Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION ANALYSIS OF OPERATIONS Consolidated sales rose 1% to a record $5,551 million in 1999. The sales increase in 1999 was primarily due to the acquisitions of occupational apparel businesses in late 1998/early 1999 and jeanswear businesses in South America, offset in part by a slowdown of jeanswear sales in Europe and in the mid-tier channel in the U.S. Sales in 1998 rose 5% over the 1997 level, due primarily to the acquisition of Bestform Group, Inc., a major manufacturer and marketer of women's intimate apparel. Gross margins were 34.1% of sales in 1999, compared with 34.5% in 1998 and 34.1% in 1997. Margins were favorably impacted during the last two years from the continuing shift to lower cost sourcing, lower raw material costs and increased operating efficiencies. However, in 1999 this was offset by lower gross margins in the domestic Lee jeanswear, European jeanswear and workwear businesses. In jeanswear, these reductions resulted from lower than anticipated volume and the resulting impact in expense absorption, as well the need to reduce inventory levels closer to demand. In workwear, lower margins resulted from the newly acquired companies. For the United States market, VF manufactures its products in owned domestic plants and offshore plants, primarily in Mexico. In addition, VF contracts production from independent contractors mostly located outside of the U.S. There has been a shift over the last three years toward a more balanced sourcing mix, with more products being manufactured in and contracted from lower cost facilities in Mexico and the Caribbean Basin. The amount of domestic sales derived from products sewn outside the United States has increased each year so that now 65% is sourced from international locations. Similarly, in foreign markets, sourcing is being shifted from higher cost owned plants located primarily in Western Europe to lower cost owned and contracted production in locations outside of Western Europe. Marketing, administrative and general expenses were 22.2% of sales in 1999, compared with 21.9% and 22.5% in 1998 and 1997, respectively. Expenses as a percent of sales increased in 1999 primarily due to fixed short-term expenses on a lower sales level in European jeanswear. This increase was partially offset by lower advertising spending. Other operating income and expense includes goodwill amortization expense, offset by net royalty income. In each of the last two years, amortization of goodwill increased from acquisitions completed during those years, and net royalty income declined from the conversion of certain formerly licensed businesses to owned operations. Net interest expense increased in each of the last two years due to higher short-term borrowings related to the business acquisitions. Interest income includes $3.0 million in 1999 and $10.5 million in 1997 related to settlements of prior years' tax examinations. The effective income tax rate was 38.5% in 1999 and 1998 and 40.1% in 1997. The effective rate declined in 1998 due to a reduction in foreign operating losses with no current tax benefit, lower state income taxes and higher tax-free income attributable to investments that fund certain deferred compensation plans. Information by Business Segment The Consumer Apparel segment consists of jeanswear, women's intimate apparel and swimwear, and children's apparel businesses. Overall, segment sales were relatively flat in 1999. Record sales in mass market domestic jeanswear sold in the discount channel and sales in the newly acquired Latin American jeanswear businesses offset declines reported in the Lee branded domestic business and in European jeanswear businesses. The decline in Lee was due to softness in retail sales in mid-tier department stores in the U.S., and the decline in Europe was due to a consumer shift away from basic jeans products to alternative fabrics and stylings. Segment profit in 1999 declined due to lower [16] sales in Lee, lower sales in Europe, European jeanswear consolidation efforts that created operating difficulties, and a $6 million charge to close the Jantzen women's sportswear division. In 1998, segment sales advanced due to the acquisition of Bestform and growth in all categories of domestic jeanswear, offset in part by the elimination of unprofitable children's playwear product lines. Segment profit in 1998 increased due to the acquisition of Bestform and higher profitability in domestic jeanswear, existing intimate apparel businesses and children's playwear, offset in part by a modest decline in European jeanswear. The Occupational Apparel segment includes the Company's industrial, career and safety apparel businesses. Sales increased in 1999 over the prior two years due to one acquisition in the latter part of 1998 and three acquisitions in early 1999. Segment profit as a percent of sales declined from 1997 and 1998 due to the lower level of profitability of the acquired businesses and to systems, distribution and other costs incurred to integrate these new businesses into VF's existing infrastructure. The All Other segment includes the Company's knitwear, daypack and backpack businesses. The decline in sales and segment profit over the last two years is due to difficult market conditions existing in the knitwear market. ANALYSIS OF FINANCIAL CONDITION In managing its capital structure, VF balances financial leverage with equity to reduce its overall cost of capital, while providing the flexibility to pursue investment opportunities that may become available. It is management's goal to maintain a debt to capital ratio of less than 40%. Our debt to capital ratio remains within these guidelines: 30.1% at the end of 1999 and 27.1% at the end of 1998. BALANCE SHEETS Accounts receivable increased in 1999 due to higher December sales and slightly higher days sales outstanding in the recently acquired companies. Inventories increased slightly in 1999 due to balances at recently acquired companies being higher than historic VF levels. Excluding businesses acquired in 1999, inventories declined by 6%. Intangible assets increased during 1999 due to the acquisitions completed during the year. Other assets increased during 1999 due to an increase in deferred income tax assets over the 1998 level and an increase in life insurance contracts and other investment securities underlying the Company's deferred compensation and retirement programs. The deficit in the Accumulated Other Comprehensive Income component of Common Shareholders' Equity increased during 1999 due to foreign currency translation adjustments resulting from the strengthening of the U.S. dollar in relation to the currencies of most European countries where the Company has operations. LIQUIDITY AND CASH FLOWS Working capital was $763.9 million and the current ratio was 1.7 to 1 at the end of 1999, compared with $815.1 million and 1.8 to 1 at the end of 1998. The decline in 1999 was due to an increase in short-term borrowings. The primary source of liquidity is the Company's strong cash flow provided by operations, which was $423.4 million in 1999, $429.3 million in 1998 and $460.7 million in 1997. Capital expenditures were $150.1 million in 1999, compared with $189.1 million and $154.3 million in 1998 and 1997, respectively. Capital expenditures relate to expansion of offshore manufacturing capacity, primarily in jeanswear, investments in information systems and ongoing capital improvements in our worldwide manufacturing and other facilities. Capital expenditures in 2000 are expected to be less than the 1999 level and to be funded by cash flow from operations. [17] During 1999, the Company purchased 4.0 million shares of its Common Stock in