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VFC > SEC Filings for VFC > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for V F CORP

Form 10-K for V F CORP


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

VF Corporation ("VF") is a worldwide leader in the manufacturing and distribution of branded lifestyle apparel, footwear and related products. Our vision is to grow by building leading lifestyle brands that excite consumers around the world. We continue to invest in all of our businesses through geographic expansion, product innovation, consumer research, marketing and our direct-to-consumer infrastructure, including retail store openings, e-commerce and omni-channel retailing.

VF is highly diversified - across brands, product categories, channels of distribution, geographies and consumer demographics. We own a broad portfolio of brands in the outerwear, footwear, jeanswear, backpacks, luggage, sportswear, occupational and performance apparel categories. These products are marketed to consumers shopping in specialty stores, upscale and traditional department stores, national chains, mass merchants and our own direct-to-consumer operations.

VF is organized by groupings of businesses called "coalitions". The five coalitions are Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. These coalitions are our segments for financial reporting purposes.

Highlights of 2013

All per share amounts are presented on a diluted basis and reflect the four-for-one stock split in December 2013:

• Revenues grew to a record $11.4 billion, a 5% increase over 2012.

• International revenues rose 8% and accounted for 38% of VF's total revenues in 2013.

• Direct-to-consumer revenues increased 13% over 2012 and accounted for 22% of VF's total revenues in 2013. VF opened 164 retail stores in 2013.

• Gross margin increased 160 basis points to 48.1% in 2013.

• Cash flow from operations exceeded $1.5 billion in 2013.

• Earnings per share increased 12% to $2.71 in 2013 from $2.43 in 2012.

In addition, VF made a discretionary contribution of $100.0 million to its U.S. qualified defined benefit pension plan, repaid $400.0 million of floating rate debt and increased the quarterly dividend rate by 21%, marking the 41st consecutive year of increase in the rate of dividends paid per share.


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Analysis of Results of Operations

Consolidated Statements of Income

The following table presents a summary of the changes in total revenues during
the last two years:



                                                            2013                     2012
                                                        Compared with            Compared with
In millions                                                 2012                     2011
Total revenues - prior year                            $      10,879.9          $       9,459.2
Operations                                                       517.6                    667.6
Acquisition in prior year (to anniversary date)                      -                    981.0
Disposition in prior year                                        (23.7 )                  (58.1 )
Impact of foreign currency translation                            45.8                   (169.8 )

Total revenues - current year                          $      11,419.6          $      10,879.9

VF reported revenue growth of 5% in 2013 driven by an increase in unit volume, with particular strength in the Outdoor & Action Sports and Sportswear Coalitions. Our international and direct-to-consumer businesses continued to expand, growing revenues by 8% and 13%, respectively. The increase in 2012 revenues compared with 2011 is primarily due to the Outdoor & Action Sports Coalition, driven by the acquisition of The Timberland Company ("Timberland") and organic growth. Additional details on revenues are provided in the section titled "Information by Business Segment".

VF's foreign currency exposure primarily relates to businesses conducted in euro-based countries. The weighted average translation rates for the euro were $1.33, $1.28 and $1.39 per euro for 2013, 2012 and 2011, respectively. In addition, VF has foreign currency exposure related to businesses in developed and emerging markets around the world. Changes in foreign currency translation rates for all currencies positively impacted revenue comparisons by $45.8 million in 2013 and negatively impacted revenue comparisons by $169.8 million in 2012.

The following table presents the percentage relationship to total revenues for components of the Consolidated Statements of Income:

                                                          2013        2012        2011
 Gross margin (total revenues less cost of goods sold)     48.1 %      46.5 %      45.8 %
 Selling, general and administrative expenses              33.6        33.1        32.6

 Operating income                                          14.4 %      13.5 %      13.2 %

Gross margin increased 160 basis points to 48.1% in 2013 compared with 46.5% in 2012, with improvements in nearly every coalition. The increase in gross margin reflects lower product costs and the continued shift in the revenue mix towards higher margin businesses, including Outdoor & Action Sports, international and direct-to-consumer.

Gross margin increased 70 basis points to 46.5% in 2012 compared with 45.8% in 2011. This increase in gross margin was driven by the continued shift in the revenue mix towards higher margin businesses, partially offset by benefits in 2011 that did not recur in 2012 related to a gain on a facility closure and change in inventory accounting policy.

