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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 3, 1999
Commission file number: 1-5256
----------------------------
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1180120
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
628 GREEN VALLEY ROAD, SUITE 500
GREENSBORO, NORTH CAROLINA 27408
(Address of principal executive offices)
(336) 547-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
-- --
On July 31, 1999, there were 118,883,706 shares of Common Stock outstanding.
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VF CORPORATION
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income -
Three months and six months ended July 3, 1999 and
July 4, 1998.......................................... 3
Consolidated Balance Sheets - July 3, 1999,
January 2, 1999 and July 4, 1998...................... 4
Consolidated Statements of Cash Flows -
Six months ended July 3, 1999 and
July 4, 1998.......................................... 5
Notes to Consolidated Financial Statements............ 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K......................... 13
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VF CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 3 JULY 4 JULY 3 JULY 4
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET SALES $ 1,364,830 $ 1,350,319 $ 2,723,074 $ 2,676,524
COSTS AND OPERATING EXPENSES
Cost of products sold 902,895 894,363 1,793,669 1,767,343
Marketing, administrative
and general expenses 314,193 298,527 624,737 608,439
Other operating expense 3,032 1,361 6,006 1,760
----------- ----------- ----------- -----------
1,220,120 1,194,251 2,424,412 2,377,542
OPERATING INCOME 144,710 156,068 298,662 298,982
OTHER INCOME (EXPENSE)
Interest income 1,214 1,457 3,227 3,259
Interest expense (18,379) (15,699) (35,044) (30,595)
Miscellaneous, net 1,073 151 904 507
----------- ----------- ----------- -----------
(16,092) (14,091) (30,913) (26,829)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 128,618 141,977 267,749 272,153
INCOME TAXES 49,036 55,196 102,601 107,266
----------- ----------- ----------- -----------
NET INCOME $ 79,582 $ 86,781 $ 165,148 $ 164,887
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE
Basic $ 0.65 $ 0.70 $ 1.35 $ 1.33
Diluted 0.64 0.69 1.33 1.31
CASH DIVIDENDS PER COMMON SHARE $ 0.21 $ 0.20 $ 0.42 $ 0.40
See notes to consolidated financial statements.
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VF CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
JULY 3 JANUARY 2 JULY 4
1999 1999 1998
----------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 83,465 $ 63,208 $ 70,211
Accounts receivable, less allowances:
July 3 - $52,721; Jan 2 - $52,011;
July 4 - $48,179 835,939 705,734 854,915
Inventories:
Finished products 623,667 552,729 525,292
Work in process 220,682 185,929 193,994
Materials and supplies 187,227 215,349 180,741
----------- ----------- -----------
1,031,576 954,007 900,027
Other current assets 149,409 125,203 149,299
----------- ----------- -----------
Total current assets 2,100,389 1,848,152 1,974,452
PROPERTY, PLANT & EQUIPMENT 1,773,145 1,711,131 1,647,119
Less accumulated depreciation 972,438 935,040 896,571
----------- ----------- -----------
800,707 776,091 750,548
INTANGIBLE ASSETS 967,182 951,562 929,460
OTHER ASSETS 318,686 260,861 251,910
----------- ----------- -----------
$ 4,186,964 $ 3,836,666 $ 3,906,370
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 562,040 $ 244,910 $ 419,166
Current portion of long-term debt 833 969 802
Accounts payable 314,597 341,126 327,175
Accrued liabilities 436,960 446,001 471,520
----------- ----------- -----------
Total current liabilities 1,314,430 1,033,006 1,218,663
LONG-TERM DEBT 520,220 521,657 517,682
OTHER LIABILITIES 191,851 181,750 170,991
REDEEMABLE PREFERRED STOCK 52,886 54,344 55,313
DEFERRED CONTRIBUTIONS TO EMPLOYEE
STOCK OWNERSHIP PLAN (17,283) (20,399) (23,291)
----------- ----------- -----------
35,603 33,945 32,022
COMMON SHAREHOLDERS' EQUITY
Common Stock 119,196 119,466 121,528
Additional paid-in capital 829,256 801,511 791,833
Accumulated other comprehensive income (61,039) (25,639) (39,522)
Retained earnings 1,237,447 1,170,970 1,093,173
----------- ----------- -----------
Total common shareholders' equity 2,124,860 2,066,308 1,967,012
----------- ----------- -----------
$ 4,186,964 $ 3,836,666 $ 3,906,370
=========== =========== ===========
See notes to consolidated financial statements.