open market transactions at a cost of $149.1 million. During 1998, the Company purchased 3.2 million shares for $147.4 million. Under its current authorization from the Board of Directors, the Company may purchase up to an additional 8.0 million shares. Depending on the level of acquisition opportunities during 2000, the Company intends to continue to invest available cash flow to repurchase shares. Cash dividends totaled $.85 per common share in 1999, compared with $.81 in 1998 and $.77 in 1997. The dividend payout rate was 28% in 1999, compared with 26% in 1998 and 28% in 1997. The indicated annual dividend rate for 2000 is $.88 per share. VF has paid dividends on its Common Stock annually since 1941 and intends to maintain a long-term payout rate of 30%. Looking ahead to 2000, operating results should benefit from steps taken to improve profitability in the Lee domestic business, the European jeanswear businesses and the recently acquired companies. Next year will bring continued investments in systems and technology, as well as expenses related to further reducing our product cost and operating cost structure. The combined effect of these actions indicates that earnings in 2000 may be flat with 1999 and that cash flow from operations should exceed $500 million. With our strong financial position, unused credit lines and additional borrowing capacity, the Company has substantial liquidity and flexibility to meet investment opportunities that may arise. EURO CURRENCY CONVERSION Effective January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies and a single new currency, the "euro." During a transition period through June 2002, business transactions can be conducted in both the euro and the legacy currencies. After that date, the euro will be the sole currency of the participating countries. Approximately 11% of the Company's 1999 sales were generated in the European Union. Management is evaluating the many areas involved with introduction of the euro, including information technology systems. As of January 1, 2000, substantially all of these systems were euro compliant, with the remainder expected to be compliant by the end of 2000. Management is also evaluating the strategic implications of adoption of the euro, including pricing and distribution of the Company's products. Although this evaluation is ongoing, it is likely that the euro will lead to a more uniform pricing in all European markets, including those that have not adopted the euro as their common currency. The Company is unable to determine the financial impact of the conversion on its operations, if any, because the impact will depend on the competitive situations that exist in the various regional markets. However, management believes that the conversion to the euro will not have a material effect on the Company's results of operations or financial position. All costs relating to the conversion to the euro, which are not significant, are being expensed as incurred. YEAR 2000 UPDATE The Year 2000 issue relates to computer systems that may not properly recognize date-sensitive information when the year changed to 2000. Since entering the year 2000, the Company has not experienced any disruptions to its business, nor is it aware of any significant Year 2000 issues impacting its suppliers and customers. The Company will continue to monitor its critical systems over the next several months but does not anticipate any exposures from its internal systems or from the activities of its suppliers and customers. The total cost of resolving the Year 2000 issues, including internal personnel and outside vendors and consultants, was $26 million over the period 1997 through 1999, which was expensed as incurred. RISK MANAGEMENT The Company is exposed to a variety of market risks in the ordinary course of business, including the effects of changes in interest rates, foreign currency exchange rates and the [18] value of marketable securities. The Company regularly assesses these potential risks and has policies and procedures to manage these risks. The Company limits its risk from interest rate fluctuations on its net income and cash flows by managing its mix of long-term borrowings at fixed interest rates and short-term borrowings at variable interest rates. The Company may also use derivative instruments to minimize its interest rate risk. The primary interest rate exposure, which is not significant, relates to short-term domestic and foreign borrowings. These borrowings averaged $430 million during 1999 and $245 million during 1998. In addition, at the end of 1998, the Company had an interest rate swap contract related to $100 million of long-term debt. This swap expired in October 1999. The Company has assets and liabilities in foreign subsidiaries that are subject to fluctuations in foreign currency exchange rates. Investments in these primarily European subsidiaries are considered to be long-term investments, and accordingly, the Company uses a functional currency other than the U.S. dollar. The Company does not hedge these net investments and does not hedge the translation of foreign currency operating results into the U.S. dollar. In addition, a growing percentage of the total product needs to support our domestic businesses are manufactured in Company-owned plants in foreign countries or by foreign contractors. The Company's primary foreign currency exposures relate to the euro and to the Mexican peso. Management monitors foreign currency exposures and may in the ordinary course of business enter into foreign currency forward exchange contracts related to specific foreign currency transactions or anticipated cash flows occurring within twelve months. The amount of these contracts, and related gains and losses, are not material. There are no financial instruments held for trading or speculative purposes. The Company is exposed to changes in the overall investment securities markets because amounts accrued under various nonqualified deferred compensation plans are based on market values of investment funds that are selected by the plans' participants. Changes in the market values of the participants' underlying investment selections expose the Company to risks of stock market fluctuations. This securities market risk is hedged by the Company's investments in a portfolio of variable life insurance contracts and other securities that substantially mirror the investment selections underlying the deferred compensation liabilities. Increases and decreases in deferred compensation liabilities are substantially offset by corresponding increases and decreases in the market value of the Company-owned investment securities, resulting in an insignificant net exposure to the Company's operating results and financial position. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS From time to time, the Company may make oral or written statements, including statements in this Annual Report, that constitute "forward-looking statements" within the meaning of the federal securities laws. This includes statements concerning plans and objectives of management relating to the Company's operations or economic performance, and assumptions related thereto. Forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations or financial condition of the Company to differ include, but are not necessarily limited to, the overall level of consumer spending for apparel; changes in trends in the segments of the market in which the Company competes; the financial strength of the retail industry; actions of competitors that may impact the Company's business; and the impact of unforeseen economic changes in the markets where the Company competes, such as changes in interest rates, currency exchange rates, inflation rates, recession, and other external economic and political factors over which the Company has no control. [19] QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
