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 4, 1998 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) 1047 NORTH PARK ROAD WYOMISSING, PENNSYLVANIA 19610 (Former address of principal executive offices, prior to July 7, 1998) 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 August 1, 1998, there were 121,468,772 shares of Common Stock outstanding. 1 VF CORPORATION INDEX
PAGE NO. PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Statements of Income - Three months and six months ended July 4, 1998 and July 5, 1997................................................. 3 Consolidated Balance Sheets - July 4, 1998, January 3, 1998 and July 5, 1997............................. 4 Consolidated Statements of Cash Flows - Six months ended July 4, 1998 and July 5, 1997................................................. 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 5 - Discretionary Voting for 1999 Annual Meeting of Shareholders............................................. 11 Item 6 - Exhibits and Reports on Form 8-K............................ 11
2 VF CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- JULY 4 JULY 5 JULY 4 JULY 5 1998 1997 1998 1997 ----------- ----------- ----------- ----------- NET SALES $ 1,350,319 $ 1,255,549 $ 2,676,524 $ 2,518,330 COSTS AND OPERATING EXPENSES Cost of products sold 894,363 827,899 1,767,343 1,672,843 Marketing, administrative and general expenses 298,527 286,953 608,439 577,495 Other operating (income) expense 1,361 337 1,760 489 ----------- ----------- ----------- ----------- 1,194,251 1,115,189 2,377,542 2,250,827 ----------- ----------- ----------- ----------- OPERATING INCOME 156,068 140,360 298,982 267,503 OTHER INCOME (EXPENSE) Interest income 1,457 3,356 3,259 7,592 Interest expense (15,699) (12,543) (30,595) (25,161) Miscellaneous, net 151 108 507 (693) ----------- ----------- ----------- ----------- (14,091) (9,079) (26,829) (18,262) ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 141,977 131,281 272,153 249,241 INCOME TAXES 55,196 52,377 107,266 100,151 ----------- ----------- ----------- ----------- NET INCOME $ 86,781 $ 78,904 $ 164,887 $ 149,090 =========== =========== =========== =========== EARNINGS PER COMMON SHARE Basic $ 0.70 $ 0.61 $ 1.33 $ 1.15 Diluted 0.69 0.60 1.31 1.13 CASH DIVIDENDS PER COMMON SHARE $ 0.20 $ 0.19 $ 0.40 $ 0.38
See notes to consolidated financial statements. 3 VF CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
JULY 4 JANUARY 3 JULY 5 1998 1998 1997 ---------- ---------- ---------- ASSETS CURRENT ASSETS Cash and equivalents $ 70,211 $ 124,094 $ 78,648 Accounts receivable, less allowances: Jul 4 - $48,179; Jan 3 - $39,576; Jul 5 - $41,234 854,915 587,934 731,093 Inventories: Finished products 525,292 434,000 462,264 Work in process 193,994 166,947 177,847 Materials and supplies 180,741 173,808 152,917 ---------- ---------- ---------- 900,027 774,755 793,028 Other current assets 149,299 114,683 124,992 ---------- ---------- ---------- Total current assets 1,974,452 1,601,466 1,727,761 PROPERTY, PLANT AND EQUIPMENT 1,647,119 1,568,952 1,591,767 Less accumulated depreciation 896,571 862,962 867,725 ---------- ---------- ---------- 750,548 705,990 724,042 INTANGIBLE ASSETS 929,460 814,332 828,489 OTHER ASSETS 251,910 200,994 189,879 ---------- ---------- ---------- $3,906,370 $3,322,782 $3,470,171 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 419,166 $ 24,191 $ 40,376 Current portion of long-term debt 802 450 450 Accounts payable 327,175 301,103 299,863 Accrued liabilities 471,520 440,164 469,801 ---------- ---------- ---------- Total current liabilities 1,218,663 765,908 810,490 LONG-TERM DEBT 517,682 516,226 516,733 OTHER LIABILITIES 170,991 143,813 167,133 REDEEMABLE PREFERRED STOCK 55,313 56,341 57,229 DEFERRED CONTRIBUTIONS TO EMPLOYEE STOCK OWNERSHIP PLAN (23,291) (26,275) (28,941) ---------- ---------- ---------- 32,022 30,066 28,288 COMMON SHAREHOLDERS' EQUITY Common Stock 121,528 121,225 62,915 Additional paid-in capital 791,833 744,108 710,725 Foreign currency translation (39,522) (36,110) (26,745) Retained earnings 1,093,173 1,037,546 1,200,632 ---------- ---------- ---------- 1,967,012 1,866,769 1,947,527 ---------- ---------- ---------- $3,906,370 $3,322,782 $3,470,171 ========== ========== ==========
