10-Q
Table of Contents

 

 

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, 2015

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

incorporation or organization)

 

(I.R.S. employer

identification number)

105 Corporate Center Boulevard

Greensboro, North Carolina 27408

(Address of principal executive offices)

(336) 424-6000

(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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

On August 1, 2015, there were 425,641,979 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

VF CORPORATION

Table of Contents

 

     Page
No.
 

 

Part I — Financial Information

  

Item 1 — Financial Statements (Unaudited)

     3   

Consolidated Balance Sheets: June 2015, December 2014 and June 2014

     3   

Consolidated Statements of Income: Three and six months ended June 2015 and June 2014

     4   

Consolidated Statements of Comprehensive Income: Three and six months ended June 2015 and June 2014

     5   

Consolidated Statements of Cash Flows: Six months ended June 2015 and June 2014

     6   

Consolidated Statements of Stockholders’ Equity: Year ended December 2014 and six months ended June 2015

     7   

Notes to Consolidated Financial Statements

     8   

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

     29   

Item 4 — Controls and Procedures

     29   

Part II — Other Information

  

Item 1 — Legal Proceedings

     29   

Item 1A — Risk Factors

     29   

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

     29   

Item 6 — Exhibits

     30   

Signatures

     31   


Table of Contents

Part I — Financial Information

Item 1 — Financial Statements (Unaudited)

VF CORPORATION

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share amounts)

 

     June
2015
    December
2014
    June
2014
 

ASSETS

      

Current assets

      

Cash and equivalents

   $ 659,770      $ 971,895      $ 475,891   

Accounts receivable, less allowance for doubtful accounts of:

      

June 2015 – $22,587; December 2014 – $26,694;

      

June 2014 – $44,747

     1,200,241        1,276,224        1,178,874   

Inventories

     1,746,418        1,482,804        1,615,245   

Other current assets

     600,061        454,931        509,902   
  

 

 

   

 

 

   

 

 

 

Total current assets

     4,206,490        4,185,854        3,779,912   

Property, plant and equipment

     964,373        942,181        921,970   

Intangible assets

     2,296,200        2,433,552        2,921,335   

Goodwill

     1,796,769        1,824,956        2,018,997   

Other assets

     641,672        593,597        573,113   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 9,905,504      $ 9,980,140      $ 10,215,327   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities

      

Short-term borrowings

   $ 1,158,516      $ 21,822      $ 581,120   

Current portion of long-term debt

     13,275        3,975        4,334   

Accounts payable

     503,753        690,842        537,192   

Accrued liabilities

     780,286        903,602        747,678   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     2,455,830        1,620,241        1,870,324   

Long-term debt

     1,412,244        1,423,581        1,425,123   

Other liabilities

     1,073,635        1,305,436        1,266,512   

Commitments and contingencies

      

Stockholders’ equity

      

Preferred Stock, par value $1; shares authorized, 25,000,000; no shares outstanding at June 2015, December 2014 or June 2014

     —          —          —     

Common Stock, stated value $0.25; shares authorized, 1,200,000,000; shares outstanding at June 2015 – 425,240,838; December 2014 – 432,859,891; June 2014 – 430,890,659

     106,310        108,215        107,723   

Additional paid-in capital

     3,114,045        2,993,186        2,875,240   

Accumulated other comprehensive income (loss)

     (913,626     (702,272     (232,212

Retained earnings

     2,657,066        3,231,753        2,902,617   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     4,963,795        5,630,882        5,653,368   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 9,905,504      $ 9,980,140      $ 10,215,327   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

VF CORPORATION

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended June     Six Months Ended June  
     2015     2014     2015     2014  

Net sales

   $ 2,484,189      $ 2,373,408      $ 5,287,491      $ 5,123,523   

Royalty income

     29,671        28,668        63,670        59,331   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,513,860        2,402,076        5,351,161        5,182,854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses

        

Cost of goods sold

     1,300,346        1,239,344        2,746,893        2,645,910   

Selling, general and administrative expenses

     990,487        942,924        1,983,406        1,913,946   
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,290,833        2,182,268        4,730,299        4,559,856   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     223,027        219,808        620,862        622,998   

Interest income

     1,895        1,519        3,993        2,850   

Interest expense

     (23,023     (21,338     (44,872     (41,975

Other income (expense), net

     670        (508     1,498        (2,600
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     202,569        199,481        581,481        581,273   

Income taxes

     31,758        41,799        121,961        126,398   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 170,811      $ 157,682      $ 459,520      $ 454,875   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

        

Basic

   $ 0.40      $ 0.37      $ 1.08      $ 1.05   

Diluted

     0.40        0.36        1.06        1.03   

Cash dividends per common share

   $ 0.3200      $ 0.2625      $ 0.6400      $ 0.5250   

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

     Three Months Ended June     Six Months Ended June  
     2015     2014     2015     2014  

Net income

   $ 170,811      $ 157,682      $ 459,520      $ 454,875   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Foreign currency translation

        

Gains (losses) arising during the period

     2,444        (25,832     (245,111     (36,734

Less income tax effect

     1,281        (703     2,755        612   

Defined benefit pension plans

        

Amortization of net deferred actuarial losses

     15,495        9,389        30,992        18,773   

Amortization of deferred prior service costs

     759        1,362        1,521        2,724   

Settlement charge

     1,592        —          1,592        —     

Less income tax effect

     (10,130     (4,108     (17,096     (8,233

Derivative financial instruments

        

Gains (losses) arising during the period

     (21,576     (11,461     46,434        (7,765

Less income tax effect

     8,763        4,504        (17,965     3,051   

Reclassification to net income for (gains) losses realized

     (15,403     7,407        (23,498     12,823   

Less income tax effect

     6,255        (2,911     9,436        (5,039

Marketable securities

        

Gains (losses) arising during the period

     —          (611     495        (1,160

Less income tax effect

     —          241        (195     456   

Reclassification to net income for (gains) losses realized

     (1,177     —          (1,177     —     

Less income tax effect

     463        —          463        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (11,234     (22,723     (211,354     (20,492
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 159,577      $ 134,959      $ 248,166      $ 434,383   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Six Months Ended June  
     2015     2014  

Operating activities

    

Net income

   $ 459,520      $ 454,875   

Adjustments to reconcile net income to cash (used) provided by operating activities:

    

Depreciation and amortization

     129,265        131,201   

Stock-based compensation

     50,313        53,580   

Provision for doubtful accounts

     4,372        4,089   

Pension expense (less than) in excess of contributions

     (229,352     17,673   

Other, net

     (22,287     4,810   

Changes in operating assets and liabilities:

    

Accounts receivable

     34,778        174,448   

Inventories

     (288,842     (220,187

Accounts payable

     (179,515     (100,841

Income taxes

     (121,240     (174,251

Accrued liabilities

     (64,699     (92,045

Other assets and liabilities

     (58,759     (33,765
  

 

 

   

 

 

 

Cash (used) provided by operating activities

     (286,446     219,587   

Investing activities

    

Capital expenditures

     (125,504     (95,844

Software purchases

     (43,450     (56,042

Other, net

     10,631        (11,701
  

 

 

   

 

 

 

Cash used by investing activities

     (158,323     (163,587

Financing activities

    

Net increase in short-term borrowings

     1,139,103        562,315   

Payments on long-term debt

     (2,203     (2,697

Payment of debt issuance costs

     (1,475     —     

Purchases of treasury stock

     (731,527     (727,536

Cash dividends paid

     (271,519     (227,625

Proceeds from issuance of Common Stock, net of shares withheld for taxes

     3,752        4,333   

Tax benefits of stock-based compensation

     33,728        39,195   
  

 

 

   

 

 

 

Cash provided (used) by financing activities

     169,859        (352,015

Effect of foreign currency rate changes on cash and equivalents

     (37,215     (4,497
  

 

 

   

 

 

 

Net change in cash and equivalents

     (312,125     (300,512

Cash and equivalents – beginning of year

     971,895        776,403   
  

 

 

   

 

 

 

Cash and equivalents – end of period

   $ 659,770      $ 475,891   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

     Common Stock    

Additional

Paid-in

    

Accumulated

Other

Comprehensive

    Retained  
     Shares     Amounts     Capital      Income (Loss)     Earnings  

Balance, December 2013

     440,310,370      $ 110,078      $ 2,746,590       $ (211,720   $ 3,432,090   

Net income

     —          —          —           —          1,047,505   

Dividends on Common Stock

     —          —          —           —          (478,933

Purchase of treasury stock

     (12,037,000     (3,009     —           —          (724,786

Stock-based compensation, net

     4,586,521        1,146        246,596         —          (44,123

Foreign currency translation

     —          —          —           (463,588     —     

Defined benefit pension plans

     —          —          —           (99,683     —     

Derivative financial instruments

     —          —          —           73,143        —     

Marketable securities

     —          —          —           (424     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, December 2014

     432,859,891        108,215        2,993,186         (702,272     3,231,753   

Net income

     —          —          —           —          459,520   

Dividends on Common Stock

     —          —          —           —          (271,519

Purchase of treasury stock

     (10,020,000     (2,505     —           —          (729,022

Stock-based compensation, net

     2,400,947        600        120,859         —          (33,666

Foreign currency translation

     —          —          —           (242,356     —     

Defined benefit pension plans

     —          —          —           17,009        —     

Derivative financial instruments

     —          —          —           14,407        —     

Marketable securities

     —          —          —           (414     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, June 2015

     425,240,838      $ 106,310      $ 3,114,045       $ (913,626   $ 2,657,066   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note A – Basis of Presentation

VF Corporation (together with its subsidiaries, collectively known as “VF”) uses a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to periods ended June 2015, December 2014 and June 2014 relate to the fiscal periods ended on July 4, 2015, January 3, 2015 and June 28, 2014, respectively.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. Similarly, the December 2014 consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the consolidated financial position, results of operations and cash flows of VF for the interim periods presented. Operating results for the three and six months ended June 2015 are not necessarily indicative of results that may be expected for any other interim period or for the year ending January 2, 2016. For further information, refer to the consolidated financial statements and notes included in VF’s Annual Report on Form 10-K for the year ended December 2014 (“2014 Form 10-K”).

