 2005. The Company has 300,000 shares available for future
grants under the 1995 Key Employee Restricted Stock Plan.
NOTE M - SPECIAL CHARGES
During the fourth quarter of 1995, the Company recorded special charges totaling
$155.9 million ($1.61 per share) to address changes in consumer buying habits
and the increasingly competitive retail environment that have occurred in the
apparel industry. These charges were aimed at reducing the Company's overall
cost structure, including both manufacturing and administrative costs, through
the closure of higher cost manufacturing facilities and personnel reductions in
administrative positions. In addition, included in the charges were provisions
related to better align inventories to existing retailer and consumer
requirements.
These actions affected approximately 7,700 of the Company's employees in
manufacturing and headquarters locations throughout North America and Europe.
Charges related to personnel reductions, including severance and related
benefits, totaled $46.9 million. Of this amount, $6.7 million was paid in 1995
and $33.3 million was paid in 1996 to approximately 6,200 employees who have
been terminated. The remainder of the employees included in the cost reduction
initiatives are located at manufacturing and other facilities that are still in
the closure process. Remaining cash payments of $6.9 million will be made to
those employees during 1997.
The remaining $109.0 million of the 1995 special provisions included noncash
charges of $59.9 million for asset write-offs for closed manufacturing
facilities and business and inventory realignments and $49.1 million for
expected cash charges for lease and other contract terminations. Cash payments
totaled $23.0 million in 1995 and $16.8 million in 1996. Remaining cash payments
totaling $9.3 million relate to asset disposition and contract and lease
termination costs to be paid in 1997.
The special charges were recorded in the 1995 consolidated statement of income
as follows: Cost of Products Sold - $109.8 million; Marketing, Administrative
and General Expenses - $41.7 million; Miscellaneous and Other Operating Expenses
- - $4.4 million.
NOTE N - INCOME TAXES
14
The provision for income taxes is computed based on the following amounts of
income before income taxes:
1996 1995 1994
--------- --------- ---------
(In thousands)
Domestic $ 433,959 $ 261,437 $ 409,806
Foreign 74,449 22,698 45,855
--------- --------- ---------
$ 508,408 $ 284,135 $ 455,661
========= ========= =========
The provision for income taxes consists of:
1996 1995 1994
--------- --------- ---------
(In thousands)
Current:
Federal $ 179,217 $ 136,863 $ 149,000
Foreign 43,493 32,535 24,649
State 15,894 11,299 12,978
--------- --------- ---------
238,604 180,697 186,627
Deferred, primarily federal (29,720) (53,853) (5,502)
--------- --------- ---------
$ 208,884 $ 126,844 $ 181,125
========= ========= =========
The reasons for the difference between income taxes computed by applying the
statutory federal income tax rate and income tax expense in the financial
statements are as follows:
1996 1995 1994
--------- --------- ---------
(In thousands)
Tax at federal statutory rate $ 177,943 $ 99,448 $ 159,481
State income taxes, net of federal tax benefit 10,331 7,344 8,436
Amortization of intangible assets 7,091 7,319 7,126
Foreign operating losses
with no current benefit 7,109 11,169 2,302
Other, net 6,410 1,564 3,780
--------- --------- ---------
$ 208,884 $ 126,844 $ 181,125
========= ========= =========
15
Deferred income tax assets and liabilities consist of the following:
1996 1995
--------- ---------
(In thousands)
Deferred income tax assets:
Employee benefits $ 42,582 $ 39,567
Other accrued expenses 93,922 82,453
Inventories 21,934 19,603
Operating loss carryforwards 32,760 27,018
--------- ---------
191,198 168,641
Valuation allowance (29,296) (22,154)
--------- ---------
$ 161,902 $ 146,487
========= =========
Deferred income tax liabilities:
Depreciation $ 58,848 $ 62,473
Inventories 21,596 22,492
Foreign currency translation 3,461 11,030
Unremitted foreign earnings 6,735 11,373
Other 16,461 6,349
--------- ---------
$ 107,101 $ 113,717
========= =========
The Company has $77.4 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 certain of those loss
carryforwards will not be realized. Income taxes paid were $177.4 million in
1996, $172.0 million in 1995 and $177.0 million in 1994.