In thousands, Earnings Per Common Share Dividends Per except per share amounts Net Sales Gross Profit Net Income Basic Diluted Common Share - --------------------------------------------------------------------------------------------------------------------------- 1999 First quarter $1,358,244 $ 467,470 $ 85,566 $ .70 $ .69 $ .21 Second quarter 1,364,830 461,935 79,582 .65 .64 .21 Third quarter 1,464,856 502,913 103,896 .87 .85 .21 Fourth quarter 1,363,686 462,178 97,198 .82 .81 .22 - --------------------------------------------------------------------------------------------------------------------------- $5,551,616 $1,894,496 $ 366,242 $ 3.04 $ 2.99 $ .85 =========================================================================================================================== 1998 First quarter $1,326,205 $ 453,225 $ 78,106 $ .63 $ .62 $ .20 Second quarter 1,350,319 455,956 86,781 .70 .69 .20 Third quarter 1,458,780 514,108 119,615 .98 .96 .20 Fourth quarter 1,343,503 468,832 103,804 .86 .84 .21 - --------------------------------------------------------------------------------------------------------------------------- $5,478,807 $1,892,121 $ 388,306 $ 3.17 $ 3.10 $ .81 =========================================================================================================================== 1997 First quarter $1,262,781 $ 417,837 $ 70,186 $ .54 $ .53 $ .19 Second quarter 1,255,549 427,650 78,904 .61 .60 .19 Third quarter 1,416,906 487,311 108,692 .86 .84 .19 Fourth quarter 1,287,010 448,837 93,160 .75 .74 .20 - --------------------------------------------------------------------------------------------------------------------------- $5,222,246 $1,781,635 $ 350,942 $ 2.76 $ 2.70 $ .77 ===========================================================================================================================
[20] CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts Fiscal year ended January 1, 2000 January 2, 1999 January 3, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Net Sales $ 5,551,616 $ 5,478,807 $ 5,222,246 Costs and Operating Expenses Cost of products sold 3,657,120 3,586,686 3,440,611 Marketing, administrative and general expenses 1,230,009 1,198,854 1,175,598 Other operating expense, net 11,855 9,098 964 - ------------------------------------------------------------------------------------------------------------------------------ 4,898,984 4,794,638 4,617,173 - ------------------------------------------------------------------------------------------------------------------------------ Operating Income 652,632 684,169 605,073 Other Income (Expense) Interest income 8,936 6,411 23,818 Interest expense (71,426) (62,282) (49,695) Miscellaneous, net 5,434 3,300 6,684 - ------------------------------------------------------------------------------------------------------------------------------ (57,056) (52,571) (19,193) - ------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 595,576 631,598 585,880 Income Taxes 229,334 243,292 234,938 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 366,242 $ 388,306 $ 350,942 ============================================================================================================================== Earnings Per Common Share Basic $ 3.04 $ 3.17 $ 2.76 Diluted 2.99 3.10 2.70 Cash Dividends Per Common Share $ .85 $ .81 $ .77 ==============================================================================================================================
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands Fiscal year ended January 1, 2000 January 2, 1999 January 3, 1998 - ----------------------------------------------------------------------------------------------------------- Net Income $ 366,242 $ 388,306 $ 350,942 Other Comprehensive Income Foreign currency translation, net of income taxes (39,117) 10,471 (42,538) - ----------------------------------------------------------------------------------------------------------- Comprehensive Income $ 327,125 $ 398,777 $ 308,404 ===========================================================================================================
See notes to consolidated financial statements. [21] CONSOLIDATED BALANCE SHEETS
In thousands January 1, 2000 January 2, 1999 - -------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and equivalents $ 79,861 $ 63,208 Accounts receivable, less allowances of $54,477 in 1999 and $52,011 in 1998 732,502 705,734 Inventories 964,040 954,007 Deferred income taxes 74,067 99,608 Other current assets 26,946 25,595 - -------------------------------------------------------------------------------------------------- Total current assets 1,877,416 1,848,152 PROPERTY, PLANT AND EQUIPMENT 804,422 776,091 INTANGIBLE ASSETS 992,463 951,562 OTHER ASSETS 352,213 260,861 - -------------------------------------------------------------------------------------------------- $ 4,026,514 $ 3,836,666 ================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 408,932 $ 244,910 Current portion of long-term debt 4,751 969 Accounts payable 332,666 341,126 Accrued liabilities 367,124 446,001 - -------------------------------------------------------------------------------------------------- Total current liabilities 1,113,473 1,033,006 LONG-TERM DEBT 517,834 521,657 OTHER LIABILITIES 194,113 181,750 REDEEMABLE PREFERRED STOCK 51,544 54,344 DEFERRED CONTRIBUTIONS TO EMPLOYEE STOCK OWNERSHIP PLAN (14,268) (20,399) - -------------------------------------------------------------------------------------------------- 37,276 33,945 COMMON SHAREHOLDERS' EQUITY Common Stock, stated value $1; shares authorized, 300,000,000; shares outstanding, 116,204,655 in 1999 and 119,466,101 in 1998 116,205 119,466 Additional paid-in capital 831,054 801,511 Accumulated other comprehensive income (64,756) (25,639) Retained earnings 1,281,315 1,170,970 - -------------------------------------------------------------------------------------------------- Total common shareholders' equity 2,163,818 2,066,308 - -------------------------------------------------------------------------------------------------- $ 4,026,514 $ 3,836,666 ==================================================================================================
See notes to consolidated financial statements. [22] CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Fiscal year ended January 1, 2000 January 2, 1999 January 3, 1998 - ------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net income $ 366,242 $ 388,306 $ 350,942 Adjustments to reconcile net income to cash provided by operations: Depreciation 134,335 128,495 128,734 Amortization of intangible assets 33,097 32,890 27,518 Other, net 5,341 27,764 (3,405) Changes in current assets and liabilities: Accounts receivable (12,379) (48,771) (9,972) Inventories 43,655 (52,406) (55,677) Accounts payable (21,414) (17,013) (12,587) Other, net (125,516) (29,983) 35,099 - ------------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 423,361 429,282 460,652 INVESTMENTS Capital expenditures (150,076) (189,059) (154,262) Business acquisitions (156,587) (299,900) (16,003) Other, net (13,114) (16,943) (13,578) - ------------------------------------------------------------------------------------------------------------------------------- Cash invested (319,777) (505,902) (183,843) FINANCING Increase in short-term borrowings 145,768 212,457 8,745 Proceeds from long-term debt 1,032 4,132 -- Payment of long-term debt (3,269) (2,998) (1,253) Purchase of Common Stock (149,075) (147,398) (391,651) Cash dividends paid (104,302) (101,660) (100,141) Proceeds from issuance of Common Stock 25,323 45,689 64,964 Other, net 1,269 2,115 1,983 - ------------------------------------------------------------------------------------------------------------------------------- Cash provided (used) by financing (83,254) 12,337 (417,353) EFFECT OF FOREIGN CURRENCY RATE CHANGES ON CASH (3,677) 3,397 (5,991) - ------------------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND EQUIVALENTS 16,653 (60,886) (146,535) CASH AND EQUIVALENTS - BEGINNING OF YEAR 63,208 124,094 270,629 - ------------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS - END OF YEAR $ 79,861 $ 63,208 $ 124,094 ===============================================================================================================================