Note B – Sale of Accounts Receivable

VF has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis. Under the agreement, up to $237.5 million of VF’s accounts receivable may be sold to the financial institution and remain outstanding at any point in time. VF removes the accounts receivable from the Consolidated Balance Sheets at the time of sale. VF does not retain any interests in the sold accounts receivable but continues to service and collect outstanding accounts receivable on behalf of the financial institution. During the first six months of 2015, VF sold total accounts receivable of $633.1 million. As of June 2015, December 2014 and June 2014, $164.3 million, $130.3 million and $138.4 million, respectively, of sold accounts receivable had been removed from the Consolidated Balance Sheets but remained outstanding with the financial institution. The funding fee charged by the financial institution is included in other income (expense), net, and was $0.5 million and $0.9 million for the second quarter and first six months of 2015, respectively, and $0.4 million and $0.8 million for the second quarter and first six months of 2014, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.

Note C – Inventories

 

In thousands    June
2015
     December
2014
     June
2014
 

Finished products

   $ 1,480,274       $ 1,232,623       $ 1,362,069   

Work in process

     108,961         104,517         104,039   

Raw materials

     157,183         145,664         149,137   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 1,746,418       $ 1,482,804       $ 1,615,245   
  

 

 

    

 

 

    

 

 

 

Note D – Property, Plant and Equipment

 

In thousands    June
2015
     December
2014
     June
2014
 

Land and improvements

   $ 96,182       $ 57,151       $ 56,962   

Buildings and improvements

     1,011,621         986,679         988,980   

Machinery and equipment

     1,235,774         1,225,293         1,191,219   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, at cost

     2,343,577         2,269,123         2,237,161   

Less accumulated depreciation and amortization

     1,379,204         1,326,942         1,315,191   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

   $ 964,373       $ 942,181       $ 921,970   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note E – Intangible Assets

 

    Weighted       June 2015     December 2014  
Dollars in thousands   Average
Amortization
Period
 

Amortization Methods

  Cost     Accumulated
Amortization
    Net
Carrying
Amount
    Net
Carrying
Amount
 

Amortizable intangible assets:

           

Customer relationships

  20 years   Accelerated   $ 571,090      $ 351,553      $ 219,537      $ 241,811   

License agreements

  24 years   Accelerated and straight-line     179,785        88,818        90,967        96,736   

Other

  11 years   Straight-line     5,728        1,951        3,777        4,363   
         

 

 

   

 

 

 

Amortizable intangible assets, net

            314,281        342,910   
         

 

 

   

 

 

 

Indefinite-lived intangible assets:

           

Trademarks and trade names

            1,981,919        2,090,642   
         

 

 

   

 

 

 

Intangible assets, net

          $ 2,296,200      $ 2,433,552   
         

 

 

   

 

 

 

Amortization expense for the second quarter and first six months of 2015 was $7.5 million and $15.2 million, respectively. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five years is:

 

Year

   Estimated
Amortization Expense
 
     In millions  

2015

   $ 29.9   

2016

     28.3   

2017

     27.2   

2018

     26.6   

2019

     26.0   

Note F – Goodwill

Changes in goodwill are summarized by business segment as follows:

 

In thousands    Outdoor &
Action Sports
    Jeanswear     Imagewear      Sportswear      Total  

Balance, December 2014

   $ 1,389,453      $ 219,442      $ 58,747       $ 157,314       $ 1,824,956   

Currency translation

     (23,577     (4,610     —           —           (28,187
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance, June 2015

   $ 1,365,876      $ 214,832      $ 58,747       $ 157,314       $ 1,796,769   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Accumulated impairment charges for the Outdoor & Action Sports and Sportswear coalitions were $43.4 million and $58.5 million, respectively, for the periods presented above. No impairment charges were recorded in the first six months of 2015.

 

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Table of Contents

Note G – Pension Plans

The components of pension cost for VF’s defined benefit plans were as follows:

 

     Three Months Ended June      Six Months Ended June  
In thousands    2015      2014      2015      2014  

Service cost – benefits earned during the period

   $ 7,344       $ 6,097       $ 14,679       $ 12,182   

Interest cost on projected benefit obligations

     19,411         20,404         38,814         40,793   

Expected return on plan assets

     (27,779      (22,697      (55,550      (45,378

Amortization of deferred amounts:

           

Net deferred actuarial losses

     15,495         9,389         30,992         18,773   

Deferred prior service costs

     759         1,362         1,521         2,724   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 15,230       $ 14,555       $ 30,456       $ 29,094   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first six months of 2015, VF contributed $261.4 million to its defined benefit plans, which included a $250.0 million discretionary contribution to its domestic qualified plan in the first quarter. VF intends to make approximately $11.9 million of additional contributions during the remainder of 2015.

In addition, VF incurred a $1.6 million settlement charge in the second quarter of 2015 related to the recognition of deferred actuarial losses resulting from lump sum payments of retirement benefits to participants in VF’s supplemental defined benefit pension plan.

Note H – Capital and Accumulated Other Comprehensive Income (Loss)

During the first six months of 2015, the Company purchased 10.0 million shares of Common Stock in open market transactions for $730.1 million under its share repurchase program authorized by VF’s Board of Directors. These transactions were treated as treasury stock transactions.

Common Stock outstanding is net of shares held in treasury which are, in substance, retired. During the first six months of 2015, VF restored 10.1 million treasury shares to an unissued status, after which they were no longer recognized as shares held in treasury. There were 23,400 shares held in treasury at the end of June 2015, and no shares held in treasury at the end of December 2014 or June 2014. The excess of the cost of treasury shares acquired over the $0.25 per share stated value of Common Stock is deducted from retained earnings.

VF Common Stock is also held by the Company’s deferred compensation plans and is treated as treasury shares for financial reporting purposes. During the first half of 2015, the Company purchased 20,000 shares of Common Stock in open market transactions for $1.4 million. Balances related to shares held for deferred compensation plans are as follows:

 

In millions, except share amounts    June
2015
     December
2014
     June
2014
 

Shares held for deferred compensation plans

     565,549         637,504         695,204   

Cost of shares held for deferred compensation plans

   $ 6.7       $ 7.7       $ 8.2   

Accumulated Other Comprehensive Income (Loss)

Comprehensive income consists of net income and specified components of other comprehensive income (“OCI”). OCI consists of changes in assets and liabilities that are not included in net income under GAAP but are instead deferred and accumulated within a separate component of stockholders’ equity in the balance sheet. VF’s comprehensive income is presented in the Consolidated Statements of Comprehensive Income. The deferred components of OCI are reported, net of related income taxes, in accumulated other comprehensive income (loss) in stockholders’ equity, as follows:

 

In thousands    June
2015
     December
2014
     June
2014
 

Foreign currency translation

   $ (599,297    $ (356,941    $ 70,525   

Defined benefit pension plans

     (360,125      (377,134      (264,187

Derivative financial instruments

     45,796         31,389         (38,684

Marketable securities

     —           414         134   
  

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income (loss)

   $ (913,626    $ (702,272    $ (232,212
  

 

 

    

 

 

    

 

 

 

 

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The changes in accumulated other comprehensive income (loss), net of related taxes, are as follows:

 

     Three Months Ended June 2015  
In thousands    Foreign
Currency
Translation
    Defined
Benefit
Pension Plans
    Derivative
Financial
Instruments
    Marketable
Securities
    Total  

Balance, March 2015

   $ (603,022   $ (367,841   $ 67,757      $ 714      $ (902,392
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassification

     3,725        —          (12,813     —          (9,088

Amounts reclassified from accumulated other comprehensive income (loss)

     —          7,716        (9,148     (714     (2,146
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     3,725        7,716        (21,961     (714     (11,234
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 2015

   $ (599,297   $ (360,125   $ 45,796      $ —        $ (913,626
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 2014  
In thousands    Foreign
Currency
Translation
    Defined
Benefit
Pension Plans
    Derivative
Financial
Instruments
    Marketable
Securities
    Total  