NOTE O - OPERATIONS BY GEOGRAPHIC AREA
1996 1995 1994
----------- ----------- -----------
(In thousands)
Net sales:
United States $ 4,203,675 $ 4,192,435 $ 4,209,090
Foreign 933,503 869,864 762,623
----------- ----------- -----------
$ 5,137,178 $ 5,062,299 $ 4,971,713
=========== =========== ===========
Operating income:
United States $ 481,684 $ 328,878 $ 493,922
Foreign 111,064 59,173 75,253
----------- ----------- -----------
592,748 388,051 569,175
Corporate expenses (35,465) (40,661) (38,669)
Interest, net (49,387) (66,217) (70,984)
Miscellaneous, net 512 2,962 (3,861)
----------- ----------- -----------
Income before income taxes $ 508,408 $ 284,135 $ 455,661
=========== =========== ===========
16
1996 1995 1994
---------- ---------- ----------
(In thousands)
Identifiable assets:
United States $2,546,162 $2,672,864 $2,632,079
Foreign 646,410 684,426 610,543
Corporate 256,963 89,781 92,986
---------- ---------- ----------
$3,449,535 $3,447,071 $3,335,608
========== ========== ==========
Foreign operations are conducted primarily in Europe. Foreign operations located
elsewhere are not significant. Corporate assets consist primarily of cash and
cash equivalents. The 1995 special charges (Note M) were incurred as follows:
United States - $127.1 million; Foreign - $22.9 million; Corporate - $2.9
million; Miscellaneous - $3.0 million.
NOTE P - LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Rental expense was $67.0 million in 1996, $70.4 million in
1995 and $55.5 million in 1994. Future minimum lease payments are $45.6 million,
$35.5 million, $26.3 million, $22.5 million and $19.4 million for the years 1997
through 2001 and $57.2 million thereafter.
NOTE Q - CONTINGENCIES
The Company has certain contingent liabilities resulting from legal proceedings
and claims arising in the ordinary course of business. Management believes that
the probable resolution of such contingencies will not have a material adverse
effect on the financial position of the Company.
NOTE R - FINANCIAL INSTRUMENTS
The following represents the carrying amount and fair value of financial
instruments included in the balance sheets:
1996 1995
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(In thousands)
Financial liabilities:
Short-term borrowings $ 17,528 $ 17,528 $229,945 $229,945
Long-term debt 519,058 537,698 614,217 668,108
Series B Preferred Stock 58,092 101,602 60,667 82,921
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 Preferred Stock is based on a valuation by an independent financial
consulting firm.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
ANALYSIS OF OPERATIONS
The Company's earnings in 1996 reflect the benefits from actions taken in late
1995 (refer to Note M to the consolidated financial statements) to (1) close a
number of higher cost domestic manufacturing facilities and move a greater
percentage of our manufacturing to lower cost offshore locations, (2) effect
reductions in selling and administrative expenses and (3) reinvest a significant
portion of the savings from these actions in increased advertising and other
actions to support and build our brands. These initiatives, along with
substantially improved inventory positions, contributed substantially to the
Company's achievement of record levels of earnings and cash generation in 1996.
Net sales in 1996 increased by 1% over 1995. Unit sales declined by 2%,
but average prices increased, primarily due to changes in product mix. Net sales
in 1995 increased by 2% over 1994 on flat unit sales. The sales dollar increase
resulted from modest price increases and the impact of a weaker U.S. dollar in
translating foreign currencies.
Gross margins were 32.7% of sales in 1996, compared with 29.3% in 1995
and 31.9% in 1994. Gross margins in 1995 included $109.8 million of special
charges; excluding these charges, 1995 gross margins were 31.5%. The margin
improvement in 1996 over the prior two years, after excluding the special
charges in 1995, resulted from lower manufacturing costs attributable to the
cost reduction initiatives of late 1995 and, particularly in relation to 1995,
lower provisions for inventory write-downs and manufacturing plant downtime.