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common Additional Accumulated Other Retained In thousands Stock Paid-in Capital Comprehensive Income Earnings - ------------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 4, 1997 $ 63,908 $ 668,554 $ 6,428 $ 1,234,849 Net income -- -- -- 350,942 Cash dividends: Common Stock -- -- -- (96,337) Series B Preferred Stock -- -- -- (3,804) Tax benefit from Preferred Stock dividends -- -- -- 700 Redemption of Preferred Stock -- -- -- (1,855) Purchase of treasury shares (5,239) -- -- (386,412) Exercise of stock options, net of shares surrendered 1,457 76,074 -- (48) Restricted Common Stock 9 (520) -- 601 Foreign currency translation, net of $22,905 deferred income taxes -- -- (42,538) -- Two-for-one stock split 61,090 -- -- (61,090) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 3, 1998 121,225 744,108 (36,110) 1,037,546 Net income -- -- -- 388,306 Cash dividends: Common Stock -- -- -- (97,943) Series B Preferred Stock -- -- -- (3,717) Tax benefit from Preferred Stock dividends -- -- -- 568 Redemption of Preferred Stock -- -- -- (2,763) Purchase of treasury shares (3,223) -- -- (144,175) Exercise of stock options, net of shares surrendered 1,678 57,195 -- (87) Restricted Common Stock 19 208 -- (37) Common Stock held in trust for deferred compensation plans (233) -- -- (6,728) Foreign currency translation, net of $5,638 deferred income taxes -- -- 10,471 -- - ------------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 2, 1999 119,466 801,511 (25,639) 1,170,970 Net income -- -- -- 366,242 Cash dividends: Common Stock -- -- -- (100,755) Series B Preferred Stock -- -- -- (3,547) Tax benefit from Preferred Stock dividends -- -- -- 437 Redemption of Preferred Stock -- -- -- (3,284) Purchase of treasury shares (4,000) -- -- (145,075) Exercise of stock options, net of shares surrendered 793 29,209 -- (131) Restricted Common Stock 20 334 -- (56) Common Stock held in trust for deferred compensation plans (74) -- -- (3,486) Foreign currency translation, net of $21,063 deferred income taxes -- -- (39,117) -- - ------------------------------------------------------------------------------------------------------------------------------- BALANCE JANUARY 1, 2000 $ 116,205 $ 831,054 $ (64,756) $ 1,281,315 ===============================================================================================================================
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of VF Corporation and all majority owned subsidiaries after elimination of intercompany transactions and profits. Inventories are stated at the lower of cost or market. Inventories stated on the last-in, first-out method represent 42% of total 1999 inventories and 48% in 1998. Remaining inventories are valued using the first-in, first-out method. PROPERTY AND DEPRECIATION: Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, ranging up to 40 years for buildings and 10 years for machinery and equipment. Intangible Assets represent the excess of costs over the fair value of net tangible assets of businesses acquired, less accumulated amortization of $270.5 million and $243.5 million in 1999 and 1998. These assets are amortized on the straight-line method over 10 to 40 years. The Company's policy is to evaluate intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss may be recorded if undiscounted future cash flows, net of income tax payments, are not expected to be adequate to recover the assets' carrying value. REVENUE RECOGNITION: Sales are recorded when products are shipped to customers, net of discounts and allowances. Advertising Costs are expensed as incurred and were $257.6 million in 1999, $287.5 million in 1998 and $309.3 million in 1997. STOCK-BASED COMPENSATION: Compensation expense is recorded for the excess, if any, of the market price of VF Common Stock at the date of grant over the amount the employee must pay for the stock. Other Comprehensive Income consists of certain changes in assets and liabilities that are not included in Net Income but are instead reported under generally accepted accounting principles within a separate component of Common Shareholders' Equity. All amounts in Accumulated Other Comprehensive Income relate to foreign currency translation and are net of income taxes at a 35% rate. STOCK SPLIT: During 1997, the Company declared a two-for-one stock split. Common Stock increased and Retained Earnings decreased by $61.1 million, representing the stated value of additional shares issued. Amounts presented in the Consolidated Statements of Common Shareholders' Equity are based on actual share amounts outstanding for each period presented. RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to conform with the current year presentation. USE OF ESTIMATES: In preparing financial statements in accordance with generally accepted accounting principles, management makes estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. NOTE B ACQUISITIONS In 1999, the Company acquired the common stock of Horace Small Holdings Corporation of Delaware, Inc., a manufacturer and marketer of occupational apparel, for $57.7 million in cash, plus repayment of $23.3 million in debt. The Company also acquired two other workwear and four jeanswear businesses for an aggregate cost of $78.4 million, plus additional contingent consideration if future earnings targets are attained. Intangible assets related to these acquisitions totaled $87.4 million. The Company accrued various restructuring charges in connection with certain of these businesses. The charges relate to severance, closure of manufacturing and distribution facilities, and lease and contract termination costs. Cash payments related to these actions will be substantially completed during 2000. Charges are summarized as follows (in thousands):
Facilities Lease and Exit Contract Severance Costs Termination Total Restructuring accrual $ 5,061 $ 1,622 $ 17,948 $ 24,631 Cash payments (1,362) (208) (2,218) (3,788) -------- -------- -------- -------- Estimated remaining costs $ 3,699 $ 1,414 $ 15,730 $ 20,843 ======== ======== ======== ========
During 1998, the Company acquired Bestform Group, Inc. for $184.3 million in cash, plus repayment of $44.4 million in debt. The Company also acquired three other businesses in 1998 for an aggregate cost of $76.1 million and three businesses in 1997 for an aggregate cost of $16.0 million. Intangible assets related to these acquisitions totaled $168.5 million in 1998 and $10.0 million in 1997. The following unaudited pro forma results of operations assume that acquisitions during the last two years had occurred at the beginning of 1998:
In thousands, except per share amounts 1999 1998 ------------- ------------- Net sales $ 5,614,028 $ 5,826,443 Net income 363,097 383,933 Earnings per common share: Basic $ 3.01 $ 3.13 Diluted 2.96 3.06 ============= =============