Balance, March 2014

   $ 97,060      $ (270,830   $ (36,223   $ 504      $ (209,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassification

     (26,535     —          (6,957     (370     (33,862

Amounts reclassified from accumulated other comprehensive income (loss)

     —          6,643        4,496        —          11,139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (26,535     6,643        (2,461     (370     (22,723
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 2014

   $ 70,525      $ (264,187   $ (38,684   $ 134      $ (232,212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 2015  
In thousands    Foreign
Currency
Translation
    Defined
Benefit
Pension Plans
    Derivative
Financial
Instruments
    Marketable
Securities
    Total  

Balance, December 2014

   $ (356,941   $ (377,134   $ 31,389      $ 414      $ (702,272
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassification

     (242,356     —          28,469        300        (213,587

Amounts reclassified from accumulated other comprehensive income (loss)

     —          17,009        (14,062     (714     2,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (242,356     17,009        14,407        (414     (211,354
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 2015

   $ (599,297   $ (360,125   $ 45,796      $ —        $ (913,626
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 2014  
In thousands    Foreign
Currency
Translation
    Defined
Benefit
Pension Plans
    Derivative
Financial
Instruments
    Marketable
Securities
    Total  

Balance, December 2013

   $ 106,647      $ (277,451   $ (41,754   $ 838      $ (211,720
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     (36,122     —          (4,714     (704     (41,540

Amounts reclassified from accumulated other comprehensive income (loss)

     —          13,264        7,784        —          21,048   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (36,122     13,264        3,070        (704     (20,492
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 2014

   $ 70,525      $ (264,187   $ (38,684   $ 134      $ (232,212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Reclassifications out of accumulated other comprehensive income (loss) are as follows:

 

In thousands    Affected Line Item in the                            
Details About Accumulated Other    Consolidated Statements    Three Months Ended June      Six Months Ended June  

Comprehensive Income (Loss) Components

  

of Income

   2015      2014      2015      2014  

Amortization of defined benefit pension plans:

              

Net deferred actuarial losses

       (a)    $ (15,495)       $ (9,389)       $ (30,992)       $ (18,773)   

Deferred prior service costs

       (a)      (759)         (1,362)         (1,521)         (2,724)   

Pension settlement charge

   Selling, general and administrative expenses      (1,592)         —           (1,592)         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
  

Total before tax

     (17,846)         (10,751)         (34,105)         (21,497)   
  

Tax benefit

     10,130         4,108         17,096         8,233   
     

 

 

    

 

 

    

 

 

    

 

 

 
  

Net of tax

     (7,716)         (6,643)         (17,009)         (13,264)   
     

 

 

    

 

 

    

 

 

    

 

 

 

Gains (losses) on derivative financial instruments:

              

Foreign exchange contracts

   Net sales      (11,790)         (1,542)         (28,845)         118   

Foreign exchange contracts

   Cost of goods sold      22,123         (4,339)         41,491         (9,703)   

Foreign exchange contracts

   Other income (expense), net      6,139         (507)         12,974         (1,215)   

Interest rate contracts

   Interest expense      (1,069)         (1,019)         (2,122)         (2,023)   
     

 

 

    

 

 

    

 

 

    

 

 

 
  

Total before tax

     15,403         (7,407)         23,498         (12,823)   
  

Tax benefit (expense)

     (6,255)         2,911         (9,436)         5,039   
     

 

 

    

 

 

    

 

 

    

 

 

 
  

Net of tax

     9,148         (4,496)         14,062         (7,784)   
     

 

 

    

 

 

    

 

 

    

 

 

 

Gains (losses) on sale of marketable securities

   Other income (expense), net      1,177         —           1,177         —     
  

Tax expense

     (463)         —           (463)         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
  

Net of tax

     714         —           714         —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications for the period

   Net of tax    $ 2,146       $ (11,139)       $ (2,233)       $ (21,048)   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost (see Note G for additional details).

Note I – Stock-based Compensation

During the second quarter of 2015, VF did not grant any stock-based compensation awards.

During the first quarter of 2015, VF granted options to employees and nonemployee members of VF’s Board of Directors to purchase 2,399,883 shares of Common Stock at an exercise price of $75.35 per share. The exercise price of each option granted was equal to the fair market value of VF Common Stock on the date of grant. Employee stock options vest in equal annual installments over three years. Options granted to nonemployee members of VF’s Board of Directors become exercisable one year from the date of grant. The grant date fair value of each option award is calculated using a lattice option—pricing valuation model, which incorporates a range of assumptions for inputs as follows:

 

     2015

Expected volatility

   20% to 29%

Weighted average expected volatility

   22%

Expected term (in years)

   5.9 to 7.5

Dividend yield

   2.0%

Risk-free interest rate

   0.1% to 2.1%

Fair value at date of grant

   $13.71

Also during the first quarter of 2015, VF granted 442,338 performance-based restricted stock units (“RSU”) to employees that enable them to receive shares of VF Common Stock at the end of a three-year period. Each RSU has a potential payout value ranging from zero to two shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of a three-year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. Shares are issued to participants in the year following the conclusion of each three-year performance period. The fair market value of VF Common Stock at the date the units were granted was $75.35 per share.

 

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The actual number of performance-based RSUs earned may also be adjusted upward or downward by 25% of the target award, based on how VF’s total shareholder return (“TSR”) over the three-year period compares to the TSR for companies included in the Standard & Poor’s 500 Index. The grant date fair value of the TSR-based adjustment related to the 2015 RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was $3.78 per share.

VF granted 11,556 nonperformance-based RSUs to nonemployee members of the Board of Directors during the first quarter of 2015. These units vest upon grant and will be settled in shares of VF Common Stock one year from the date of grant. The fair market value of VF Common Stock at the date the units were granted was $75.35 per share.

VF granted 37,300 nonperformance-based RSUs to employees during the first quarter of 2015. These units vest four years from the date of grant and each unit entitles the holder to one share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was $68.47 per share.

VF granted 104,500 restricted shares of VF Common Stock to employees during the first quarter of 2015. These shares generally vest four years from the date of grant. The weighted average fair market value of VF Common Stock at the date the units were granted was $70.98 per share.

Note J – Income Taxes

The effective income tax rate for the first half of 2015 was 21.0% compared with 21.7% in the first half of 2014. The first six months of 2015 included a net discrete tax benefit of $29.5 million, which included $33.0 million of tax benefits related to the settlement of tax audits and $5.0 million of discrete tax expense related to the effects of tax rate changes. The $29.5 million tax benefit reduced the effective income tax rate by 5.1%. The first six months of 2014 included a net discrete tax benefit of $15.5 million, which included $4.1 million of prior year refund claims and $8.5 million of net tax benefits related to the realization of previously unrecognized tax benefits and interest, reducing the effective income tax rate by 2.7%. Without discrete items, the effective income tax rate for the first half of 2015 increased by 1.7% compared with the 2014 period primarily due to a lower percentage of projected foreign earnings for 2015, reflecting the impact of changes in foreign currency exchange rates.

VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and foreign jurisdictions. In the U.S., the Internal Revenue Service (“IRS”) examinations for tax years 2007 through 2011 were effectively settled during the first half of 2015. Additionally, tax years prior to 2007 were effectively settled with the IRS in prior years. During the second quarter of 2014, the IRS completed its examination of Timberland’s 2010 tax return. The examination of Timberland’s 2011 tax return is still ongoing. The IRS has proposed adjustments to Timberland’s 2011 tax return that would significantly impact the timing of cash tax payments and assessment of interest charges. The Company has formally disagreed with the findings. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and has concluded that VF’s provision for income taxes is adequate. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these audits and negotiations will conclude during the next 12 months.

During the first half of 2015, the amount of net unrecognized tax benefits and associated interest decreased by $25.6 million to $81.9 million. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits and interest may decrease during the next 12 months by approximately $29.9 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $19.8 million would reduce income tax expense.