Selling, general and administrative expenses as a percentage of total revenues were 50 basis points higher in 2013 compared with 2012 due to additional marketing and direct-to-consumer investments to support future growth for our largest and fastest growing businesses, partially offset by the leverage of operating expenses on higher revenues and lower acquisition-related expenses for Timberland.


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Selling, general and administrative expenses as a percentage of total revenues were higher in 2012 compared with 2011 due to the inclusion of a full year of Timberland, which has higher expense ratios than other VF businesses, as well as increases in pension and marketing expenses. These increases were partially offset by lower Timberland acquisition-related expenses in 2012 and the leverage of operating expenses on higher total revenues.

Operating margin increased 90 basis points, to 14.4% in 2013 from 13.5% in 2012. The increase in operating margin for 2013 was due to improved gross margin and the leverage of operating expenses on higher revenues, partially offset by increased marketing and direct-to-consumer investments in 2013.

Operating margin increased 30 basis points, to 13.5% in 2012 from 13.2% in 2011. Timberland negatively impacted 2012 operating margin by 90 basis points, including 30 basis points from the impact of acquisition-related expenses. Timberland negatively impacted 2011 operating margin by 40 basis points, including 30 basis points from the impact of acquisition-related expenses.

Net interest expense decreased $9.6 million to $80.6 million in 2013, due to
(i) lower average levels of short-term borrowings, (ii) the repayment of $400.0 million of floating rate notes during the third quarter of 2013 and
(iii) increased amounts of interest capitalized for significant projects. Net interest expense increased $17.5 million to $90.3 million in 2012 primarily due to (i) the issuance of $900.0 million of term debt in 2011 to fund the Timberland acquisition and (ii) higher average levels of short-term borrowings throughout 2012.

Outstanding interest-bearing debt averaged $1.9 billion for 2013, $2.5 billion for 2012 and $1.7 billion for 2011, with short-term borrowings representing 10%, 25% and 24% of average debt outstanding for the respective years. The weighted average interest rate on outstanding debt was 4.5% for 2013, 3.7% for 2012 and 4.5% for 2011. The weighted average interest rate increased in 2013 primarily due to (i) lower average levels of short-term borrowings, which have lower interest rates than the average of all outstanding debt and (ii) fewer months outstanding of the $400.0 million floating rate debt, which had a lower interest rate than the average of all outstanding debt, and was repaid during the year. The decrease in the weighted average interest rate in 2012 from 2011 resulted from the full year inclusion of the lower average interest rates on the $900.0 million term debt noted above.

Other income (expense) netted to expense of $4.0 million in 2013 compared with income of $46.9 million in 2012. The expense in 2013 was primarily due to foreign currency exchange losses. The income in 2012 was primarily due to the $42.0 million gain on the sale of VF's 80% ownership in John Varvatos Enterprises, Inc. ("John Varvatos").

Other income (expense) netted to income of $46.9 million in 2012 compared with expense of $7.2 million in 2011. The income in 2012 was primarily due to the $42.0 million gain on the sale of John Varvatos and foreign currency exchange gains. The expense in 2011 was primarily due to foreign currency exchange losses.

The effective income tax rate for 2013 was 22.6%, which is 1.0% lower than the effective rate in 2012. The 2013 tax rate included a net $26.0 million in discrete tax benefits, primarily related to the retroactive impact of the American Tax Relief Act of 2012 discussed below ($8.7 million tax benefit), prior year refund claims and tax credits ($7.0 million tax benefit), unrecognized tax benefits and interest (net $5.9 million tax benefit) and changes in valuation allowances for capital and operating loss carryforwards (net $3.4 million tax benefit). These discrete items collectively lowered the 2013 annual tax rate by 1.7%, compared with 2.2% in 2012. Without discrete items, the effective tax rate during 2013 decreased by approximately 1.5% primarily due to the 2013 impact of tax law changes in the U.S. (related to the American Tax Relief Act of 2012) and a higher percentage of income in lower tax rate jurisdictions compared with 2012. The international effective tax rate was 12.1% and 13.6% for 2013 and 2012, respectively.