See notes to consolidated financial statements 4 VF CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED ------------------------- JULY 4 JULY 5 1998 1997 ---------- ---------- OPERATIONS Net income $ 164,887 $ 149,090 Adjustments to reconcile net income to cash provided by operations: Depreciation 65,198 66,105 Amortization of intangible assets 16,115 13,880 Other, net (4,566) (21,643) Changes in current assets and liabilities: Accounts receivable (210,526) (155,530) Inventories (25,770) (73,273) Accounts payable (14,252) (14,521) Other, net (35,792) 45,532 ---------- ---------- Cash provided (used) by operations (44,706) 9,640 INVESTMENTS Capital expenditures (105,503) (77,671) Business acquisitions (235,303) 0 Other, net 18,480 (679) ---------- ---------- Cash invested (322,326) (78,350) FINANCING Increase in short-term borrowings 382,667 24,551 Proceeds from long-term debt 1,000 0 Payments of long-term debt (532) (1,229) Purchase of Common Stock (58,580) (134,964) Cash dividends paid (50,481) (50,320) Proceeds from issuance of stock 38,361 37,407 Other, net 714 1,284 ---------- ---------- Cash provided (used) by financing 313,149 (123,271) ---------- ---------- NET CHANGE IN CASH AND EQUIVALENTS (53,883) (191,981) CASH AND EQUIVALENTS - BEGINNING OF YEAR 124,094 270,629 ---------- ---------- CASH AND EQUIVALENTS - END OF PERIOD $ 70,211 $ 78,648 ========== ==========
See notes to consolidated financial statements 5 VF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. 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 4, 1998 are not necessarily indicative of results that may be expected for the year ending January 2, 1999. 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 3, 1998. NOTE B - EARNINGS PER COMMON SHARE Earnings per share amounts for 1997 have been restated in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. Earnings per share are computed as follows (in thousands, except per share amounts):
Second Quarter Six Months ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Basic earnings per share: Net income $ 86,781 $ 78,904 $164,887 $149,090 Less Preferred Stock dividends and redemption premium 1,554 1,158 3,139 2,268 -------- -------- -------- -------- Net income available for Common Stock $ 85,227 $ 77,746 $161,748 $146,822 ======== ======== ======== ======== Weighted average Common Stock outstanding 121,643 127,386 121,447 127,656 ======== ======== ======== ======== Basic earnings per share $ 0.70 $ 0.61 $ 1.33 $ 1.15 Diluted earnings per share: Net income $ 86,781 $ 78,904 $164,887 $149,090 Increased ESOP expense if Preferred Stock were converted to Common Stock 290 312 579 624 -------- -------- -------- -------- Net income available for Common Stock and dilutive securities $ 86,491 $ 78,592 $164,308 $148,466 ======== ======== ======== ======== Weighted average Common Stock outstanding 121,643 127,386 121,447 127,656 Additional Common Stock resulting from dilutive securities: Preferred Stock 2,867 2,966 2,878 2,978 Stock options 1,495 1,212 1,404 1,078 -------- -------- -------- -------- Weighted average Common Stock and dilutive securities outstanding 126,005 131,564 125,729 131,712 ======== ======== ======== ======== Diluted earnings per share $ 0.69 $ 0.60 $ 1.31 $ 1.13
6 NOTE C - CAPITAL The Company declared a two-for-one stock split in November 1997. References in this report to per share and average amounts have been restated, but numbers of shares presented are based on the actual amounts outstanding. At July 4, 1998, there were 300,000,000 authorized shares of Common Stock, no par value - stated capital $1 per share. At July 4, 1998, there were 121,528,272 shares outstanding, excluding 15,021,670 treasury shares. At January 3, 1998 and July 5, 1997, there were 121,225,298 and 62,914,669 shares outstanding, excluding 13,910,519 and 4,139,641 treasury shares, respectively. 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 1,791,504 shares were outstanding at July 4, 1998, 1,824,820 at January 3, 1998 and 1,853,570 at July 5, 1997. NOTE D - ACQUISITIONS On January 8, 1998, the Company acquired the common stock of Bestform Group, Inc. for $184.3 million in cash, plus repayment of $44.4 million in debt. Effective June 20, 1998, the Company acquired a majority interest in VF Japan, a joint venture to manufacture and market Wrangler branded jeanswear in Japan. These acquisitions 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 two companies are included based on preliminary allocations of the purchase prices, with approximately $132 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 1997 (in thousands, except per share amounts):
Second Quarter Six Months --------------------------------- --------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net sales $ 1,376,633 $ 1,378,450 $ 2,725,931 $ 2,739,205 Net income 86,373 82,531 163,997 154,578 Earnings per common share: Basic $ 0.70 $ 0.64 $ 1.32 $ 1.19 Diluted 0.68 0.62 1.30 1.17
7 NOTE E - NEW ACCOUNTING STANDARDS Effective January 4, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting 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 ------------------------ -------------------------- 1998 1997 1998 1997 -------- -------- --------- --------- Net income as reported $ 86,781 $ 78,904 $ 164,887 $ 149,090 Other comprehensive income: Foreign currency translation adjustments, net of income taxes (230) (13,373) (3,412) (33,173) -------- -------- --------- --------- Comprehensive income $ 86,551 $ 65,531 $ 161,475 $ 115,917 ======== ======== ========= =========