 

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Table of Contents

Note K – Business Segment Information

VF’s businesses are grouped into product categories, and by brands within those product categories, for internal financial reporting used by management. These groupings of businesses within VF are referred to as “coalitions” and are the basis for VF’s reportable segments. Financial information for VF’s reportable segments is as follows:

 

     Three Months Ended June      Six Months Ended June  
In thousands    2015      2014      2015      2014  

Coalition revenues:

           

Outdoor & Action Sports

   $ 1,396,344       $ 1,279,144       $ 3,003,233       $ 2,853,791   

Jeanswear

     608,201         605,838         1,307,856         1,296,168   

Imagewear

     248,788         249,963         531,684         513,202   

Sportswear

     142,191         140,102         277,848         271,607   

Contemporary Brands

     86,874         96,186         174,411         194,355   

Other

     31,462         30,843         56,129         53,731   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total coalition revenues

   $ 2,513,860       $ 2,402,076       $ 5,351,161       $ 5,182,854   
  

 

 

    

 

 

    

 

 

    

 

 

 

Coalition profit:

           

Outdoor & Action Sports

   $ 134,925       $ 130,684       $ 395,745       $ 405,174   

Jeanswear

     104,568         100,137         236,500         229,403   

Imagewear

     35,450         35,317         76,797         73,089   

Sportswear

     14,433         10,267         27,274         22,822   

Contemporary Brands

     1,140         8,840         4,680         16,742   

Other

     597         (74      15,124         (3,190
  

 

 

    

 

 

    

 

 

    

 

 

 

Total coalition profit

     291,113         285,171         756,120         744,040   

Corporate and other expenses

     (67,416      (65,871      (133,760      (123,642

Interest expense, net

     (21,128      (19,819      (40,879      (39,125
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

   $ 202,569       $ 199,481       $ 581,481       $ 581,273   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note L – Earnings Per Share

 

     Three Months Ended June      Six Months Ended June  
In thousands, except per share amounts    2015      2014      2015      2014  

Earnings per share – basic:

           

Net income

   $ 170,811       $ 157,682       $ 459,520       $ 454,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     424,349         429,940         425,305         434,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

   $ 0.40       $ 0.37       $ 1.08       $ 1.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share – diluted:

           

Net income

   $ 170,811       $ 157,682       $ 459,520       $ 454,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     424,349         429,940         425,305         434,115   

Incremental shares from stock options and other dilutive securities

     6,354         7,191         7,102         7,584   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding

     430,703         437,131         432,407         441,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

   $ 0.40       $ 0.36       $ 1.06       $ 1.03   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding options to purchase 2.4 million shares were excluded from the calculations of diluted earnings per share for both the three and six-month periods ended June 2015, and options to purchase 2.7 million shares were excluded from the calculations of diluted earnings per share for both the three and six-month periods ended June 2014, because the effect of their inclusion would have been

 

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Table of Contents

antidilutive to those periods. In addition, 1.0 million shares of performance-based restricted stock units were excluded from the calculations of diluted earnings per share for both the three and six-month periods ended June 2015, and 1.3 million shares of performance-based restricted stock units were excluded from the calculations of diluted earnings per share for the three and six-month periods ended June 2014, because these units are not considered to be contingent outstanding shares in those periods.

Note M – Fair Value Measurements

Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:

 

    Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

    Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.

 

    Level 3 — Prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.

The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:

 

     Total      Fair Value Measurement Using (a)  
In thousands    Fair Value      Level 1      Level 2      Level 3  

June 2015

           

Financial assets:

           

Cash equivalents:

           

Money market funds

   $ 364,033       $ 364,033       $ —         $ —     

Time deposits

     48,531         48,531         —           —     

Derivative financial instruments

     136,665         —           136,665         —     

Investment securities

     219,483         205,049         14,434         —     

Financial liabilities:

           

Derivative financial instruments

     56,829         —           56,829         —     

Deferred compensation

     273,770         —           273,770         —     

December 2014

           

Financial assets:

           

Cash equivalents:

           

Money market funds

   $ 388,635       $ 388,635       $ —         $ —     

Time deposits

     197,303         197,303         —           —     

Derivative financial instruments

     105,264         —           105,264         —     

Investment securities

     228,406         208,874         19,532         —     

Other marketable securities

     5,111         5,111         —           —     

Financial liabilities:

           

Derivative financial instruments

     31,769         —           31,769         —     

Deferred compensation

     295,226         —           295,226         —     

 

(a)  There were no transfers among the levels within the fair value hierarchy during the first half of 2015 or the year ended December 2014.

VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of forward foreign currency exchange contracts, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies, and considers the credit risk of the Company and its counterparties. Investment securities are held in VF’s deferred compensation plans as

 

15


Table of Contents

an economic hedge of the related deferred compensation liabilities. These investments are classified as trading securities and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed income fund (Level 2) that is valued based on the net asset values of the underlying assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments. Prior to the second quarter of 2015, other marketable securities consisted of common stock investments classified as available-for-sale, the fair value of which was based on quoted prices in active markets. During the second quarter, VF sold all of its available-for-sale securities for $5.9 million in cash proceeds and recognized a gain of $1.5 million, which is included in other income (expense), net in the Consolidated Statements of Income for the second quarter and six months ended June 2015.

All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At June 2015 and December 2014, their carrying values approximated their fair values. Additionally, at June 2015 and December 2014, the carrying value of VF’s long-term debt, including the current portion, was $1,425.5 million and $1,427.6 million, respectively, compared with a fair value of $1,646.3 million and $1,684.1 million at those dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.

Note N – Derivative Financial Instruments and Hedging Activities

Summary of Derivative Financial Instruments

All of VF’s outstanding derivative financial instruments are forward foreign currency exchange contracts. Although derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. The notional amounts of outstanding derivative contracts were $2.5 billion at June 2015 and $1.9 billion at both December 2014 and June 2014, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Swiss franc, Japanese yen and Polish zloty. Derivative contracts have maturities up to 24 months.

The following table presents outstanding derivatives on an individual contract basis:

 

     Fair Value of Derivatives with
Unrealized Gains
     Fair Value of Derivatives with
Unrealized Losses
 
In thousands    June
2015
     December
2014
     June
2014
     June
2015
    December
2014
    June
2014
 

Foreign currency exchange contracts designated as hedging instruments

   $ 136,265       $ 104,860       $ 11,635       $ (56,786   $ (31,711   $ (40,191

Foreign currency exchange contracts not designated as hedging instruments

     400         404         —           (43     (58     (607
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivatives

   $ 136,665       $ 105,264       $ 11,635       $ (56,829   $ (31,769   $ (40,798
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. However, if VF were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current gross presentation to the net amounts as detailed in the following table:

 

     June 2015     December 2014     June 2014  
In thousands    Derivative
Asset
    Derivative
Liability
    Derivative
Asset
    Derivative
Liability
    Derivative
Asset
    Derivative
Liability
 

Gross amounts presented in the Consolidated Balance Sheets

   $ 136,665      $ (56,829   $ 105,264      $ (31,769   $ 11,635      $ (40,798

Gross amounts not offset in the Consolidated Balance Sheets

     (52,154     52,154        (30,724     30,724        (10,380     10,380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts

   $ 84,511      $ (4,675   $ 74,540      $ (1,045   $ 1,255      $ (30,418
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Derivatives are classified in the Consolidated Balance Sheets as current or noncurrent based on their maturity dates, as follows:

 

In thousands    June
2015
     December
2014
     June
2014
 

Other current assets

   $ 122,749       $ 84,995       $ 7,866   

Accrued liabilities

     (49,522      (26,968      (34,289

Other assets

     13,916         20,269         3,769   

Other liabilities

     (7,307      (4,801      (6,509

Cash Flow Hedges

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:

 

In thousands    Gain (Loss) on Derivatives
Recognized in OCI
     Three Months Ended June     
     Gain (Loss) on Derivatives
Recognized in OCI
     Six Months Ended June     
 

Cash Flow Hedging Relationships

   2015      2014      2015      2014  

Foreign currency exchange

   $ (21,576    $ (11,461    $  46,434       $   (7,765

 

In thousands    Gain (Loss) Reclassified from
Accumulated OCI into Income
    Three Months Ended  June    
     Gain (Loss) Reclassified from
Accumulated OCI into Income
    Six Months Ended  June    
 

Location of Gain (Loss)

   2015      2014      2015      2014  

Net sales

   $ (11,790    $ (1,542    $ (28,845    $ 118   

Cost of goods sold

     22,123         (4,339      41,491         (9,703

Other income (expense), net

     6,139         (507      12,974         (1,215

Interest expense

     (1,069      (1,019      (2,122      (2,023
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,403       $ (7,407    $ 23,498       $ (12,823
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Contracts Not Designated as Hedges

VF uses derivative contracts to manage foreign currency exchange risk on intercompany loans as well as intercompany and third-party accounts receivable and payable. These contracts are not designated as hedges, and are recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:

 

In thousands   

Location of Gain (Loss)
on Derivatives
Recognized in Income

   Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended June
    Gain (Loss) on Derivatives
Recognized in Income
Six Months Ended June
 

Derivatives Not Designated as Hedges

      2015     2014     2015     2014  

Foreign currency exchange

   Other income (expense), net    $ (1,430   $ (4,014   $ (2,461   $ (4,870

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and six-month periods ended June 2015 and June 2014.

At June 2015, accumulated OCI included $84.8 million of pretax net deferred gains for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.

 

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VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in 2021 and 2033, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pretax net deferred loss in accumulated OCI was $29.4 million at June 2015, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. VF reclassified $1.0 million and $2.1 million of net deferred losses from accumulated OCI into interest expense during the three and six-month periods ended June 2015, respectively, and $1.0 million and $2.0 million for the three and six-month periods ended June 2014, respectively. VF expects to reclassify $4.4 million to interest expense during the next 12 months.