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VF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
------------------------
JULY 3 JULY 4
1999 1998
--------- ---------
OPERATIONS
Net income $ 165,148 $ 164,887
Adjustments to reconcile net income to
cash provided by operations:
Depreciation 65,931 65,198
Amortization of intangible assets 16,681 16,115
Other, net (25,110) (4,566)
Changes in current assets and liabilities:
Accounts receivable (118,672) (210,526)
Inventories (19,679) (25,770)
Accounts payable (36,657) (14,252)
Other, net (43,374) (35,792)
--------- ---------
Cash provided (used) by operations 4,268 (44,706)
INVESTMENTS
Capital expenditures (90,051) (105,503)
Business acquisitions (117,133) (235,303)
Other, net (6,622) 18,480
--------- ---------
Cash invested (213,806) (322,326)
FINANCING
Increase in short-term borrowings 303,885 382,667
Proceeds from long-term debt 0 1,000
Payment of long-term debt (1,085) (532)
Purchase of Common Stock (45,571) (58,580)
Cash dividends paid (52,052) (50,481)
Proceeds from issuance of stock 23,479 38,361
Other, net 1,139 714
--------- ---------
Cash provided by financing 229,795 313,149
--------- ---------
NET CHANGE IN CASH AND EQUIVALENTS 20,257 (53,883)
CASH AND EQUIVALENTS - BEGINNING OF YEAR 63,208 124,094
--------- ---------
CASH AND EQUIVALENTS - END OF PERIOD $ 83,465 $ 70,211
========= =========
See notes to consolidated financial statements.
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VF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended July
3, 1999 are not necessarily indicative of results that may be expected for the
year ending January 1, 2000. For further information, refer to the consolidated
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ended January 2, 1999.
NOTE B - ACQUISITIONS
During the first quarter of 1999, the Company acquired a majority interest in
the business of its former licensee for the Wrangler and JanSport brands in
Chile, Peru and Bolivia. The Company also acquired the operating assets of
Fibrotek Industries, Inc. and the common stock of Todd Uniform, Inc. and of
Horace Small Holdings Corporation. These acquisitions for an aggregate cost of
$117.1 million have been accounted for as purchases, and accordingly, operating
results have been included in the financial statements from the dates of
acquisition. The net assets of these companies are included based on preliminary
allocations of the purchase prices, with approximately $47 million representing
intangible assets. Final asset and liability valuations are not expected to have
a material effect on the financial statements.
The following pro forma results of operations assume that these businesses had
been acquired at the beginning of 1998 (in thousands, except per share amounts):
Second Quarter Six Months
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $1,364,830 $1,395,815 $2,769,208 $2,778,592
Net income 79,582 85,719 164,507 162,981
Earnings per common share:
Basic $ 0.65 $ 0.69 $ 1.35 $ 1.32
Diluted 0.64 0.68 1.33 1.29
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NOTE C - BUSINESS SEGMENT INFORMATION
Second Quarter Six Months
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In thousands)
Net sales:
Apparel $ 1,033,043 $ 1,049,837 $ 2,144,884 $ 2,138,351
All Other 331,787 300,482 578,190 538,173
----------- ----------- ----------- -----------
Consolidated net sales $ 1,364,830 $ 1,350,319 $ 2,723,074 $ 2,676,524
=========== =========== =========== ===========
Segment profit:
Apparel $ 138,145 $ 160,234 $ 305,726 $ 317,526
All Other 42,904 31,679 64,907 49,321
----------- ----------- ----------- -----------
Total segment profit 181,049 191,913 370,633 366,847
Interest, net (17,165) (14,242) (31,817) (27,336)
Amortization of intangible assets (8,429) (8,071) (16,681) (16,115)
Corporate and other expenses (26,837) (27,623) (54,386) (51,243)
----------- ----------- ----------- -----------
Consolidated income before income taxes $ 128,618 $ 141,977 $ 267,749 $ 272,153
=========== =========== =========== ===========
NOTE D - EARNINGS PER SHARE
Earnings per share are computed as follows (in thousands, except per share
amounts):