All acquisitions have been accounted for as purchases, and accordingly, the purchase prices have been allocated to the net assets acquired based on fair values at the dates of acquisition. The excess of cost over fair value of the purchased businesses has been allocated to intangible assets and is being amortized over periods from 19 to 40 years. Operating results of these businesses have been included in the consolidated financial statements since the dates of acquisition. NOTE C INVENTORIES
In thousands 1999 1998 -------- -------- Finished products $575,617 $552,729 Work in process 171,275 185,929 Materials and supplies 217,148 215,349 -------- -------- $964,040 $954,007 ======== ========
The current cost of inventories stated on the last-in, first-out method is not significantly different from their value determined under the first-in, first-out method. [25] NOTE D PROPERTY, PLANT AND EQUIPMENT
In thousands 1999 1998 ---------- ---------- Land $ 46,626 $ 45,296 Buildings 478,372 443,619 Machinery and equipment 1,289,064 1,222,216 ---------- ---------- 1,814,062 1,711,131 Less accumulated depreciation 1,009,640 935,040 ---------- ---------- $ 804,422 $ 776,091 ========== ==========
NOTE E SHORT-TERM BORROWINGS
In thousands 1999 1998 -------- -------- Commercial paper $319,033 $ -- Banks 89,899 244,910 -------- -------- $408,932 $244,910 ======== ========
The weighted average interest rate for short-term borrowings was 6.5% at the end of 1999 and 5.8% at the end of 1998. The Company maintains an unsecured revolving credit agreement with a group of banks for $750.0 million that supports commercial paper borrowings and is otherwise available for general corporate purposes. The agreement, which extends to July 2004, requires an .08% facility fee per year and contains various financial covenants, including a debt to net worth requirement. At January 1, 2000, there were no borrowings under the agreement. NOTE F ACCRUED LIABILITIES
In thousands 1999 1998 -------- -------- Income taxes $ 59,242 $ 70,112 Compensation 71,798 103,769 Other 236,084 272,120 -------- -------- $367,124 $446,001 ======== ========
NOTE G LONG-TERM DEBT
In thousands 1999 1998 -------- -------- 9.50% notes, due 2001 $100,000 $100,000 6.63% notes, due 2003 100,000 100,000 7.60% notes, due 2004 100,000 100,000 6.75% notes, due 2005 100,000 100,000 9.25% debentures, due 2022 100,000 100,000 Other 22,585 22,626 -------- -------- 522,585 522,626 Less current portion 4,751 969 -------- -------- $517,834 $521,657 ======== ========
The scheduled payments of long-term debt are $114.0 million in 2001, $.5 million in 2002, $100.4 million in 2003 and $100.4 million in 2004. The Company paid interest of $73.4 million in 1999, $59.5 million in 1998 and $48.0 million in 1997. NOTE H OTHER LIABILITIES
In thousands 1999 1998 -------- -------- Deferred compensation $179,321 $151,436 Deferred income taxes -- 11,512 Other 14,792 18,802 -------- -------- $194,113 $181,750 ======== ========
NOTE I BENEFIT PLANS The Company sponsors a noncontributory defined benefit pension plan covering substantially all full-time domestic employees and a nonqualified supplemental defined benefit pension plan covering key employees. The effect of the defined benefit plans on income is as follows:
In thousands 1999 1998 1997 -------- -------- -------- Service cost - benefits earned during the year $ 22,174 $ 20,391 $ 17,264 Interest cost on projected benefit obligation 41,166 38,584 35,934 Expected return on plan assets (50,692) (45,270) (34,771) Amortization of: Transition asset -- (3,068) (4,378) Prior service cost 5,359 5,667 5,475 Actuarial (gain) loss (831) 610 391 -------- -------- -------- Pension expense $ 17,176 $ 16,914 $ 19,915 ======== ======== ========
The following provides a reconciliation of the changes in fair value of the pension plans' assets and benefit obligations, based on a September 30 valuation date, plus the funded status at the end of each year:
In thousands 1999 1998 --------- --------- Fair value of plan assets, beginning of year $ 553,591 $ 526,087 Actual return on plan assets 112,848 28,013 Company contributions 24,000 20,400 Benefits paid (23,144) (20,909) --------- --------- Fair value of plan assets, end of year 667,295 553,591 --------- --------- Benefit obligations, beginning of year 591,726 503,340 Service cost 22,174 20,391 Interest cost 41,166 38,584 Plan amendments -- 22,427 Actuarial (gain) loss (44,831) 29,019 Benefits paid (24,385) (22,035) --------- --------- Benefit obligations, end of year 585,850 591,726 --------- --------- Funded status, end of year 81,445 (38,135) Unrecognized net actuarial (gain) loss (88,095) 17,825 Unrecognized prior service cost 29,911 35,269 --------- --------- Pension asset, net $ 23,261 $ 14,959 ========= ========= Amount included in: Other Assets $ 47,633 $ 35,164 Other Liabilities (24,372) (20,205) --------- --------- $ 23,261 $ 14,959 ========= =========
[26] For the unfunded supplemental defined benefit pension plan, the projected benefit obligation and the accumulated benefit obligation were $50.2 million and $37.6 million, respectively, at the end of 1999 and $41.2 million and $27.9 million, respectively, at the end of 1998. To support these benefit liabilities, the Company has purchased life insurance contracts and other investment securities. These securities are held in irrevocable trusts and are included in Other Assets. The cash value of life insurance and the market value of other investments, which approximates cost, was $27.9 million in 1999 and $23.7 million in 1998. The projected benefit obligation was determined using an assumed discount rate of 7.8% in 1999, 6.8% in 1998 and 7.5% in 1997. The assumption for compensation increases was 4.0% in 1999 and 1998 and 4.5% in 1997, and the assumption for return on plan assets was 8.8% in each year. The Company sponsors an Employee Stock Ownership Plan (ESOP) as part of a 401(k) savings plan covering most domestic salaried employees. Contributions made by the Company to the 401(k) plan are based on a specified percentage of employee contributions. Cash contributions by the Company were $6.9 million in 1999, $6.5 million in 1998 and $5.7 million in 1997. Plan expense was $5.2 million in 1999 and $5.5 million in 1998 and 1997, after giving effect to dividends on the Series B Preferred Stock of $3.5 million in 1999, $3.7 million in 1998 and $3.8 million in 1997. The Company also sponsors other savings and retirement plans for certain domestic and foreign employees. Expense for these plans totaled $6.2 million in 1999, $6.5 million in 1998 and $5.8 million in 1997. NOTE J CAPITAL Common shares outstanding are net of shares held in treasury, and in substance retired, of 21,136,952 in 1999, 17,134,370 in 1998 and 13,910,519 in 1997. In addition, 306,698 shares of VF Common Stock at the end of 1999 and 232,899 shares at the end of 1998 are held in trust for deferred compensation plans. These shares are treated for financial accounting purposes as treasury shares at a cost of $10.5 million and $7.0 million, respectively. There are 25,000,000 authorized shares of Preferred Stock, $1 par value. As of January 1, 2000, 2,000,000 shares are designated as Series A Preferred Stock, of which none has been issued. In addition, 2,105,263 shares are designated as 6.75% Series B Preferred Stock, which were purchased by the ESOP. There were 1,669,444 shares of Series B Preferred Stock outstanding at January 1, 2000, 1,760,119 outstanding at January 2, 1999 and 1,824,820 outstanding at January 3, 1998, after share redemptions. Each outstanding share of Common Stock has one preferred stock purchase right attached. The rights become exercisable ten days after an outside party acquires, or makes an offer for, 15% or more of the Common Stock. Once