The effective income tax rate was 23.6% for both 2012 and 2011. The 2012 effective income tax rate included a net $31.0 million in discrete tax benefits primarily related to changes in valuation allowances for


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capital and operating loss carryforwards (net $33.0 million tax benefit) and unrecognized tax benefits and interest (net $2.0 million tax expense). These discrete items collectively lowered the 2012 annual tax rate by 2.2%, compared with 1.4% in 2011. Without discrete items, the effective tax rate during 2012 increased by approximately 0.8% primarily due to tax law changes in the U.S., partially offset by a higher percentage of income in lower tax rate jurisdictions compared with 2011. The 2011 income tax rate included a net $16.3 in discrete tax benefits primarily related to changes in valuation allowances for operating loss carryforwards (net $12.1 million benefit) and unrecognized tax benefits and interest (net $4.2 million benefit), which together lowered the 2011 annual tax rate by 1.4%.

The American Tax Relief Act of 2012, signed into law in January 2013, retroactively extended certain tax credits and incentives through tax year 2013. The impact of this tax law change to the 2012 tax year was considered a discrete tax benefit when recorded in the first quarter of 2013. The change in tax law also provided tax credits and incentives applicable to the 2013 tax year which were not considered discrete items. These tax incentives do not extend beyond 2013 and therefore have been excluded from future tax rates. VF expects the 2014 annual tax rate to approximate 23.5% to 24%.

Net income attributable to VF Corporation in 2013 increased to $1.2 billion ($2.71 per share), compared with $1.1 billion ($2.43 per share) in 2012. The increase in earnings per share in 2013 resulted primarily from improved operating performance, as discussed in the "Information by Business Segment" section below as well as the other factors described above. In addition, earnings per share in 2013 compared with 2012 benefited by $0.04 per share due to lower Timberland acquisition-related expenses.

Net income attributable to VF Corporation in 2012 increased to $1.1 billion ($2.43 per share), compared with $888.1 million ($2.00 per share) in 2011. The increase in earnings per share in 2012 resulted primarily from improved operating performance, as discussed in the "Information by Business Segment" section below as well as the other factors described above. In addition, earnings per share in 2012 compared with 2011 benefited by a $0.12 per share incremental contribution from Timberland (net of acquisition-related expenses) and an $0.08 per share gain on the sale of John Varvatos.

Information by Business Segment

Management at each of the coalitions has direct control over and responsibility for its revenues and operating income, hereinafter termed "coalition revenues" and "coalition profit", respectively. VF management evaluates operating performance and makes investment and other decisions based on available opportunities and analysis of coalition revenues and coalition profit. Common costs such as information systems processing, retirement benefits and insurance are allocated to the coalitions based on appropriate metrics such as sales, usage or number of employees.


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The following tables present a summary of the changes in coalition revenues and coalition profit during the last two years:

                                         Outdoor
                                        & Action                                                            Contemporary
In millions                              Sports         Jeanswear        Imagewear         Sportswear          Brands            Other          Total
Coalition revenues - 2011               $ 4,562.0       $  2,731.8       $  1,025.2       $      543.5      $       485.1       $ 111.6       $  9,459.2
Operations                                  441.0            101.1             51.7               33.8               26.1          13.9            667.6
Acquisition in prior year (to
anniversary date)                           981.0                -                -                  -                  -             -            981.0
Disposition in current year                     -                -                -                  -              (58.1 )           -            (58.1 )
Impact of foreign currency
translation                                (117.9 )          (43.6 )           (1.2 )                -               (7.1 )           -           (169.8 )

Coalition revenues - 2012               $ 5,866.1       $  2,789.3       $  1,075.7       $      577.3      $       446.0       $ 125.5       $ 10,879.9
Operations                                  459.7             30.0             (7.3 )             47.4              (10.3 )        (1.9 )          517.6
Disposition in prior year                       -                -                -                  -              (23.7 )           -            (23.7 )
Impact of foreign currency
translation                                  53.4             (8.3 )           (2.4 )                -                3.1             -             45.8

Coalition revenues - 2013               $ 6,379.2       $  2,811.0       $  1,066.0       $      624.7      $       415.1       $ 123.6       $ 11,419.6


                                         Outdoor
                                        & Action                                                            Contemporary
In millions                              Sports         Jeanswear        Imagewear         Sportswear          Brands            Other          Total
Coalition profit - 2011                 $   828.2       $    413.2       $    145.7       $       56.3      $        35.9       $  (1.1 )     $  1,478.2
Operations                                  177.6             57.9             (0.2 )             16.7               18.7           0.8            271.5
Acquisition in prior year (to
anniversary date)                            46.9                -                -                  -                  -             -             46.9
Disposition in current year                     -                -                -                  -               (4.3 )           -             (4.3 )
Impact of foreign currency
translation                                 (33.3 )           (4.1 )           (0.4 )                -               (1.1 )           -            (38.9 )