Second Quarter Six Months
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Basic earnings per share:
Net income $ 79,582 $ 86,781 $165,148 $164,887
Less Preferred Stock dividends and
redemption premium 1,802 1,554 3,682 3,139
-------- -------- -------- --------
Net income available for Common Stock $ 77,780 $ 85,227 $161,466 $161,748
======== ======== ======== ========
Weighted average Common
Stock outstanding 119,447 121,643 119,418 121,447
======== ======== ======== ========
Basic earnings per share $ 0.65 $ 0.70 $ 1.35 $ 1.33
======== ======== ======== ========
Diluted earnings per share:
Net income $ 79,582 $ 86,781 $165,148 $164,887
Increased ESOP expense if Preferred Stock
were converted to Common Stock 264 290 530 579
-------- -------- -------- --------
Net income available for Common Stock
and dilutive securities $ 79,318 $ 86,491 $164,618 $164,308
======== ======== ======== ========
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Weighted average Common Stock outstanding 119,447 121,643 119,418 121,447
Additional Common Stock resulting from
dilutive securities:
Preferred Stock 2,741 2,867 2,758 2,878
Stock options and other 1,294 1,495 1,267 1,404
-------- -------- -------- --------
Weighted average Common Stock and
dilutive securities outstanding 123,482 126,005 123,443 125,729
======== ======== ======== ========
Diluted earnings per share $ 0.64 $ 0.69 $ 1.33 $ 1.31
======== ======== ======== ========
NOTE E - COMPREHENSIVE INCOME
Comprehensive income consists of net income from operations, plus certain
changes in assets and liabilities that are not included in net income but are
instead reported within a separate component of shareholders' equity under
generally accepted accounting principles. The Company's comprehensive income was
as follows (in thousands):
Second Quarter Six Months
---------------------- ------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Net income as reported $ 79,582 $ 86,781 $ 165,148 $ 164,887
Other comprehensive income:
Foreign currency translation adjustments,
net of income taxes (15,787) (230) (35,400) (3,412)
-------- -------- --------- ---------
Comprehensive income $ 63,795 $ 86,551 $ 129,748 $ 161,475
======== ======== ========= =========
The significant change in foreign currency translation adjustments in the 1999
periods is due to the strengthening of the U.S. dollar in relation to the
currencies of most European countries where the Company has operations.
NOTE F - CAPITAL
At July 3, 1999, there were 300,000,000 authorized shares of Common Stock, no
par value - stated capital $1 per share. At July 3, 1999, there were 119,195,507
shares outstanding, excluding 18,385,851 treasury shares. At January 2, 1999 and
July 4, 1998, there were 119,466,101 and 121,528,272 shares outstanding,
excluding 17,367,269 and 15,021,670 treasury shares, respectively. For financial
accounting purposes, treasury shares presented above include shares of VF Common
Stock held in trust for deferred compensation plans, as follows:
248,899 shares at July 3, 1999 and 232,899 shares at January 2, 1999.
There are 25,000,000 authorized shares of Preferred Stock, $1 par value. Of
these shares, 2,000,000 were designated as Series A, of which none have been
issued, and 2,105,263 shares were designated and issued as 6.75% Series B
Preferred Stock, of which 1,712,895 shares were outstanding at July 3, 1999,
1,760,119 at January 2, 1999 and 1,791,504 at July 4, 1998.
NOTE G - REVOLVING CREDIT AGREEMENT
Subsequent to the end of the second quarter, the Company entered into a new
$750.0 million unsecured revolving credit agreement, which replaces the prior
agreement that was scheduled to expire in October 1999. Terms are substantially
the same as the prior credit agreement.
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VF CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales increased 1% for the second quarter and 2% for the six months
ended July 3, 1999, compared with the comparable periods of 1998. During the
quarter, the Company announced the discontinuation of the Jantzen women's
sportswear business; provisions for inventory losses and other costs
approximated $12 million ($.06 per share).