exercisable, each right will entitle its holder to buy 1/100 share of Series A Preferred Stock for $175. If the Company is involved in a merger or other business combination or an outside party acquires 15% or more of the Common Stock, each right will be modified to entitle its holder (other than the acquirer) to purchase common stock of the acquiring company or, in certain circumstances, VF Common Stock having a market value of twice the exercise price of the right. In some circumstances, rights other than those held by an acquirer may be exchanged for one share of VF Common Stock. The rights, which expire in January 2008, may be redeemed at $.01 per right prior to their becoming exercisable. NOTE K REDEEMABLE PREFERRED STOCK Each share of Series B Preferred Stock has a redemption value of $30.88 plus cumulative accrued dividends, is convertible into 1.6 shares of Common Stock and is entitled to two votes per share along with the Common Stock. The trustee for the ESOP may convert the preferred shares to Common Stock at any time or may cause the Company to redeem the preferred shares under certain circumstances. The Series B Preferred Stock also has preference in liquidation over all other stock issues. The ESOP's purchase of the preferred shares was funded by a loan of $65.0 million from the Company that bears interest at 9.80% and is payable in increasing installments through 2002. Interest related to this loan was $2.6 million in 1999, $3.3 million in 1998 and $3.9 million in 1997. Principal and interest obligations on the loan are satisfied as the Company makes contributions to the savings plan and dividends are paid on the Preferred Stock. As principal payments are made on the loan, shares of Preferred Stock are allocated to participating employees' accounts within the ESOP. At the end of 1999, 1,207,392 shares of Preferred Stock had been allocated to participating employees' accounts. NOTE L STOCK OPTION PLAN The Company has granted nonqualified stock options to officers, directors and key employees under a stock compensation plan at prices not less than fair market value on the date of grant. Options become exercisable one year after the date of grant and expire ten years after the date of grant. Activity in the stock compensation plan is summarized as follows:
Weighted Shares Average Under Exercise Options Price ---------- ---------- Balance January 4, 1997 8,164,472 $ 26.21 Options exercised (2,521,346) 25.78 Options canceled (131,510) 29.88 ---------- ---------- Balance January 3, 1998 5,511,616 28.21 Options granted 1,940,000 43.30 Options exercised (1,680,000) 27.26 Options canceled (69,310) 25.41 ---------- ---------- Balance January 2, 1999 5,702,306 33.65 Options granted 1,975,400 43.20 Options exercised (795,400) 31.87 Options canceled (250,810) 32.88 ---------- ---------- Balance January 1, 2000 6,631,496 $ 36.74 ========== ==========
[27] Stock options outstanding at January 1, 2000 are summarized as follows:
Weighted Average Weighted Range of Remaining Average Exercise Number Contractual Exercise Prices Outstanding Life Price - -------- ----------- ----------- -------- $ 6 - 10 8,900 .9 years $ 8.09 16 - 20 44,220 1.9 years 17.95 21 - 25 641,616 4.6 years 23.49 26 - 30 1,179,510 4.7 years 27.01 31 - 35 1,127,900 6.9 years 34.48 40 - 45 3,629,350 8.6 years 43.25 --------- --- ------ $ 6 - 45 6,631,496 7.2 years $36.74 ========= === ======
All above options are exercisable, except for those granted in 1999. There are 4,646,983 shares available for future grants of stock options and stock awards, of which no more than 1,030,053 may be grants of restricted stock awards. Since all stock options are granted at market value, compensation expense is not required. However, had compensation expense been determined based on the fair value of the options on the grant dates, the Company's net income would have been reduced by $11.9 million ($.10 per share) in 1999, $9.7 million ($.08 per share) in 1998 and $9.0 million ($.07 per share) in 1997. The fair value of options granted during 1999 was $9.97 per share and of options granted during 1998 was $8.78 per share. Fair value is estimated based on the Black-Scholes option-pricing model with the following assumptions for grants in 1999 and 1998: dividend yield of 2.0%; expected volatility of 26% in 1999 and 20% in 1998; risk-free interest rates of 4.8% in 1999 and 5.4% in 1998; and expected lives of 4 years. The Company has granted to key employees 67,367 shares of restricted stock that vest in the year 2005. Compensation equal to the market value of shares at the date of grant is amortized to expense over the vesting period. Expense for these shares was $.3 million in 1999 and $.2 million in 1998 and 1997. In 1999, the Company granted stock awards to certain key employees under a new stock award plan, which replaced a portion of the cash incentive compensation for those employees. The stock awards entitle the participants to the right to receive shares of VF Common Stock, with the number of shares to be earned based on the three year total shareholder return of VF Common Stock compared with a peer group of other major apparel companies. Shares earned at the end of each three year period are issued to participants in the following year, unless they elect to defer receipt of the shares. A total of 44,962 shares of VF Common Stock were earned for the three year performance period ended in 1999. At the end of 1999, there are 34,062 stock awards outstanding for the performance period ending in 2000 and 34,062 for the performance period ending in 2001. Compensation expense equal to the market value of the shares to be issued is recognized ratably over each three year performance period. In 1999, expense of $2.0 million was recognized for this plan. NOTE M INCOME TAXES The provision for income taxes is computed based on the following amounts of income before income taxes:
In thousands 1999 1998 1997 -------- -------- -------- Domestic $567,545 $582,128 $514,028 Foreign 28,031 49,470 71,852 -------- -------- -------- $595,576 $631,598 $585,880 ======== ======== ========
The provision for income taxes consists of:
In thousands 1999 1998 1997 --------- --------- --------- Current: Federal $ 175,052 $ 174,346 $ 201,924 Foreign 14,113 35,082 46,466 State 19,607 14,757 19,553 --------- --------- --------- 208,772 224,185 267,943 Deferred, primarily federal 20,562 19,107 (33,005) --------- --------- --------- $ 229,334 $ 243,292 $ 234,938 ========= ========= =========
The reasons for the difference between income taxes computed by applying the statutory federal income tax rate and income tax expense in the financial statements are as follows:
In thousands 1999 1998 1997 --------- --------- --------- Tax at federal statutory rate $ 208,452 $ 221,059 $ 205,058 State income taxes, net of federal tax benefit 12,744 9,592 12,709 Amortization of intangible assets 8,241 7,916 7,084 Foreign operating losses with no current benefit 11,608 4,715 4,033 Other, net (11,711) 10 6,054 --------- --------- --------- $ 229,334 $ 243,292 $ 234,938 ========= ========= =========
Deferred income tax assets and liabilities consist of the following:
In thousands 1999 1998 --------- --------- Deferred income tax assets: Employee benefits $ 51,582 $ 62,564 Inventories 19,990 16,780 Other accrued expenses 79,767 103,811 Operating loss carryforwards 71,911 38,083 Foreign currency translation 34,869 13,806 --------- --------- 258,119 235,044 Valuation allowance (46,526) (34,249) --------- --------- Deferred income tax assets 211,593 200,795 --------- --------- Deferred income tax liabilities: Depreciation 56,103 59,288 Other 25,244 39,857 --------- --------- Deferred income tax liabilities 81,347 99,145 --------- --------- Net deferred income tax assets $ 130,246 $ 101,650 ========= ========= Amount included in: Current Assets $ 74,067 $ 99,608 Other Assets 56,179 13,554 Other Liabilities -- (11,512) --------- --------- $ 130,246 $ 101,650 ========= =========