Note O – Recently Issued and Adopted Accounting Standards

In April 2014, the FASB changed the definition and disclosure requirements for discontinued operations. This guidance became effective in the first quarter of 2015, but did not have an impact on VF’s consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue recognition which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new model provides a 5-step analysis in determining the measurement of revenue and the timing of when it is recognized. New disclosures about revenues and cash flows arising from contracts with customers are also required. In July 2015, the FASB approved a one-year delay to the adoption date of the standard that makes it effective in the first quarter of 2018 with early adoption permitted. The Company is currently evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

In June 2014, the FASB issued an update to their accounting guidance related to stock-based compensation. The guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. This guidance will be effective in the first quarter of 2016, but is not expected to have an impact on VF’s consolidated financial statements.

In February 2015, the FASB issued an update to their existing consolidation model, which changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance will be effective in the first quarter of 2016. The Company is currently evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

In April 2015, the FASB issued an update to their accounting guidance related to debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance will be effective in the first quarter of 2016, and the Company will reclassify the debt issuance costs in VF’s consolidated financial statements in accordance with this guidance.

In April 2015, the FASB issued an update to their accounting guidance related to retirement benefits that provides a practical expedient permitting companies to measure defined benefit plan assets and obligations using the month-end that is closest to an entity’s fiscal year-end. This guidance will be effective in the first quarter of 2016 with early adoption permitted. The Company is currently evaluating whether it will adopt this guidance.

In April 2015, the FASB issued new guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This guidance provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting for other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. This guidance will be effective in the first quarter of 2016, but is not expected to have an impact on VF’s consolidated financial statements.

In May 2015, the FASB issued an update to their accounting guidance related to fair value measurements. The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and requires separate disclosure instead. This guidance will be effective in the first quarter of 2016 with early adoption permitted. The Company is currently evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

Note P – Subsequent Events

On July 21, 2015, VF’s Board of Directors declared a quarterly cash dividend of $0.32 per share, payable on September 18, 2015 to stockholders of record on September 8, 2015.

 

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

All per share amounts are presented on a diluted basis. All percentages shown in the tables below and the discussion that follows have been calculated using unrounded numbers. All references to foreign currency amounts below reflect the changes in foreign exchange rates from the 2014 comparable periods and their impact on both translating foreign currencies into U.S. dollars and on transactions denominated in a foreign currency.

Highlights of the Second Quarter of 2015

 

    Revenues grew to $2.5 billion, a 5% increase from the second quarter of 2014, despite a negative 5% impact from foreign currency.

 

    Outdoor & Action Sports revenues rose 9% over the 2014 quarter. Foreign currency negatively impacted this growth rate by 7%.

 

    Direct-to-consumer revenues were up 7% over the 2014 quarter, including a negative 6% impact from foreign currency, and accounted for 26% of total revenues in the quarter.

 

    International revenues decreased 1% compared with the 2014 quarter, including a negative 14% impact from foreign currency, and represented 34% of total revenues in the quarter.

 

    Earnings per share was up 11% to $0.40 from $0.36 in the 2014 quarter, reflecting improved operating performance and a lower effective tax rate, partially offset by a negative 11% impact from foreign currency.

Analysis of Results of Operations

Consolidated Statements of Income

The following table presents a summary of the changes in total revenues from the comparable periods in 2014:

 

In millions    Second Quarter      Six Months  

Total revenues – 2014

   $ 2,402.1       $ 5,182.9   

Operations

     230.9         455.1   

Impact of foreign currency

     (119.1      (286.8
  

 

 

    

 

 

 

Total revenues – 2015

$ 2,513.9    $ 5,351.2   
  

 

 

    

 

 

 

VF reported revenue growth of 5% and 3% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The revenue increases in the second quarter and first half of 2015 were driven by operational growth of 10% and 9%, respectively, partially offset by unfavorable foreign currency exchange rates in both periods. Excluding the negative impact from foreign currency, sales grew in every region around the world in both the second quarter and first six months of 2015. Additional details on revenues by coalition are provided in the section titled “Information by Business Segment.”

VF’s most significant foreign currency exposure relates to business conducted in euro-based countries. However, VF also conducts business in other developed and emerging markets around the world with exposure to foreign currencies other than the euro. The strengthening of the U.S. dollar relative to foreign currencies negatively impacted comparisons with 2014 revenues by 5% ($119.1 million) and 6% ($286.8 million) in the second quarter and first six months of 2015, respectively.

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

 

     Second Quarter     Six Months  
     2015     2014     2015     2014  

Gross margin (total revenues less cost of goods sold)

     48.3     48.4     48.7     48.9

Selling, general and administrative expenses

     39.4     39.3     37.1     36.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  8.9   9.2   11.6   12.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin declined 10 and 20 basis points during the second quarter and first half of 2015, respectively, compared with the 2014 periods. Foreign currency negatively impacted gross margin by 40 and 50 basis points in the second quarter and first half of 2015, respectively, compared with the 2014 periods. Excluding this impact, gross margin improved 30 basis points in both the second quarter and first six months of 2015 due to the continued shift in our revenue mix to higher margin businesses, including Outdoor & Action Sports and direct-to-consumer, partially offset by higher costs.

 

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Selling, general and administrative expenses as a percentage of total revenues increased 10 and 20 basis points during the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The increases for both periods were due to increased investments in direct-to-consumer businesses and slightly higher operating costs primarily due to the stronger Swiss franc, partially offset by the leverage of operating expenses on higher revenues. In addition, selling, general and administrative expenses as a percentage of total revenues in the first half of 2015 benefitted from a $16.6 million gain recognized on the sale of a VF Outlet® location in the first quarter of 2015.

Net interest expense increased by $1.3 million and $1.8 million in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The increases for both periods were primarily due to higher average levels of short-term borrowings, higher interest rates on short-term borrowings and lower amounts of interest capitalized for significant projects, partially offset by increased interest income on cash equivalents. Total outstanding debt averaged $2.3 billion for the first half of 2015 and $1.7 billion for the same period in 2014. The weighted average interest rates on total outstanding debt were 3.7% and 4.9% for the first six months of 2015 and 2014, respectively.

The effective income tax rate for the first half of 2015 was 21.0% compared with 21.7% in the first half of 2014. The first six months of 2015 included a net discrete tax benefit of $29.5 million, which included $33.0 million of tax benefits related to the settlement of tax audits and $5.0 million of discrete tax expense related to the effects of tax rate changes. The $29.5 million tax benefit reduced the effective income tax rate by 5.1%. The first six months of 2014 included a net discrete tax benefit of $15.5 million, which included $4.1 million of prior year refund claims and $8.5 million of net tax benefits related to the realization of previously unrecognized tax benefits and interest, reducing the effective income tax rate by 2.7%. Without discrete items, the effective tax rate for the first half of 2015 increased by 1.7% compared with the 2014 period primarily due to a lower percentage of projected foreign earnings for 2015, reflecting the impact of changes in foreign currency exchange rates.

As a result of the above, net income for the second quarter of 2015 was $170.8 million ($0.40 per share) compared with $157.7 million ($0.36 per share) in 2014, and net income for the first half of 2015 was $459.5 million ($1.06 per share) compared with $454.9 million ($1.03 per share) in the first half of 2014. Refer to additional discussion in the “Information by Business Segment” section below.

Information by Business Segment

VF’s businesses are grouped into product categories, and by brands within those product categories, for management and internal financial reporting purposes. These groupings of businesses within VF are referred to as “coalitions.” These coalitions are the basis for VF’s reportable business segments.

See Note K to the Consolidated Financial Statements for a summary of results of operations by coalition, along with a reconciliation of coalition profit to income before income taxes.

 

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The following tables present a summary of the changes in coalition revenues and profit for the second quarter and first six months of 2015 from the comparable periods in 2014:

Coalition revenues

 

     Second Quarter  
In millions    Outdoor &
 Action Sports 
     Jeanswear       Imagewear       Sportswear        Contemporary 
Brands
     Other        Total   

Revenues – 2014

   $ 1,279.1      $ 605.8      $ 250.0      $ 140.1       $ 96.2      $ 30.9       $ 2,402.1   

Operations

     207.6        24.8        0.8        2.1         (5.0     0.6         230.9   

Impact of foreign currency

     (90.4     (22.4     (2.0     —           (4.3     —           (119.1
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Revenues – 2015

   $ 1,396.3      $ 608.2      $ 248.8      $ 142.2       $ 86.9      $ 31.5       $ 2,513.9   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Six Months  
In millions    Outdoor &
 Action Sports 
     Jeanswear       Imagewear       Sportswear        Contemporary 
Brands
     Other        Total   

Revenues – 2014

   $ 2,853.8      $ 1,296.2      $ 513.2      $ 271.6       $ 194.4      $ 53.7       $ 5,182.9   

Operations

     371.2        64.7        22.5        6.2         (12.0     2.5         455.1   

Impact of foreign currency

     (221.8     (53.0     (4.0     —           (8.0     —           (286.8
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Revenues – 2015

   $ 3,003.2      $ 1,307.9      $ 531.7      $ 277.8       $ 174.4      $ 56.2       $ 5,351.2   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Coalition profit

 

     Second Quarter  
In millions    Outdoor &
 Action Sports 
     Jeanswear       Imagewear       Sportswear        Contemporary 
Brands
     Other        Total   