Coalition profit - 2012                 $ 1,019.4       $    467.0       $    145.1       $       73.0      $        49.2       $  (0.3 )     $  1,753.4
Operations                                   70.9             75.7              7.1               15.2              (11.4 )        (0.3 )          157.2
Disposition in prior year                       -                -                -                  -                0.5             -              0.5
Impact of foreign currency
translation                                  16.1              2.2                -                  -                0.5             -             18.8

Coalition profit - 2013                 $ 1,106.4       $    544.9       $    152.2       $       88.2      $        38.8       $  (0.6 )     $  1,929.9

The following section discusses changes in revenues and profitability by coalition:

Outdoor & Action Sports:



                                                                              Percent
                                                                              Change
      Dollars in millions     2013           2012           2011         2013        2012
      Coalition revenues    $ 6,379.2      $ 5,866.1      $ 4,562.0        8.7 %      28.6 %
      Coalition profit        1,106.4        1,019.4          828.2        8.5 %      23.1 %
      Operating margin           17.3 %         17.4 %         18.2 %

The Outdoor & Action Sports Coalition includes the following brands: The North Face®, Vans®, Timberland®, Kipling® (outside of North America), Napapijri®, Reef®, Eastpak®, JanSport®, SmartWool®, lucy® and Eagle Creek®.


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The Outdoor & Action Sports Coalition revenues increased 9% in 2013 over 2012 primarily due to an increase in unit volume. The North Face®, Vans®, and Timberland® brands achieved global revenue growth of 7%, 17% and 5%, respectively. U.S. revenues increased 7% in 2013 and international revenues increased 10% with balanced growth in Europe and Asia Pacific.
Direct-to-consumer revenues rose 15% in 2013 driven by increases of 28% and 15% for The North Face® and Vans® brands, respectively. New store openings, comp store growth and an expanding e-commerce business all contributed to the direct-to-consumer revenue growth. Foreign currency translation positively impacted revenues by $53.4 million in 2013.

Coalition revenues increased 29% in 2012 over 2011. Of this increase, 10% related to organic growth (which is net of a 3% negative impact from foreign currency translation) and 19% related to the inclusion of Timberland. In particular, The North Face® and Vans® brands achieved global revenue growth of 9% and 23%, respectively. Foreign currency translation negatively impacted revenues by $117.9 million in 2012.

U.S. revenues increased 21% in 2012, with 12 percentage points of the increase coming from the Timberland acquisition. International revenues rose 37% in 2012, reflecting 11% organic growth (net of a 6% negative impact from foreign currency translation) and 26% growth due to the inclusion of Timberland.
Direct-to-consumer revenues rose 37% in 2012 with 23 percentage points of the growth from the Timberland acquisition. The direct-to-consumer businesses of The North Face® and Vans® brands increased 13% and 18%, respectively, in 2012. New store openings, comp store growth and an expanding e-commerce business all contributed to the direct-to-consumer revenue growth.

Operating margin decreased 10 basis points in 2013 due to additional marketing and direct-to-consumer investments for the coalition's three largest brands, The North Face®, Vans® and Timberland®, partially offset by increased leverage of operating expenses on higher revenues.

The decrease in operating margin for 2012 compared with 2011 was primarily due to the inclusion for the full year of Timberland, which has a lower operating margin than the overall coalition average.

Jeanswear:



                                                                              Percent
                                                                               Change
      Dollars in millions     2013           2012           2011          2013        2012
      Coalition revenues    $ 2,811.0      $ 2,789.3      $ 2,731.8         0.8 %       2.1 %
      Coalition profit          544.9          467.0          413.2        16.7 %      13.0 %
      Operating margin           19.4 %         16.7 %         15.1 %

The Jeanswear Coalition consists of the global jeanswear businesses, led by the Wrangler® and Lee® brands.