[28] The Company has $141.8 million of foreign operating loss carryforwards expiring at various dates; a valuation allowance has been provided where it is more likely than not that the deferred tax assets relating to certain of those loss carryforwards will not be realized. Income taxes paid were $228.0 million in 1999, $215.2 million in 1998 and $230.1 million in 1997. Interest income includes $3.0 million in 1999 and $10.5 million in 1997 relating to settlements of prior years' tax examinations. NOTE N BUSINESS SEGMENT INFORMATION The Company designs and manufactures apparel products marketed primarily under Company-owned brand names. Customers are primarily department, discount and specialty stores throughout the world. The Company manages its businesses through separate marketing companies that support specific brands. Manufacturing and product sourcing needs are met by groups that support individual or in some cases several different product types. These operations have been aggregated into three reportable segments. The "Consumer Apparel" segment includes jeanswear and related products, women's intimate apparel and swimwear, and children's apparel, all having similar characteristics of economic performance, product type, production process, method of distribution and class of customer. The "Occupational Apparel" segment is distinguished from the Consumer Apparel segment because of a different class of customer. The "All Other" segment consists of the Company's knitwear, daypack and backpack operations, which have different product or economic characteristics than those in the other segments. The Occupational Apparel segment is separately reportable for 1999 because of recent acquisitions; accordingly, prior years' segment information has been restated to conform to the 1999 presentation. Management evaluates the operating performance of each of its marketing companies based on their income from operations. Accounting policies used for segment reporting are consistent with those stated in Note A, except that inventories are valued on a first-in, first-out basis and that interest income and expense and amortization of intangible assets are not allocated to individual segments. Corporate and other expenses include expenses incurred in and directed by the Corporate offices that are not allocated to specific business units. Segment assets are those used directly in the operations of each business unit, such as accounts receivable, inventories and property, plant and equipment. Corporate assets include investments and deferred income taxes. Financial information for the Company's reportable segments is as follows:
In thousands 1999 1998 1997 ----------- ----------- ----------- Net sales: Consumer Apparel $ 4,276,809 $ 4,313,082 $ 3,963,869 Occupational Apparel 640,227 482,931 461,940 All Other 634,580 682,794 796,437 ----------- ----------- ----------- Consolidated net sales $ 5,551,616 $ 5,478,807 $ 5,222,246 =========== =========== =========== Segment profit: Consumer Apparel $ 629,127 $ 693,638 $ 574,384 Occupational Apparel 79,164 80,988 72,626 All Other 57,715 38,686 73,517 ----------- ----------- ----------- Total segment profit 766,006 813,312 720,527 Interest, net (62,490) (55,871) (25,877) Amortization of intangible assets (33,097) (32,890) (27,518) Corporate and other expenses (74,843) (92,953) (81,252) ----------- ----------- ----------- Consolidated income before income taxes $ 595,576 $ 631,598 $ 585,880 =========== =========== =========== Segment assets: Consumer Apparel $ 1,783,225 $ 1,858,873 $ 1,506,035 Occupational Apparel 379,004 247,734 217,239 All Other 332,850 377,155 421,389 ----------- ----------- ----------- Total segment assets 2,495,079 2,483,762 2,144,663 Cash and equivalents 79,861 63,208 124,094 Intangible assets 992,463 951,562 814,332 Corporate assets 459,111 338,134 239,693 ----------- ----------- ----------- Consolidated assets $ 4,026,514 $ 3,836,666 $ 3,322,782 =========== =========== =========== Depreciation expense: Consumer Apparel $ 89,313 $ 83,382 $ 81,199 Occupational Apparel 14,958 11,769 11,631 All Other 23,555 26,165 29,993 Corporate 6,509 7,179 5,911 ----------- ----------- ----------- Consolidated depreciation expense $ 134,335 $ 128,495 $ 128,734 =========== =========== =========== Capital expenditures: Consumer Apparel $ 97,196 $ 129,532 $ 109,458 Occupational Apparel 20,845 19,362 16,821 All Other 8,358 11,480 15,856 Corporate 23,677 28,685 12,127 ----------- ----------- ----------- Consolidated capital expenditures $ 150,076 $ 189,059 $ 154,262 =========== =========== ===========
Information by geographic area is presented below, with sales based on the location of the customer:
In thousands 1999 1998 1997 ---------- ---------- ---------- Net sales: United States $4,605,624 $4,552,785 $4,368,474 Foreign, primarily Europe 945,992 926,022 853,772 ---------- ---------- ---------- Consolidated net sales $5,551,616 $5,478,807 $5,222,246 ========== ========== ========== Long-lived assets, primarily property, plant and equipment: United States $ 650,577 $ 634,231 $ 596,125 Mexico 71,627 60,400 41,055 Other foreign, primarily Europe 83,029 83,842 73,253 ---------- ---------- ---------- Total long-lived assets $ 805,233 $ 778,473 $ 710,433 ========== ========== ==========
[29] Worldwide sales by product category are as follows:
In thousands 1999 1998 1997 ---------- ---------- ---------- Jeanswear and related products $2,936,196 $2,962,790 $2,888,967 Intimate apparel 981,798 965,782 648,937 Occupational apparel 640,227 482,931 461,940 Knitwear 453,103 506,365 614,798 Other 540,292 560,939 607,604 ---------- ---------- ---------- Total $5,551,616 $5,478,807 $5,222,246 ========== ========== ==========
Sales to one domestic discount store group comprise 13.0% of consolidated sales in 1999, 12.3% in 1998 and 11.1% in 1997. NOTE O LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Rental expense was $59.3 million in 1999, $64.3 million in 1998 and $66.2 million in 1997. Future minimum lease payments are $54.7 million, $44.2 million, $35.3 million, $28.0 million and $20.4 million for the years 2000 through 2004 and $43.1 million thereafter. NOTE P EARNINGS PER SHARE
In thousands, except per share amounts 1999 1998 1997 -------- -------- -------- Basic earnings per share: Net income $366,242 $388,306 $350,942 Less Preferred Stock dividends and redemption premium 6,394 5,912 5,003 -------- -------- -------- Net income available for Common Stock $359,848 $382,394 $345,939 -------- -------- -------- Weighted average Common Stock outstanding 118,538 120,744 125,504 -------- -------- -------- Basic earnings per share $ 3.04 $ 3.17 $ 2.76 ======== ======== ======== Diluted earnings per share: Net income $366,242 $388,306 $350,942 Increased ESOP expense if Preferred Stock were converted to Common Stock 1,036 1,136 1,227 -------- -------- -------- Net income available for Common Stock and dilutive securities $365,206 $387,170 $349,715 -------- -------- -------- Weighted average Common Stock outstanding 118,538 120,744 125,504 Additional Common Stock resulting from dilutive securities: Preferred Stock 2,724 2,854 2,955 Stock options and other 996 1,397 1,261 -------- -------- -------- Weighted average Common Stock and dilutive securities outstanding 122,258 124,995 129,720 -------- -------- -------- Diluted earnings per share $ 2.99 $ 3.10 $ 2.70 ======== ======== ========