Marketing, administrative and general expenses were 21.8% of sales in
1996, compared with 22.3% and 21.0% in 1995 and 1994, respectively. Excluding
special charges of $41.7 million in 1995, expenses were 21.5% of sales. During
1996, administrative expenses declined as
18
a result of the cost reduction initiatives undertaken in late 1995, but
marketing and promotional expenses increased as a result of the Company's
decision to invest more heavily in brand support. The increase in 1995 over
1994, after excluding the special charges, was due to increased advertising and
other marketing expenses on lower than expected sales.
Other operating income and expense includes goodwill amortization
expense, offset by net royalty income. Royalty income increased over the three
year period, while amortization of goodwill declined in 1996 from expiring
amortization periods.
Net interest expense declined significantly in 1996 as the high level
of cash generated from operations was used to reduce borrowings. Net interest
expense declined slightly in 1995 from 1994 due to a lower borrowing level.
The effective income tax rate was 41.1% in 1996, 44.6% in 1995 and
39.7% in 1994. The increase in rate over 1994 is primarily due to a higher level
of foreign operating losses with no current tax benefit. The rate in 1995 was
unusually high due to the amounts of nondeductible foreign operating losses and
goodwill expense in relation to the low level of income before income taxes.
- -OPERATING RESULTS BY BUSINESS GROUP-
The Jeanswear business group includes the Lee, Wrangler, Rustler and Riders
brands in the United States and the Lee, Wrangler and Maverick brands in
international markets, primarily in Europe. International sales have been
growing at a higher rate than in the United States. Jeanswear operating income
in 1995 includes $54.8 million of special charges related to both domestic and
international operations. The operating income improvement in 1996 over the
prior two years, after excluding special charges in 1995, resulted from lower
manufacturing and other product costs, both domestically and abroad.
19
The Decorated Knitwear business group consists of the Lee Sport and
Nutmeg sports apparel brands, JanSport imprinted apparel, and private label and
printwear fleece and T-shirt operations. Sales increased in 1996 due to higher
private label fleece and T-shirt volume. Operating income increased
substantially in 1996 over the two prior years, even after excluding $28.7
million of special charges in 1995. In addition to higher sales volume, this
increase resulted from improved operating margins within the sports apparel
businesses.
The Intimate Apparel business group includes the Vanity Fair and
Vassarette brands as well as a private label business in the United States,
along with a number of brands in Europe, primarily in France and Spain. Sales
declined in 1996 in both the United States and Europe. The operating loss in
1995 includes $45.4 million in special charges. Otherwise, the declines in
operating income have been primarily volume related.
The Playwear business group consists of the Healthtex brand, the
preschool sizes of Lee and Wrangler, Nike licensed products and playwear and
sleepwear products imprinted with characters licensed from The Walt Disney
Company and others. Operating income in the business group in 1995 was impacted
by $12.7 million in special charges. The overall decline in this category from
1994 resulted from manufacturing and operating difficulties along with continued
pricing pressures at retail.
The Specialty Apparel business group includes Red Kap occupational
apparel, Jantzen swim and casual apparel and JanSport brand daypacks and
equipment. Sales grew in each brand in 1996. Sales in the business group
declined in 1995 as a result of the discontinuation of the Jantzen men's
sportswear and sweater businesses. Operating income increased in each brand in
1996, even after excluding $6.9 million of special charges in 1995.
ANALYSIS OF FINANCIAL CONDITION
In managing its capital structure, VF balances financial leverage with equity to
reduce its overall cost of capital, while providing the flexibility to pursue
investment opportunities that may become
20
available. It is management's goal to maintain a debt to capital ratio of less
than 40%. Our debt to capital ratio was within these guidelines: 21.4% at the
end of 1996 and 32.3% at the end of 1995. Despite our stated goal, we will
exceed this level if warranted by appropriate investment opportunities.
- -BALANCE SHEETS-
Accounts receivable was lower at the end of 1996 than 1995, despite higher
fourth quarter sales. The timing of our fiscal year-end in 1996 provided for an
additional week of cash collections in January.
Inventories are lower at the end of 1996, reflecting improvements in
inventory management and controls. Total inventories are at their lowest level
since 1991.
All domestic short-term borrowings were repaid during 1996 from the
strong cash flow from operations. The remaining balance in short-term borrowings
represents amounts due to international lenders only. In addition, during 1996,
the Company called for redemption $100 million of its long-term debt originally
due in 1999. No further debt reductions were made in 1996, despite cash
availability, as there are no long-term debt maturities until the year 2001.