Global Jeanswear revenues increased 1% in 2013 over 2012, driven by 2% growth in the U.S. within the combined Mass, Western Specialty and Lee® brand businesses, despite continued weakness in the mid-tier channel and a slowdown in the Mass business. International Jeanswear revenues decreased 1% in 2013 driven by an 8% decrease in Asia Pacific, where the Wrangler® brand in China converted from direct wholesale to a licensing model, and the Lee® brand in China was impacted by an industry-wide inventory build-up that began during the latter part of 2012. Partially offsetting the decrease in Asia Pacific revenues was a 2% increase in Jeanswear Europe primarily resulting from the benefit of foreign currency translation gains. Revenues in the Americas (non-U.S.) region were about flat in 2013 compared with 2012.

Global Jeanswear revenues increased 2% in 2012 over 2011, led by 5% revenue growth in the U.S. business. The increase in U.S. revenues was primarily due to growth in the Mass and Western Specialty businesses as well as in our newest brand, Rock & Republic®, offsetting a decline in the Lee® brand revenues due to continued


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softness in the mid-tier channel in the U.S. International jeanswear revenues decreased by 4% in 2012 due to weak economic conditions in Europe and a 2% ($43.6 million) negative impact from foreign currency translation. This decrease was partially offset by revenue increases in Asia, reflecting strong wholesale growth.

Operating margin improved 270 basis points in 2013 over 2012, primarily driven by lower product costs and improvement in international performance.

Operating margin improved 160 basis points in 2012 over 2011, primarily driven by lower product costs. Operating margin in 2011 included a 40 basis point gain on a facility closure.

Imagewear:



                                                                              Percent
                                                                              Change
     Dollars in millions     2013           2012           2011          2013         2012
     Coalition revenues    $ 1,066.0      $ 1,075.7      $ 1,025.2        (0.9 )%       4.9 %
     Coalition profit          152.2          145.1          145.7         4.9 %       (0.4 )%
     Operating margin           14.3 %         13.5 %         14.2 %

The Imagewear Coalition consists of VF's Image business (occupational apparel and uniforms, including the Red Kap® and Bulwark® brand businesses) and Licensed Sports business (athletic apparel and fanwear, which includes the Majestic® brand business).

Coalition revenues decreased 1% in 2013 compared with 2012, primarily due to a long-standing Image business customer that shipped throughout 2012, but did not have significant shipments in 2013 until late in the third quarter. Revenues from the Licensed Sports business were slightly down in 2013 compared with 2012, as declines in the Major League Baseball and Harley Davidson businesses were partially offset by increases in the National Football League, Collegiate and National Hockey League businesses.

The increase in coalition revenues for 2012 was primarily attributable to a 6% increase in the Image business, due to growth in the government and public safety and industrial uniform businesses. Revenues in the Licensed Sports business increased 3% in 2012 due to expansion in the Harley Davidson, Collegiate and National Basketball Association businesses.

The 80 basis point improvement in operating margin in 2013 compared with 2012 was driven by improved gross margin due to lower product costs.

The decline in operating margin in 2012 compared with 2011 was primarily due to higher product costs that negatively impacted the business during the first three quarters of 2012.

Sportswear:



                                                                           Percent
                                                                            Change
         Dollars in millions    2013         2012         2011         2013        2012
         Coalition revenues    $ 624.7      $ 577.3      $ 543.5         8.2 %       6.2 %
         Coalition profit         88.2         73.0         56.3        20.8 %      29.7 %
         Operating margin         14.1 %       12.6 %       10.4 %

The Sportswear Coalition consists of the Nautica® and Kipling® brand businesses in North America (the Kipling® brand outside of North America is managed by the Outdoor & Action Sports Coalition).


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Coalition revenues increased 8% in 2013 over 2012 primarily due to an increase in unit volume. Revenues increased in the Nautica® and Kipling®brands by 5% and 29%, respectively, driven primarily by the direct-to-consumer businesses. New store openings, comp store growth and higher e-commerce revenues contributed to a 19% increase in the coalition's direct-to consumer business.

Coalition revenues rose 6% in 2012 compared with 2011, reflecting 5% and 17% growth in the Nautica® and Kipling® brands, respectively. These revenue increases are primarily attributable to double-digit growth in the direct-to-consumer businesses of both brands.

Operating margin improved 150 basis points in 2013 over 2012 due to a continuing shift in the business mix toward higher margin direct-to-consumer businesses, improvements in the profitability of the wholesale and direct-to-consumer businesses, as well as the leverage of operating expenses on higher revenues.

Operating margin increased in 2012 compared with 2011 due to improved performance in both the wholesale and direct-to-consumer businesses.

. . .

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