Profit – 2014

   $ 130.7      $ 100.1      $ 35.3      $ 10.3       $ 8.8      $ —         $ 285.2   

Operations

     21.8        5.2        0.8        4.1         (7.4     0.6         25.1   

Impact of foreign currency

     (17.6     (0.7     (0.6     —           (0.3     —           (19.2
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Profit – 2015

   $ 134.9      $ 104.6      $ 35.5      $ 14.4       $ 1.1      $ 0.6       $ 291.1   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Six Months  
In millions    Outdoor &
 Action Sports 
     Jeanswear       Imagewear       Sportswear        Contemporary 
Brands
     Other       Total   

Profit – 2014

   $ 405.2      $ 229.4      $ 73.1      $ 22.8       $ 16.7      $ (3.2   $ 744.0   

Operations

     43.8        14.2        6.0        4.5         (11.1     18.3        75.7   

Impact of foreign currency

     (53.3     (7.1     (2.3     —           (0.9     —          (63.6
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Profit – 2015

   $ 395.7      $ 236.5      $ 76.8      $ 27.3       $ 4.7      $ 15.1      $ 756.1   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

Outdoor & Action Sports

 

     Second Quarter     Six Months  
                 Percent
Change
          Percent
Change
 
Dollars in millions    2015     2014       2015     2014    

Revenues

   $ 1,396.3      $ 1,279.1        9.2   $ 3,003.2      $ 2,853.8        5.2

Profit

     134.9        130.7        3.2     395.7        405.2        (2.3 %) 

Operating margin

     9.7     10.2       13.2     14.2  

Global revenues for Outdoor & Action Sports increased 9% in the second quarter of 2015 compared with 2014, reflecting 16% operational growth partially offset by a negative 7% ($90.4 million) impact from foreign currency. Revenues in the Americas and Asia Pacific regions increased 15% and 16%, respectively, in the second quarter of 2015. European revenues declined 5% due to foreign currency, which unfavorably impacted revenue growth in the region by 19%.

 

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Global revenues for Outdoor & Action Sports increased 5% in the first six months of 2015 compared with 2014, reflecting 13% operational growth partially offset by a negative 8% ($221.8 million) impact from foreign currency. Revenues in the Americas and Asia Pacific regions increased 12% and 15%, respectively, in the first six months of 2015. European revenues declined 10% due to foreign currency, which unfavorably impacted revenue growth in the region by 19%.

Global revenues for The North Face® brand increased 6% and 3% in the second quarter and first six months of 2015, respectively, as operational growth in the direct-to-consumer and wholesale channels was partially offset by foreign currency. Vans® brand global revenues were up 17% and 12% in the second quarter and first six months of 2015, respectively, reflecting balanced wholesale and direct-to-consumer growth partially offset by foreign currency. Global revenues for the Timberland® brand were up 2% and 1% in the second quarter and first six months of 2015, respectively, as strong wholesale sales were partially offset by foreign currency.

Global direct-to-consumer revenues for Outdoor & Action Sports grew 11% and 9% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. New store openings, comparable store growth and an expanding e-commerce business all contributed to the direct-to-consumer revenue growth in both periods. Foreign currency negatively impacted direct-to-consumer revenues by 7% and 6% in the second quarter and first half of 2015, respectively. Wholesale revenues were up 8% and 4% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. Foreign currency negatively impacted wholesale revenues by 7% and 8% in the second quarter and first six months of 2015, respectively.

Operating margin declined 50 and 100 basis points in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The decrease in the second quarter was due to the negative impact from foreign currency. The decrease in the first half of 2015 was primarily driven by the negative impact from foreign currency and the impact of the 53-week calendar of 2014, which shifted a more profitable week into fiscal 2014. In addition, operating margin for both periods reflected increased investments in direct-to-consumer businesses and the leverage of operating expenses on higher revenues.

Jeanswear

 

     Second Quarter     Six Months  
                 Percent                 Percent  
Dollars in millions    2015     2014     Change     2015     2014     Change  

Revenues

   $ 608.2      $ 605.8        0.4   $ 1,307.9      $ 1,296.2        0.9

Profit

     104.6        100.1        4.4     236.5        229.4        3.1

Operating margin

     17.2     16.5       18.1     17.7  

Global Jeanswear revenues were flat in the second quarter of 2015 compared with 2014, reflecting 4% operational growth offset by a negative 4% ($22.4 million) impact from foreign currency. Revenues in the Americas and Asia Pacific regions increased 2% and 10%, respectively, in the second quarter of 2015, which included a negative 2% impact from foreign currency in both regions. European revenues decreased 19% due to foreign currency.

Global Jeanswear revenues were up 1% in the first six months of 2015 compared with 2014, reflecting 5% operational growth offset by a negative 4% ($53.0 million) impact from foreign currency. Revenues in the Americas and Asia Pacific regions increased 3% and 8%, respectively, in the first six months of 2015, which included a negative 2% impact from foreign currency in both regions. European revenues decreased 17% due to foreign currency, which negatively impacted revenue growth in the region by 19%.

Global revenues for the Wrangler® brand increased 4% in both the second quarter and first six months of 2015 compared with the 2014 periods, driven by continued strength in the mass business, partially offset by the negative impact from foreign currency. Global revenues for the Lee® brand decreased 4% and 2% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods, as operational growth due to strong wholesale sales in China and India, continued strength in Europe, and recent product launches and strong seasonal programs in the U.S. was more than offset by unfavorable foreign currency.

Operating margin increased 70 and 40 basis points in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The increases for both periods were primarily due to mix, increased volume and the resulting leverage of operating expenses, partially offset by the negative impact from foreign currency.

 

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Imagewear

 

     Second Quarter     Six Months  
                 Percent                 Percent  
Dollars in millions    2015     2014     Change     2015     2014     Change  

Revenues

   $ 248.8      $ 250.0        (0.5 %)    $ 531.7      $ 513.2        3.6

Profit

     35.5        35.3        0.4     76.8        73.1        5.1

Operating margin

     14.2     14.1       14.4     14.2  

Imagewear revenues were flat in the second quarter and increased 4% in the first six months of 2015 compared with the 2014 periods. The Image business (occupational apparel and uniforms) revenues decreased 4% in the second quarter and increased 5% in the first six months of 2015. The second quarter decrease in the Image business was driven by slower production demand in the oil and gas industry which negatively impacted the Bulwark® brand. Partially offsetting the second quarter sales decrease and driving the increase in the first half of 2015 was continued growth in the government sector and the Red Kap® brand.

Revenues for the Licensed Sports Group (“LSG”) business (athletic apparel) were up 5% and 2% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The second quarter increase in the LSG business was driven by strong National Football League and National Basketball Association sales. The increase in the first half of 2015 was driven by strong Major League Baseball sales during the first quarter.

Operating margin increased 10 and 20 basis points during the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The increases for both periods were due to the LSG business, which reflected improved gross margin due to product mix and leverage of operating expenses on higher revenues, partially offset by the negative impact from foreign currency. These LSG improvements were partially offset by the Image business, which experienced lower gross margin and a negative impact from foreign currency.

Sportswear

 

     Second Quarter     Six Months  
                 Percent                 Percent  
Dollars in millions    2015     2014     Change     2015     2014     Change  

Revenues

   $ 142.2      $ 140.1        1.5   $ 277.8      $ 271.6        2.3

Profit

     14.4        10.3        40.6     27.3        22.8        19.5

Operating margin

     10.2     7.3       9.8     8.4  

Sportswear revenues increased 1% and 2% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. Nautica® brand revenues decreased 3% during the second quarter and were flat in the first six months of 2015 compared with the 2014 periods, reflecting a reduction in special program sales and the exit of less profitable stores. Kipling® brand revenues in the U.S. increased 20% and 15% during the second quarter and first six months of 2015, respectively, driven by strong growth in both the wholesale and direct-to-consumer channels.

Operating margin increased 290 and 140 basis points in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The increases for both periods were due to a shift in business mix to the higher margin Kipling® brand business, lower levels of promotional activity in the wholesale channel and the leverage of operating expenses on higher revenues, partially offset by increased investments in direct-to-consumer businesses and marketing.

Contemporary Brands

 

     Second Quarter     Six Months  
                 Percent                 Percent  
Dollars in millions    2015     2014     Change     2015     2014     Change  

Revenues

   $ 86.9      $ 96.2        (9.7 %)    $ 174.4      $ 194.4        (10.3 %) 

Profit

     1.1        8.8        (87.1 %)      4.7        16.7        (72.0 %) 

Operating margin

     1.3     9.2       2.7     8.6  

Global revenues for Contemporary Brands decreased 10% in both the second quarter and first six months of 2015 compared with the 2014 periods, reflecting ongoing challenges in demand for contemporary apparel and premium denim. In addition, foreign currency negatively impacted revenues by 5% ($4.3 million) and 4% ($8.0 million) during the second quarter and first six months of 2015, respectively, compared with the 2014 periods.

 

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Operating margin decreased 790 and 590 basis points in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. The decreases for both periods were primarily due to discounting and reduced expense leverage on a lower revenue base.