Over 18% of our 1996 sales and operating income were derived from
international locations. VF's financial position and operating results can be
influenced by economic conditions in countries where VF conducts business and by
changing foreign currency exchange rates. VF does not hedge the translation of
foreign currencies into the U.S. dollar, but we do enter into foreign currency
forward contracts to minimize the effect of fluctuating foreign currencies on
cash flows from foreign operations. These contracts are not material.
21
- -LIQUIDITY AND CASH FLOW-
Working capital increased in 1996, and the current ratio increased to 2.2 to 1
from 1.9 to 1 in 1995 due to the high cash and low short-term debt levels at the
end of 1996.
Cash provided by operations was a record $711 million for 1996,
resulting from higher net income, reduced accounts receivable and inventory
levels and an increase in current liabilities. The 1995 amount was lower than
1994 because of lower net income and an increase in working capital
requirements.
Capital expenditures were $139 million in 1996, compared with $155
million and $133 million in 1995 and 1994, respectively. Capital expenditures in
1997 should be somewhat higher than the level of the past three years and are
expected to be funded by cash flows from operations. Beginning in late 1994 and
continuing through 1996, the Company purchased 3.3 million shares of its Common
Stock in open market transactions for a total of $175 million. Of these totals,
one million shares were purchased for $61 million during 1996. Under the most
recent authorization of the Board of Directors for share repurchase, the Company
can purchase up to an additional 4.7 million shares.
Cash dividends totaled $1.46 per common share in 1996, compared with
$1.38 in 1995 and $1.30 in 1994. The dividend payout rate was 31% in 1996,
compared with 57% in 1995 due to lower earnings and 31% in 1994. The indicated
annual dividend rate for 1997 is $1.52 per share. VF has paid dividends on its
Common Stock annually since 1941 and intends to maintain a long-term payout rate
of 30%.
The Company's strong financial position, including existing cash,
unused credit lines and a low debt ratio, provides substantial capacity to meet
investment opportunities that may arise.
22
- -OTHER MATTERS-
The Company is a defendant in an action initiated in 1990 alleging infringement
of a patent allegedly relating to a process, commonly called "acid wash," used
in the production of certain denim garments. Similar actions have been brought
against other denim apparel manufacturers. The Company is vigorously contesting
the action and believes that it has numerous substantive defenses. No trial date
has been ordered. Based on currently available information and the advice of
counsel, management is not in a position to determine the likelihood of the
outcome of the action with certainty. Notwithstanding, management believes at
this time that the outcome will not have a material impact on the financial
position of the Company.
23
QUARTERLY RESULTS OF OPERATIONS
In thousands, except per share amounts
EARNINGS PER COMMON SHARE DIVIDENDS PER
NET SALES GROSS PROFIT NET INCOME PRIMARY FULLY DILUTED COMMON SHARE
---------- ------------ ---------- ------- ------------- -------------
1996
FIRST QUARTER $1,158,123 $ 380,517 $ 55,930 $ .86 $ .85 $ .36
SECOND QUARTER 1,220,997 396,319 69,892 1.08 1.06 .36
THIRD QUARTER 1,380,919 446,358 91,048 1.42 1.39 .36
FOURTH QUARTER 1,377,139 455,818 82,654 1.28 1.25 .38
---------- ---------- -------- ----- ----- -----
$5,137,178 $1,679,012 $299,524 $4.64 $4.54 $1.46
========== ========== ======== ===== ===== =====
1995
First quarter $1,187,587 $ 388,439 $ 57,953 $ .89 $ .87 $ .34
Second quarter 1,271,936 400,924 65,237 1.01 .99 .34
Third quarter 1,332,102 412,552 69,718 1.08 1.05 .34
Fourth quarter 1,270,674 282,829 (35,617)* (0.57)* (0.57)* .36
---------- ---------- -------- ----- ----- -----
$5,062,299 $1,484,744 $157,291 $2.41 $2.37 $1.38
========== ========== ======== ===== ===== =====
1994
First quarter $1,123,035 $ 362,612 $ 52,898 $ .81 $ .79 $ .32
Second quarter 1,186,324 380,175 58,916 .90 .88 .32
Third quarter 1,373,037 442,077 87,804 1.34 1.31 .32
Fourth quarter 1,289,317 399,554 74,918 1.15 1.12 .34
---------- ---------- -------- ----- ----- -----
$4,971,713 $1,584,418 $274,536 $4.20 $4.10 $1.30
========== ========== ======== ===== ===== =====
* Special charges of $155.9 million reduced net income by $102.5 million ($1.61
per share). See Note M to Consolidated Financial Statements.