Outstanding options to purchase 2.1 million shares of Common Stock have been excluded from the computation of diluted earnings per share in 1999 because the option exercise prices were greater than the average market price of the Common Stock. NOTE Q FINANCIAL INSTRUMENTS The carrying amount and fair value of financial instruments included in the balance sheets are as follows:
In thousands 1999 1998 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Financial liabilities: Short-term borrowings $408,932 $408,932 $244,910 $244,910 Long-term debt 522,585 507,297 522,626 552,476 Series B Preferred Stock 51,544 80,133 54,344 132,008 ======== ======== ======== ========
The fair value of the Company's short-term and long-term debt is estimated based on quoted market prices or values of comparable borrowings. The fair value of the Series B Preferred Stock is based on a valuation by an independent financial consulting firm. The Company enters into short-term foreign currency forward exchange contracts to manage exposures related to specific foreign currency transactions or anticipated cash flows. Changes in the fair values of these contracts are recognized currently in operating income. The amounts of the contracts, and related gains and losses, are not material. The fair value of foreign currency financial instruments approximates their carrying value. [30] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders VF Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows and common shareholders' equity present fairly, in all material respects, the financial position of VF Corporation and its subsidiaries at January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. [PricewaterhouseCoopers LLP] PricewaterhouseCoopers LLP Greensboro, North Carolina February 3, 2000 [31] VF CORPORATION FINANCIAL SUMMARY
In thousands, except per share amounts 1999 1998 1997 ----------- ----------- ----------- Summary of Operations Net sales $ 5,551,616 $ 5,478,807 $ 5,222,246 Cost of products sold 3,657,120 3,586,686 3,440,611 ----------- ----------- ----------- Gross margin 1,894,496 1,892,121 1,781,635 Marketing, administrative and other 1,241,864 1,207,952 1,176,562 ----------- ----------- ----------- Operating income 652,632 684,169 605,073 Interest, net (62,490) (55,871) (25,877) Miscellaneous, net 5,434 3,300 6,684 ----------- ----------- ----------- Income before income taxes 595,576 631,598 585,880 Income taxes 229,334 243,292 234,938 ----------- ----------- ----------- Net income $ 366,242 $ 388,306 $ 350,942 ----------- ----------- ----------- Per share of Common Stock(1) Earnings - basic $ 3.04 $ 3.17 $ 2.76 Earnings - diluted 2.99 3.10 2.70 Dividends .85 .81 .77 Average number of common shares outstanding 118,538 120,744 125,504 Net income as % of average common shareholders' equity 17.3% 19.7% 18.2% Net income as % of average total assets 8.9% 10.2% 10.1% =========== =========== =========== Financial Position Accounts receivable, net $ 732,502 $ 705,734 $ 587,934 Inventories 964,040 954,007 774,755 Total current assets 1,877,416 1,848,152 1,601,466 Property, plant and equipment, net 804,422 776,091 705,990 Total assets 4,026,514 3,836,666 3,322,782 Total current liabilities 1,113,473 1,033,006 765,908 Long-term debt 517,834 521,657 516,226 Common shareholders' equity 2,163,818 2,066,308 1,866,769 =========== =========== =========== Other Statistics Working capital $ 763,943 $ 815,146 $ 835,558 Current ratio 1.7 1.8 2.1 Debt to capital ratio(2) 30.1% 27.1% 22.5% Dividends $ 104,302 $ 101,660 $ 100,141 Purchase of Common Stock 149,075 147,398 391,651 Cash provided by operations 423,361 429,282 460,652 Capital expenditures (excluding acquisitions) 150,076 189,059 154,262 Depreciation and amortization 167,432 161,385 156,252 =========== =========== =========== Market Data Market price range(1) $55-27 7/16 $54 11/16-33 7/16 $48 1/4-32 1/4 Book value per common share(1) 18.62 17.30 15.40 Price earnings ratio - high-low 18.1-9.0 17.3-10.5 17.5-11.7 Rate of payout(3) 28.0% 25.6% 27.9% =========== =========== ===========
In thousands, except per share amounts 1996 1995 ----------- ----------- Summary of Operations Net sales $ 5,137,178 $ 5,062,299 Cost of products sold 3,458,166 3,577,555 ----------- ----------- Gross margin 1,679,012 1,484,744 Marketing, administrative and other 1,121,729 1,137,354 ----------- ----------- Operating income 557,283 347,390 Interest, net (49,387) (66,217) Miscellaneous, net 512 2,962 ----------- ----------- Income before income taxes 508,408 284,135 Income taxes 208,884 126,844 ----------- ----------- Net income $ 299,524 $ 157,291 ----------- ----------- Per share of Common Stock(1) Earnings - basic $ 2.32 $ 1.20 Earnings - diluted 2.28 1.19 Dividends .73 .69 Average number of common shares outstanding 127,292 127,486 Net income as % of average common shareholders' equity 16.2% 8.8% Net income as % of average total assets 8.6% 4.4% =========== =========== Financial Position Accounts receivable, net $ 592,942 $ 629,506 Inventories 730,823 841,907 Total current assets 1,706,326 1,667,637 Property, plant and equipment, net 721,524 749,880 Total assets 3,449,535 3,447,071 Total current liabilities 766,267 868,320 Long-term debt 519,058 614,217 Common shareholders' equity 1,973,739 1,771,506 =========== =========== Other Statistics Working capital $ 940,059 $ 799,317 Current ratio 2.2 1.9 Debt to capital ratio(2) 21.4% 32.3% Dividends $ 97,036 $ 92,038 Purchase of Common Stock 61,483 86,251 Cash provided by operations 711,454 323,656 Capital expenditures (excluding acquisitions) 138,747 155,206 Depreciation and amortization 160,578 167,721 =========== =========== Market Data Market price range(1) $34 15/16-23 13/16 $28 9/16-23 3/8 Book value per common share(1) 15.44 13.96 Price earnings ratio - high-low 15.1-10.3 23.8-19.5 Rate of payout(3) 31.5% 57.5% =========== ===========
(1) Per share computations and market price ranges have been adjusted to reflect a two-for-one stock split in November 1997. (2) Capital is defined as common shareholders' equity plus short-term and long-term debt. (3) Dividends per share divided by earnings per share. [32] INVESTOR INFORMATION COMMON STOCK Listed on the New York Stock Exchange and Pacific Exchange - trading symbol VFC. SHAREHOLDERS OF RECORD As of February 18, 2000, there were 6,974 shareholders of record. DIVIDEND POLICY Quarterly dividends on VF Corporation Common Stock, when declared, are paid on or about the 20th day of March, June, September and December. DIVIDEND REINVESTMENT PLAN The Plan is offered to shareholders by First Chicago Trust Company of New York. The Plan provides for automatic dividend reinvestment and voluntary cash contributions for the purchase of additional shares of VF Corporation Common Stock. Questions concerning general Plan information should be directed to the Office of the Vice President - Administration, General Counsel and Secretary of VF Corporation. DIVIDEND DIRECT DEPOSIT Shareholders may have their dividends deposited into their savings or checking account at any bank that is a member of the Automated Clearing House (ACH) system. A brochure describing this service may be obtained by contacting First Chicago. QUARTERLY COMMON STOCK PRICE INFORMATION The high and low sales prices for the periods indicated were as follows:
1999 1998 1997 - -------------------------------------------------------------------------------------------------------- High Low High Low High Low - -------------------------------------------------------------------------------------------------------- First quarter $50 13/16 $40 7/8 $53 1/4 $40 3/4 $35 11/16 $32 1/2 Second quarter 55 37 1/2 54 11/16 49 11/16 43 5/8 32 1/4 Third quarter 43 3/8 30 52 1/4 36 5/8 48 1/4 42 9/16 Fourth quarter 32 5/8 27 7/16 50 11/16 33 7/16 47 3/16 41 11/16