Other

 

     Second Quarter     Six Months  
Dollars in millions    2015     2014      Percent
Change
    2015     2014     Percent
Change
 

Revenues

   $ 31.5      $ 30.9         2.0   $ 56.2      $ 53.7        4.5

Profit (loss)

     0.6        —             15.1        (3.2  

Operating margin

     1.9     —             26.9     (5.9 %)   

VF Outlet® stores in the U.S. sell VF products at prices that are generally higher than what could be realized through external wholesale channels, as well as other non-VF products. Revenues and profits of VF products sold in these stores are reported as part of the operating results of the applicable coalition, while revenues and profits of non-VF products are reported in this “other” category. The increase in profit in the first six months of 2015 is primarily due to a $16.6 million gain recognized on the sale of a VF Outlet® location during the first quarter of 2015.

Reconciliation of Coalition Profit to Income Before Income Taxes

There are two types of costs necessary to reconcile total coalition profit, as discussed in the preceding paragraphs, to consolidated income before income taxes. These costs are (i) corporate and other expenses, discussed below, and (ii) interest expense, net, which was discussed in the “Consolidated Statements of Income” section.

 

     Second Quarter     Six Months  
Dollars in millions    2015      2014      Percent
Change
    2015      2014      Percent
Change
 

Corporate and other expenses

   $ 67.4       $ 65.9         2.3   $ 133.8       $ 123.6         8.2

Interest expense, net

     21.1         19.8         6.6     40.9         39.1         4.5

Corporate and other expenses are those that have not been allocated to the coalitions for internal management reporting, including (i) information systems and shared services, (ii) corporate headquarter costs and (iii) certain other income and expenses. The increases in corporate and other expenses in both the second quarter and first six months of 2015, compared with the 2014 periods, were primarily due to increased information technology costs due to recent system implementations, additional investments in our global innovation centers, and higher compensation expense.

International Operations

International revenues declined 1% and 3% in the second quarter and first six months of 2015, respectively, due to foreign currency, which negatively impacted international revenue growth by 14% ($119.1 million) in the second quarter and 14% ($286.8 million) in the first six months of 2015. Revenues in Europe declined 8% and 12% in the second quarter and first six months of 2015, respectively, as foreign currency negatively impacted growth by 19% in both periods. In the Asia Pacific region, revenues increased 14% and 13% in the second quarter and first six months of 2015, respectively, driven by strong growth in China and India. Foreign currency negatively impacted growth in the Asia Pacific region by 3% and 4% in the second quarter and first six months of 2015, respectively. Revenues in the Americas (non-U.S.) region decreased 1% in the second quarter and increased 2% during the first six months of 2015. Sales in both periods were tempered by weakening currencies in the region relative to the U.S. dollar, which negatively impacted growth by 12% and 11% in the second quarter and first six months of 2015, respectively. International revenues were 34% and 36% of total revenues in the second quarter of 2015 and 2014, respectively, and 37% and 40% of total revenues in the first six months of 2015 and 2014, respectively.

Direct-to-Consumer Operations

Direct-to-consumer revenues grew 7% and 6% in the second quarter and first six months of 2015, respectively, driven by operational growth in all regions, partially offset by the negative impact from foreign currency (primarily in Europe), which reduced growth by

 

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6% and 5% in the second quarter and first six months of 2015, respectively, compared with the 2014 periods. New store openings, comparable sales growth and an expanding e-commerce business all contributed to the direct-to-consumer revenue growth in both periods. VF opened 49 stores in the second quarter and 72 stores in the first six months of 2015, bringing the total number of VF-owned retail stores to 1,438 at June 2015. Direct-to-consumer revenues were 26% of total revenues in both the second quarter of 2015 and 2014. Direct-to-consumer revenues were 25% of total revenues in the first six months of 2015 compared with 24% in the 2014 period.

Analysis of Financial Condition

Consolidated Balance Sheets

The following discussion refers to significant changes in balances at June 2015 compared with December 2014:

 

    Decrease in accounts receivable—due to the seasonality of the business.

 

    Increase in inventories—due to the seasonality of the business and anticipated sales growth in the third quarter of 2015.

 

    Increase in other current assets—primarily due to unrealized hedging gains and higher levels of prepaid expenses, including prepaid income taxes.

 

    Decrease in intangible assets—due to foreign currency exchange rate fluctuations and amortization expense.

 

    Increase in short-term borrowings—due to commercial paper borrowings used to support seasonal working capital requirements, share repurchases and a $250.0 million discretionary pension contribution in the first quarter of 2015.

 

    Decrease in accounts payable—driven by timing of inventory purchases and payments to vendors.

 

    Decrease in accrued liabilities—primarily due to timing of accruals and payments related to compensation and income taxes.

 

    Decrease in other liabilities—primarily due to an improvement in the funded status of the defined benefit pension plans, resulting from a $250.0 million discretionary pension contribution in the first quarter of 2015.

The following discussion refers to significant changes in balances at June 2015 compared with June 2014:

 

    Increase in inventories—due to anticipated sales growth in the third quarter of 2015.

 

    Increase in other current assets—primarily due to unrealized hedging gains.

 

    Decrease in intangible assets—driven by (i) impairment charges for customer relationship assets and indefinite-lived trademarks during the fourth quarter of 2014, (ii) the impact of foreign currency exchange rate fluctuations and (iii) amortization expense.

 

    Decrease in goodwill—resulting from an impairment charge during the fourth quarter of 2014 and the impact of foreign currency exchange rate fluctuations.

 

    Increase in other assets—resulting from (i) an improvement in the funded status of the domestic qualified pension plan, (ii) deferred software costs primarily related to system implementations and (iii) unrealized hedging gains.

 

    Increase in short-term borrowings—due to commercial paper borrowings used to support working capital requirements and a $250.0 million discretionary pension contribution in the first quarter of 2015.

 

    Decrease in other liabilities—primarily due to lower deferred and accrued income taxes, and an improvement in the funded status of the defined benefit pension plans.

 

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Liquidity and Capital Resources

The financial condition of VF is reflected in the following:

 

Dollars in millions    June
2015
    December
2014
    June
2014
 

Working capital

   $ 1,750.7      $ 2,565.6      $ 1,909.6   

Current ratio

     1.7 to 1        2.6 to 1        2.0 to 1   

Debt to total capital ratio

     34.2     20.5     26.2

For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and total capital is defined as debt plus stockholders’ equity. The increase in the debt to total capital ratio at June 2015 compared to both December 2014 and June 2014 was primarily due to the increase in short-term borrowings as explained above and a reduction in stockholders’ equity due to the increase in accumulated other comprehensive loss, reflecting the impact of changes in foreign currency exchange rates. In addition, the June 2015 over June 2014 comparison was impacted by a $396.4 million noncash impairment charge of goodwill and intangible assets recorded in the fourth quarter of 2014.

The ratio of net debt to total net capital (with net debt defined as debt less cash and equivalents and total net capital defined as total capital less cash and equivalents) was 27.9% at June 2015, 7.8% at December 2014 and 21.4% at June 2014.

VF’s primary source of liquidity is the strong annual cash flow provided by operating activities. Cash from operations is typically lower in the first half of the year as inventory builds to support peak sales periods in the second half of the year. Cash provided by operating activities in the second half of the year is substantially higher as wholesale inventories are sold and accounts receivable are collected. Additionally, direct-to-consumer sales are highest in the fourth quarter of the year.

In summary, our cash flows were as follows:

 

     Six Months  
In thousands    2015      2014  

Net cash (used) provided by operating activities

   $ (286,446    $ 219,587   

Net cash used by investing activities

     (158,323      (163,587

Net cash provided (used) by financing activities

     169,859         (352,015

Cash (Used) Provided by Operating Activities

Cash used by operating activities in the first six months of 2015 was $286.4 million compared with cash provided by operating activities of $219.6 million in the 2014 period. The decline in cash flows was primarily due to a $250.0 million discretionary contribution to the domestic qualified pension plan in the first quarter of 2015, an increase in net cash usage from working capital changes, and lower cash collections during the first half of 2015 due to the 53-week calendar of 2014, which shifted a relatively higher cash collection week into fiscal 2014.

Cash Used by Investing Activities

Cash used by investing activities in the first six months of 2015 decreased to $158.3 million from $163.6 million in the 2014 period. VF’s investing activities in the first six months of 2015 related primarily to capital expenditures of $125.5 million and software purchases of $43.5 million, partially offset by $16.6 million of proceeds from the sale of a VF Outlet® location during the first quarter of 2015. Capital expenditures increased $29.7 million compared with the 2014 period primarily due to the purchase of a headquarters building in the Outdoor & Action Sports coalition, partially offset by the completion of a number of significant projects during 2014. Software purchases decreased $12.6 million in the first half of 2015 compared with the 2014 period primarily due to the completion of a number of system implementations during 2014.