24
SALES AND OPERATING INCOME BY BUSINESS GROUP (Unaudited)
In thousands Fiscal year ended JANUARY 4, 1997 December 30, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------
NET SALES
Jeanswear $ 2,754,039 $ 2,664,930 $ 2,547,131
Decorated Knitwear 637,982 619,932 623,272
Intimate Apparel 650,197 729,149 724,462
Playwear 382,382 371,717 367,508
Specialty Apparel 712,578 676,571 709,340
- --------------------------------------------------------------------------------------------------
$ 5,137,178 $ 5,062,299 $ 4,971,713
- --------------------------------------------------------------------------------------------------
OPERATING INCOME
Jeanswear $ 395,591 $ 311,688 $ 372,392
Decorated Knitwear 52,362 8,039 32,423
Intimate Apparel 39,947 (778) 60,349
Playwear 12,342 2,745 36,457
Specialty Apparel 92,160 72,421 75,851
- --------------------------------------------------------------------------------------------------
592,402 394,115 577,472
OTHER OPERATING (EXPENSE) INCOME 347 (6,064) (8,297)
CORPORATE EXPENSES (35,466) (40,661) (38,669)
- --------------------------------------------------------------------------------------------------
$ 557,283 $ 347,390 $ 530,506
==================================================================================================
25
QUARTERLY COMMON STOCK PRICE INFORMATION
1996 1995 1994
----------------- ----------------- -----------------
High Low High Low High Low
----------------- ----------------- -----------------
First quarter $56 3/4 $47 5/8 $53 1/8 $47 1/8 $51 7/8 $44 1/2
Second quarter 63 3/8 53 3/4 53 3/4 50 1/2 53 3/4 46
Third quarter 62 3/8 52 1/2 57 1/8 48 52 7/8 46 1/2
Fourth quarter 69 7/8 59 53 5/8 46 3/4 51 5/8 44 1/4
26
VF CORPORATION 1996 FINANCIAL SUMMARY
In thousands, except per share amounts 1996 1995 1994
------------ ------------ ------------
SUMMARY OF OPERATIONS
Net sales $ 5,137,178 $ 5,062,299 $ 4,971,713
Cost of products sold 3,458,166 3,577,555 3,387,295
------------ ------------ ------------
Gross profit 1,679,012 1,484,744 1,584,418
Marketing, administrative and other 1,121,729 1,137,354 1,053,912
------------ ------------ ------------
Operating income 557,283 347,390 530,506
Interest, net (49,387) (66,217) (70,984)
Miscellaneous, net 512 2,962 (3,861)
------------ ------------ ------------
Income before income taxes 508,408 284,135 455,661
Income taxes 208,884 126,844 181,125
------------ ------------ ------------
Net income $ 299,524 $ 157,291 $ 274,536
------------ ------------ ------------
Per share of Common Stock (1)
Earnings - primary $ 4.64 $ 2.41 $ 4.20
Dividends 1.46 1.38 1.30
Average number of common shares outstanding 63,646 63,743 64,620
Net income as % of average common shareholders'
equity 16.2% 8.8% 16.8%
Net income as % of average total assets 8.6% 4.4% 7.9%
------------ ------------ ------------
FINANCIAL POSITION
Accounts receivable, net $ 592,942 $ 629,506 $ 613,337
Inventories 730,823 841,907 801,338
Total current assets 1,706,326 1,667,637 1,551,166
Property, plant and equipment, net 721,524 749,880 767,011
Total assets 3,449,535 3,447,071 3,335,608
Total current liabilities 766,267 868,320 912,332
Long-term debt 519,058 614,217 516,700
Common shareholders' equity 1,973,739 1,771,506 1,734,009
------------ ------------ ------------
OTHER STATISTICS
Working capital $ 940,059 $ 799,317 $ 638,834
Current ratio 2.2 1.9 1.7
Debt to total capital ratio (2) 21.4% 32.3% 32.7%
Dividends $ 97,036 $ 92,038 $ 88,223
Purchase of Common Stock 61,483 86,251 27,878