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of the Company's limited use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on net income or the financial position of the Company. 8 VF CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated sales increased 8% for the quarter and 6% for the six months ended July 4, 1998, compared with the comparable periods of 1997. Also, in the translation of foreign currencies into the U.S. dollar, a stronger U.S. dollar in 1998 reduced sales comparisons by 1% in each period in 1998 (and earnings by $.01 and $.03 per share, respectively). Sales in the Company's growth categories - - jeanswear, domestic intimate apparel, workwear and daypacks, where marketing efforts are focused to achieve sales increases - - advanced 14% in the quarter and 13% in the six months, due in part to the recently acquired companies. Domestic jeanswear sales increased 4% in the quarter and 6% year-to-date, particularly in the Lee and Riders brands. Intimate apparel sales increased from the acquisition of Bestform Group, Inc. (Bestform) and the continuing growth of the Vassarette brand. Total international sales for our jeanswear and intimate apparel businesses were flat for the quarter but declined for the six months due to the effects of a stronger U.S. dollar in translating foreign currencies. Sales declined in knitwear in both periods due to difficult market conditions. Gross margins were 33.8% of sales in the quarter and 34.0% in the six months, compared with 34.1% and 33.6% in the 1997 periods. Margins continue to improve in most businesses due to the continuing shift to lower cost sourcing, lower raw material costs and improved operating efficiencies. Marketing, administrative and general expenses were 22.1% of sales during the quarter and 22.7% in the six months, compared with 22.9% in both 1997 periods. Overall marketing and administrative expenses as a percent of sales have declined during 1998 through cost savings efforts even though the Company has continued its advertising spending above historical spending levels to support and build its brands. In addition, the Company has continued to incur significant costs to implement shared services and common systems. Net interest expense increased in 1998 due to increased short-term borrowings related to the acquisition of Bestform in January 1998. The effective income tax rate for the six months of 1998 was 39.4%, based on the expected rate for the year, compared with 40.2% in the prior year. 9 FINANCIAL CONDITION AND LIQUIDITY The financial condition of the Company is reflected in the following:
JULY 4 JANUARY 3 JULY 5 1998 1998 1997 ---- ---- ---- (Dollars in millions) Working capital $755.8 $835.6 $917.3 Current ratio 1.6 to 1 2.1 to 1 2.1 to 1 Debt to total capital 32.3% 22.5% 22.3%
Accounts receivable balances at the end of the second quarter of 1998 include those of Bestform and VF Japan. Excluding these acquisitions, receivables are higher at the end of the second quarter than at year-end due to seasonal sales patterns. Inventories at the end of the second quarter of 1998 include those of Bestform and VF Japan. Excluding these acquisitions, inventories are higher than at the end of 1997 due to seasonal sales patterns and 3% higher than at the end of the second quarter of 1997 due to sales growth expectations. Intangible assets increased during 1998 due to the acquisitions of Bestform and VF Japan. The increase in short-term borrowings relates to the acquisition of Bestform in January 1998. During the first six months of 1998, the Company repurchased 1,171,000 shares of its Common Stock in open market transactions for a total cost of $58.6 million. Under its current authorization from the Board of Directors, the Company may repurchase up to an additional 4.1 million Common Shares. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Certain statements included herein are "forward-looking statements" within the meaning of the federal securities laws. This includes 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; 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. 10 PART II - OTHER INFORMATION Item 5 - Discretionary Voting for 1999 Annual Meeting of Shareholders Pursuant to Rule 14a-4 promulgated under the Securities Exchange Act of 1934, as recently amended, in connection with the Company's 1999 Annual Meeting of Shareholders, the execution of a proxy solicited by the Company shall confer on the designated proxyholder discretionary voting authority to vote the shares on any matter for which the Company has not received notice on or prior to February 1, 1999. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial data schedule as of July 4, 1998 (b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended July 4, 1998. 11 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 11, 1998 By: /s/ Timothy R. Wheeler --------------------------- Timothy R. Wheeler Vice President - Controller (Chief Accounting Officer) 12