Sales in the Company's "growth" category businesses - - jeanswear, domestic
intimate apparel, workwear and daypacks, where investments are focused to
achieve sales increases - - advanced by $51 million or 5% for the 1999 quarter
and $109 million or 5% for the six month period, including acquisitions for both
periods. Domestic jeanswear sales declined 6% for the quarter and 2% for the
six month period, primarily due to a shift in timing of shipments, versus prior
year comparisons, of seasonal jeans products from the second to the third
quarter. In addition, jeanswear consolidation efforts created short-term
shipping difficulties, which were resolved by the end of the quarter. Domestic
intimate apparel sales advanced 4% for the quarter and 6% for the six month
period, with continuing growth in the Vassarette brand and private label
businesses. International jeans sales and workwear sales advanced in 1999, due
to businesses acquired since the end of the 1998 quarter. Sales in the
Company's "maintenance" category businesses - - knitwear, international
intimates, playwear and swimwear, where efforts are focused on increased profit
ability - - declined by $36 million or 14% for the second quarter and $62
million or 11% for the six month period due to declines in knitwear sales and
elimination of unprofitable playwear product lines.
Gross margins were 33.8% of sales in the quarter and 34.1% in the six months,
compared with 33.8% and 34.0% in the 1998 periods. Gross margins improved in
most businesses due to the continuing shift to lower cost sourcing, lower raw
material costs and improved operating efficiencies. Overall, however, gross
margin percentages were basically flat for the quarter and six month periods due
to the effects of costs related to closing the Jantzen women's sportswear
business in the second quarter of 1999.
Marketing, administrative and general expenses were 23.0% of sales during the
quarter and 22.9% in the six months, compared with 22.1% and 22.7% in the 1998
periods. The increases in marketing, administrative and general expenses for the
1999 periods relate to increased spending for information systems, partially
offset by lower advertising spending.
Other operating expense consists of amortization of intangible assets, offset by
net royalty income. Amortization of intangible assets increased in 1999 due to
the recent acquisitions, and royalty income declined in 1999 from the conversion
of certain formerly licensed businesses to owned operations.
Net interest expense increased in 1999 due to higher short-term borrowings.
The effective income tax rate for the six months of 1999 was 38.3%, based on the
expected rate for the year, compared with 39.4% in the prior year. The expected
rate for 1999 is consistent with the rate for the full year 1998.
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FINANCIAL CONDITION AND LIQUIDITY
The financial condition of the Company is reflected in the following:
July 3 January 2 July 4
1999 1999 1998
--------- --------- ---------
(Dollars in millions)
Working capital $ 786.0 $ 815.1 $ 755.8
Current ratio 1.6 to 1 1.8 to 1 1.6 to 1
Debt to total capital 33.7% 27.1% 32.3%
Accounts receivable balances at the end of the second quarter of 1999 include
those of businesses acquired. Receivables are higher than at the end of 1998 due
to seasonal sales patterns.
Inventories at the end of the second quarter of 1999 include those of businesses
acquired. Excluding these acquisitions, inventories are slightly higher than at
the end of 1998 due to seasonal sales patterns and also 5% higher than at the
end of the second quarter of 1998 due in part to the timing of domestic
jeanswear shipments (as previously discussed).
Intangible assets increased during 1999 due to four business acquisitions during
the first quarter.
The increase in short-term borrowings since the end of 1998 relates to higher
seasonal working capital requirements and to the 1999 business acquisitions.
During the first six months of 1999, the Company repurchased 1,000,000 shares of
its Common Stock in open market transactions for a total cost of $45.6 million.
At July 3, 1999, there were 1.0 million shares remaining under the existing
authorization. Subsequent to that date, the Board of Directors authorized the
Company to purchase up to an additional 10.0 million shares.
YEAR 2000 READINESS STATEMENT
The Year 2000 issue relates to computer systems that will not properly recognize
date-sensitive information when the year changes to 2000. A Year 2000 issue that
is not properly addressed could result in a system failure or miscalculations.
While the Company's products are not directly affected by the Year 2000 problem,
its computer systems and equipment, as well as the systems and equipment of its
vendors, service providers and customers, may be affected.
Senior management of the Company has established a task force to address Year
2000 issues and regularly reviews its progress with the Board of Directors. The
task force activities relate to four broad business categories: (1)
infrastructure; (2) applications software; (3) processors embedded in machinery
and equipment used in the Company's manufacturing, distribution and
administrative operations; and (4) significant third party vendors, service
providers and customers. Actions common to evaluation of Year 2000 issues in
each of these business categories include:
* Inventorying all date-sensitive systems and equipment
* Assessing compliance and assigning priorities to items identified as
not being compliant
* Repairing or replacing items identified as not being compliant
* Testing converted systems and equipment
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Infrastructure: This category relates to mainframe, personal computer and
network hardware, as well as operating system software. Substantially all
hardware and related operating systems are fully compliant at July 3, 1999; the
balance is expected to be fully compliant by the end of the third quarter of
1999. The testing phase is ongoing as hardware or system software is remediated,
upgraded or replaced and is substantially complete.