Cash Provided (Used) by Financing Activities

Cash provided by financing activities in the first six months of 2015 was $169.9 million compared with a cash usage of $352.0 million in the first six months of 2014. The increased cash flow from financing activities in the first six months of 2015 compared with the 2014 period was primarily due to higher levels of short-term borrowings, partially offset by incremental cash dividends paid during 2015.

 

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During the first six months of 2015, VF purchased 10.0 million shares of its Common Stock in open market transactions at a total cost of $731.5 million (average price per share of $73.01). During the first six months of 2014, VF purchased 12.0 million shares of its Common Stock in open market transactions at a total cost of $727.5 million (average price per share of $60.46).

As of the end of the second quarter of 2015, the Company had 30.7 million shares remaining under its current share repurchase program authorized by VF’s Board of Directors. VF will continue to evaluate its use of capital, giving first priority to business acquisitions and then to direct shareholder return in the form of dividends and share repurchases.

VF relies on continued strong cash generation to finance its ongoing operations. In addition, VF has significant liquidity from its available cash balances and credit facilities. In April 2015, VF entered into a $1.75 billion senior unsecured revolving line of credit (the “Global Credit Facility”) that expires in April 2020. The Global Credit Facility replaced VF’s $1.25 billion revolving credit facility which was scheduled to expire in December 2016. The Global Credit Facility may be used to borrow readily available non-US dollar currencies, and has a $50.0 million letter of credit sublimit. VF may request two extensions of one year each, subject to stated terms and conditions. In addition, the Global Credit Facility supports VF’s U.S. commercial paper program for short-term, seasonal working capital requirements, which was also increased to $1.75 billion. Commercial paper borrowings and standby letters of credit issued as of June 2015 were $1.13 billion and $17.3 million, respectively, leaving $602.7 million available for borrowing against this facility at June 2015.

VF’s favorable credit agency ratings allow for access to additional liquidity at competitive rates. At the end of June 2015, VF’s long-term debt ratings were ‘A’ by Standard & Poor’s Ratings Services and ‘A3’ by Moody’s Investors Service, and commercial paper ratings by those rating agencies were ‘A-1’ and ‘Prime-2’, respectively.

None of VF’s long-term debt agreements contain acceleration of maturity clauses based solely on changes in credit ratings. However, if there were a change in control of VF and, as a result of the change in control, the 2017, 2021 and 2037 notes were rated below investment grade by recognized rating agencies, VF would be obligated to repurchase the notes at 101% of the aggregate principal amount, plus any accrued and unpaid interest.

Management’s Discussion and Analysis in the 2014 Form 10-K provided a table summarizing VF’s contractual obligations and commercial commitments at the end of 2014 that would require the use of funds. Since the filing of the 2014 Form 10-K, there have been no material changes in the disclosed amounts, except as noted below:

 

    Inventory purchase obligations increased by approximately $415.8 million at the end of June 2015 due to the seasonality of VF’s businesses.

Management believes that VF’s cash balances and funds provided by operating activities, as well as its Global Credit Facility, additional borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures and to maintain the dividend to stockholders at current and expected levels and (iii) flexibility to meet investment opportunities that may arise.

Recently Issued and Adopted Accounting Standards

In April 2014, the FASB changed the definition and disclosure requirements for discontinued operations. This guidance became effective in the first quarter of 2015, but did not have an impact on VF’s consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue recognition which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new model provides a 5-step analysis in determining the measurement of revenue and the timing of when it is recognized. New disclosures about revenues and cash flows arising from contracts with customers are also required. In July 2015, the FASB approved a one-year delay to the adoption date of the standard that makes it effective in the first quarter of 2018 with early adoption permitted. The Company is currently evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

In June 2014, the FASB issued an update to their accounting guidance related to stock-based compensation. The guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. This guidance will be effective in the first quarter of 2016, but is not expected to have an impact on VF’s consolidated financial statements.

In February 2015, the FASB issued an update to their existing consolidation model, which changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance will be effective in the first quarter of 2016. The Company is currently evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

 

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In April 2015, the FASB issued an update to their accounting guidance related to debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance will be effective in the first quarter of 2016, and the Company will reclassify the debt issuance costs in VF’s consolidated financial statements in accordance with this guidance.

In April 2015, the FASB issued an update to their accounting guidance related to retirement benefits that provides a practical expedient permitting companies to measure defined benefit plan assets and obligations using the month-end that is closest to an entity’s fiscal year-end. This guidance will be effective in the first quarter of 2016 with early adoption permitted. The Company is currently evaluating whether it will adopt this guidance.

In April 2015, the FASB issued new guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This guidance provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting for other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. This guidance will be effective in the first quarter of 2016, but is not expected to have an impact on VF’s consolidated financial statements.

In May 2015, the FASB issued an update to their accounting guidance related to fair value measurements. The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and requires separate disclosure instead. This guidance will be effective in the first quarter of 2016 with early adoption permitted. The Company is currently evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

Critical Accounting Policies and Estimates

Management has chosen accounting policies that it considers to be appropriate to accurately and fairly report VF’s operating results and financial position in conformity with GAAP. Our critical accounting policies are applied in a consistent manner. Significant accounting policies are summarized in Note A to the Consolidated Financial Statements included in the 2014 Form 10-K.

The application of these accounting policies requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. Management evaluates these estimates and assumptions and may retain outside consultants to assist in the evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known.

The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis in the 2014 Form 10-K. There have been no material changes in these policies.

Cautionary Statement on Forward-Looking Statements

From time to time, VF may make oral or written statements, including statements in this quarterly report that constitute “forward-looking statements” within the meaning of the federal securities laws. These include statements concerning plans, objectives, projections and expectations relating to VF’s operations or economic performance, and assumptions related thereto. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. Forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements.

Potential risks and uncertainties that could cause the actual results of operations or financial condition of VF to differ materially from those expressed or implied by forward-looking statements in this quarterly report on Form 10-Q include, but are not limited to, the overall level of consumer demand for apparel, footwear and accessories; fluctuations in the price, availability and quality of raw materials and contracted products; disruption to VF’s distribution system; foreign currency fluctuations; disruption and volatility in the global capital and credit markets; VF’s reliance on a small number of large customers; the financial strength of VF’s customers; VF’s response to changing fashion trends; increasing pressure on margins; VF’s ability to implement its growth strategy; VF’s ability to grow its international and direct-to-consumer businesses; VF and its customers’ ability to maintain the strength and security of information technology systems; adverse unseasonable weather conditions; stability of VF’s manufacturing facilities and foreign suppliers; continued use by VF’s suppliers of ethical business practices; VF’s ability to accurately forecast demand for products;

 

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continuity of members of VF’s management; VF’s ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment; maintenance by VF’s licensees and distributors of the value of VF’s brands; changes in tax liabilities; and legal, regulatory, political and economic risks in international markets. More information on potential factors that could affect VF’s financial results is included from time to time in VF’s public reports filed with the Securities and Exchange Commission, including VF’s Annual Report on Form 10-K.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in VF’s market risk exposures from what was disclosed in Item 7A in the 2014 Form 10-K.

Item 4 — Controls and Procedures

Disclosure controls and procedures:

Under the supervision of the Chief Executive Officer and Chief Financial Officer, a Disclosure Committee comprising various members of management has evaluated the effectiveness of the disclosure controls and procedures at VF and its subsidiaries as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of the Evaluation Date that such controls and procedures were effective.

Changes in internal control over financial reporting:

There have been no changes during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, VF’s internal control over financial reporting.

Part II — Other Information

Item 1 — Legal Proceedings

Information on VF’s legal proceedings is set forth under Part I, Item 3, “Legal Proceedings,” in the 2014 Form 10-K. There have been no material changes to the legal proceedings from those described in the 2014 Form 10-K.

Item 1A — Risk Factors

You should carefully consider the risk factors set forth under Part I, Item 1A, “Risk Factors,” in the 2014 Form 10-K. There have been no material changes to the risk factors from those disclosed in the 2014 Form 10-K.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer purchases of equity securities:

 

Second Quarter 2015    Total
Number of
Shares
Purchased (1)
     Weighted
Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Programs (1)
     Maximum Number
of Shares that May
Yet be Purchased
Under the Program
 

April 5 – May 2, 2015

     —         $ —           —           30,715,276   

May 3 – May 30, 2015

     4,500         71.20         4,500         30,710,776   

May 31 – July 4, 2015

     5,700         69.39         5,700         30,705,076   
  

 

 

       

 

 

    

Total

     10,200            10,200      
  

 

 

       

 

 

    

 

(1)  All 10,200 shares of Common Stock were purchased during the quarter in connection with VF’s deferred compensation plans.

 

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Exhibits

    
  31.1    Certification of Eric C. Wiseman, Chairman and Chief Executive Officer, pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Scott A. Roe, Vice President and Chief Financial Officer, pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Eric C. Wiseman, Chairman and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Scott A. Roe, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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/ Scott A. Roe

Scott A. Roe
Vice President and Chief Financial Officer (Chief Financial Officer)
Date: August 7, 2015 By:

/s/ Bryan H. McNeill

Bryan H. McNeill
Vice President—Controller (Chief Accounting Officer)

 

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