Cash provided by operations 711,454 323,656 479,401
Capital expenditures (excluding acquisitions) 138,747 155,206 132,908
Depreciation and amortization 160,578 167,721 158,511
------------ ------------ ------------
MARKET DATA
Market price range (1) $69 7/8 - 47 5/8 $57 1/8 - 46 3/4 $53 3/4 - 44 1/4
Book value per common share (1) 30.88 27.92 27.02
Price earnings ratio -- high-low 15.1 - 10.3 23.7 - 19.4 12.8 - 10.5
Rate of payout (3) 31.5% 57.3% 31.0%
In thousands, except per share amounts 1993 1992
------------ ------------
SUMMARY OF OPERATIONS
Net sales $ 4,320,404 $ 3,824,449
Cost of products sold 2,974,861 2,603,726
------------ ------------
Gross profit 1,345,543 1,220,723
Marketing, administrative and other 911,063 788,216
------------ ------------
Operating income 434,480 432,507
Interest, net (37,387) (53,615)
Miscellaneous, net 2,894 (3,119)
------------ ------------
Income before income taxes 399,987 375,773
Income taxes 153,572 138,742
------------ ------------
Net income $ 246,415 $ 237,031
============ ============
Per share of Common Stock (1)
Earnings - primary $ 3.80 $ 3.97
Dividends 1.22 1.11
Average number of common shares outstanding 64,011 58,608
Net income as % of average common shareholders'
equity 16.9% 23.0%
Net income as % of average total assets 8.5% 9.7%
------------ ------------
FINANCIAL POSITION
Accounts receivable, net $ 511,887 $ 493,030
Inventories 778,767 742,474
Total current assets 1,500,180 1,365,573
Property, plant and equipment, net 712,759 711,087
Total assets 2,877,348 2,712,380
Total current liabilities 659,848 684,002
Long-term debt 527,573 767,641
Common shareholders' equity 1,547,400 1,153,971
------------ ------------
OTHER STATISTICS
Working capital $ 840,332 $ 681,571
Current ratio 2.3 2.0
Debt to total capital ratio (2) 30.3% 44.8%
Dividends $ 82,831 $ 69,552
Purchase of Common Stock - -
Cash provided by operations 293,751 123,060
Capital expenditures (excluding acquisitions) 209,494 207,202
Depreciation and amortization 125,765 108,281
------------ ------------
MARKET DATA
Market price range (1) $56 1/2 - 39 1/2 $57 1/2 - 38 1/2
Book value per common share (1) 23.99 19.39
Price earnings ratio -- high-low 14.9 - 10.4 14.5 - 9.7
Rate of payout (3) 32.1% 28.0%
(1) Per share computations and market price ranges have been adjusted to reflect
two-for-one stock split in April 1986.
(2) Capital is defined as common shareholders' equity plus short-term and
long-term debt.
(3) Dividends per share divided by earnings per share.
27
VF BRANDS
CHANNEL OF JEANSWEAR INTIMATE DECORATED PLAYWEAR SPECIALTY
DISTRIBUTION APPAREL KNITWEAR APPAREL
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT Lee Vanity Fair Lee Sport Healthtex JanSport
STORES Marithe & Nutmeg Lee Jantzen
Francois Nike* Nike*
Girbaud*
Joe Boxer*
- ------------------------------------------------------------------------------------------------------------------------------------
DISCOUNT Wrangler Vassarette Cutler Cutler Wolf Creek
STORES Riders Sports Wrangler Big Ben
Rustler
Timber Creek
- ------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY Wrangler Nutmeg JanSport
STORES Western JanSport Nike*
Rugged Wear Red Kap
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL Lee Lou Nutmeg
Wrangler Bolero
Maverick Carina
Variance
Siltex
Belcor
Intima Cherry
Gemma
- ------------------------------------------------------------------------------------------------------------------------------------
*licensed