Applications software: This refers to computer software programs, whether
internally developed or purchased from outside parties. Approximately 96% of
such software systems are compliant at July 3, 1999. All remaining software is
expected to be fully compliant by the end of the third quarter of 1999. The
testing phase is scheduled to be completed for all critical applications during
the third quarter of 1999.
Processors: The Company has completed the inventory and assessment of all
processors embedded in the Company's critical manufacturing, distribution and
administrative equipment. Substantially all of the hardware or software has been
remediated, upgraded or replaced as Year 2000 issues were noted. The upgrade of
all remaining processors will be completed during the third quarter. The
testing phase is ongoing and is scheduled to be completed during the third
quarter of 1999.
Third Parties: The Company has initiated formal communications with all of its
significant vendors, service providers and financial institutions to determine
the extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. Substantially all of the Company's
significant vendors, service providers and financial institutions have responded
to the Company's survey. Of those that have responded, 97% of the Company's
significant vendors and service providers and 98% of the financial institutions
have indicated that they either are compliant or expect to be compliant by the
end of the third quarter of 1999. The majority of the remainder is expected to
be compliant by the end of 1999. The communication and evaluation process is
ongoing.
In addition, contingency plans to mitigate the possible disruption of business
operations are being developed as the testing phase and third party assessments
are completed. Contingency plans will be substantially completed during the
third quarter of 1999 and will continue to be evaluated and modified as
additional information becomes available.
The Company expects all internal systems to be compliant by the end of the third
quarter. However, it is possible that all Year 2000 problems may not be
identified or corrected or that third parties with which the Company has
significant relationships will not resolve all of their Year 2000 issues. The
Company expects that the most reasonably likely Year 2000 worst case scenario is
that its manufacturing infrastructure would not be able to provide an
uninterrupted flow of product due to suppliers' systems failures or disruptions
in utility or government services. Based on our contingency planning efforts,
by the end of the third quarter we will determine which suppliers appear to be
at risk of noncompliance. Responsive actions will include accelerating
purchases of supplies, accelerating production of inventory or, if necessary,
arranging for alternative suppliers to reduce this risk. Because the Company
conducts business with numerous vendors and has numerous manufacturing
facilities around the world, the Company believes that significant
interruptions of normal operations are unlikely and, in any event, would
likely be short-term nature. Nevertheless, if there were serious systems
failures by the Company or its third party relationships, they could have a
material adverse effect on the Company's financial position or results of
operations.
The estimated total cost of resolving the Year 2000 issues, including internal
personnel and outside vendors and consultants, is approximately $27 million over
the period 1997 through 1999, of which $25 million has been spent through July
3, 1999. These costs are being expensed as incurred.
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements included herein are "forward-looking statements" within the
meaning of the federal securities laws. This includes any statements concerning
plans and objectives of management relating to the Company's operations or
economic performance, and assumptions related thereto. In addition, the Company
and its representatives may from time to time make other oral or written
statements that are also forward-looking statements.
These forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting the Company and therefore involve a
number of risks and uncertainties. Management cautions that forward-looking
statements are not guarantees and that 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; the financial strength of
the retail industry; actions of competitors that may impact the Company's
business; the Company's ability, and the ability of its suppliers and customers,
to adequately address the Year 2000 computer issue; and the impact of unforeseen
economic changes in the markets where the Company competes, such as changes in
interest rates, currency exchange rates, inflation rates, recession, and other
external economic and political factors over which the Company has no control.
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PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 10 - 1996 Stock Compensation Plan, as amended
Exhibit 27 - Financial data schedule as of July 3,
1999
(b) Reports on Form 8-K - There were no reports on Form
8-K filed for the three months ended July 3, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
V.F. CORPORATION
--------------------------------------
(Registrant)
By: /s/ Robert K. Shearer
---------------------------------
Robert K. Shearer
Vice President - Finance
(Chief Financial Officer)
Date: August 16, 1999
By: /s/ Peter E. Keene
---------------------------------
Peter E. Keene
Vice President - Controller
(Chief Accounting Officer)
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