Management's Discussion and Analysis of
Operations and Financial Condition
ANALYSIS OF OPERATIONS
Restructuring Actions
During the fourth quarter of 2000, management announced that it intended to exit
several underperforming businesses and to aggressively reduce its overall cost
structure to get the Company on track to achieve our long-term earnings growth
target of 8% to 10% per year. Accordingly, we recorded pretax charges of $119.9
million ($.67 per share) to implement these initiatives.
As part of these restructuring charges, the Company recorded costs of $69.7
million to exit several underperforming businesses. The Company transferred its
Wrangler business in Japan to a licensee and incurred a loss on disposition of
$26.8 million, of which $23.8 million related to the write-off of intangible
assets. In the occupational apparel business units, the Company eliminated
several product lines that were part of the acquisitions made in late 1998 and
early 1999 and decided to exit certain intimate apparel lines determined to have
limited potential. During 2000, these businesses or product lines had sales of
$101 million and incurred $20 million of operating losses.
Also included in the restructuring charges was $18.5 million to close higher
cost manufacturing facilities as part of our ongoing strategy of moving toward
lower cost, more flexible global sourcing. In addition, the Company recorded
$31.7 million of costs to close or consolidate distribution centers and
administrative offices and functions.
The elimination of operating losses of the closed businesses and savings from
the manufacturing, distribution and administrative cost reduction initiatives
should result in an annualized benefit to pretax earnings of $45 million. See
Note M to the consolidated financial statements for more information on the
restructuring charges.
Consolidated Statements of Income
Consolidated sales rose 4% to a record $5,748 million in 2000. The sales
increase was primarily due to the acquisitions completed in 2000, plus increases
in our domestic jeanswear, knitwear and playwear businesses, offset by declines
in our international businesses primarily due to foreign currency translation.
In translating foreign currencies into the U.S. dollar, the stronger U.S. dollar
reduced 2000 sales comparisons by $73 million. Sales in 1999 rose 1% over the
1998 level. This was primarily due to the 1999 acquisitions, offset in part by a
slowdown in the jeanswear market in Europe and in the mid-tier channel of
distribution in the U.S.
Gross margins were 33.2% of sales in 2000, compared with 34.1% in 1999 and
34.5% in 1998. Excluding restructuring charges included in cost of products sold
of $55.9 million in 2000, gross margins were flat with 1999 at 34.1%. Gross
margins benefited from higher than average margins in the companies acquired in
2000. In addition, 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. Offsetting these increases in 2000 were lower
gross margins in occupational apparel. In 1999, lower gross margins in the
domestic Lee jeanswear and European jeanswear businesses reduced overall ratios
from the prior year.
For the U.S. market, VF manufactures its products in owned domestic plants
and offshore plants, primarily in Mexico, and contracts production from
independent contractors mostly located outside of the U.S. The amount of
domestic sales derived from products manufactured in lower cost locations
outside the U.S. has increased each year over the last three years to where now
67% is sourced from international locations. Similarly, in foreign markets over
the last three years, sourcing has 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 23.5% of sales in 2000,
compared with 22.2% in 1999 and 21.9% in 1998, respectively. Excluding
restructuring charges of $37.2 million in 2000, expenses were 22.9% of sales.
Expenses as a percent of sales increased in 2000 due to the higher than average
expense levels of the 2000 acquisitions. Expenses as a percent of sales
increased in 1999 primarily due to fixed short-term expenses on a lower sales
level in European jeanswear, partially offset by lower advertising spending.
Other operating income and expense includes amortization of intangible
assets, net royalty income and, in 2000, the $26.8 million loss on disposal of
the Wrangler business in Japan representing primarily the write-off of
intangible assets. In each of the last two years, amortization of intangible
assets increased because of acquisitions completed during those years. Net
royalty income in 2000 was flat with 1999 but declined from 1998 due to the
conversion of certain formerly licensed businesses to owned operations.
Net interest expense increased in each of the last two years due to higher
borrowings related to the business acquisitions and, to a lesser extent, higher
interest rates.
The effective income tax rate was 38.1% (before cumulative effect of a change
in accounting policy) in 2000 and 38.5% in 1999 and 1998. Excluding the effect
of the restructuring charges, the effective tax rate was 37.7% in 2000. The
effective rate declined in 2000
17
due to higher U.S. tax credits, taxes not provided on permanently invested
foreign earnings and lower state income taxes.
Reported net income was $260.3 million in 2000, or $2.25 per share, compared
with $366.2 million ($3.04 per share) in 1999 and $388.3 million ($3.17 per
share) in 1998. Excluding the effects of restructuring charges and the
cumulative effect of a change in accounting policy, net income in 2000 was
$343.8 million, or $2.98 per share. Net income declined by 6% from the 1999
level, while earnings per share declined by 2%, reflecting the benefit of
the Company's share repurchase program. The 2000 acquisitions had a $.06
negative impact on 2000 reported earnings per share, and the stronger U.S.
dollar in 2000 had a $.05 negative impact on earnings per share compared with
the prior year. Similarly, 1999 net income declined by 6% from 1998, while
earnings per share declined by 4%, again reflecting the benefit of the
Company's share repurchase program.
Information by Business Segment
The Consumer Apparel segment consists of jeanswear, women's intimate apparel,
women's swimwear, and the children's apparel businesses. Overall, segment sales
declined by 1% in each of the last two years. In 2000, domestic jeanswear sales
increased by 5%, with strength across the mass, western and Lee marketing units.
European jeanswear sales declined due to the negative effects of foreign
currency translation. In other international markets, jeanswear sales increases
in Latin America were offset by a decline in the Wrangler business in Japan.
Domestic intimate apparel sales declined 9% in 2000, as increases in department
store brands were more than offset by the absence of new private label programs
and by a reduction in Vassarette brand sales in the mass channel of
distribution. Segment profit in 2000, excluding $71.0 million of
restructuring charges, increased 7% over 1999, led by growth in sales and
profit margins in both domestic and international jeanswear. In 1999, sales
increases in mass market domestic jeanswear and 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
related to the overall 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 styles. Segment profit in 1999
declined due to lower sales in Lee, lower sales in Europe, operating
difficulties resulting from European jeanswear consolidation efforts, and a
$6 million charge to close the Jantzen women's sportswear division.
The Occupational Apparel segment includes the Company's industrial, career
and safety apparel businesses. Sales increases in each of the last two years
were due to one acquisition in the latter part of 1998 and three acquisitions in
early 1999. Segment profit in 2000 includes $34.6 million of restructuring
costs. Excluding these restructuring costs, segment profit still declined
significantly in 2000 due to manufacturing and distribution inefficiencies
related to integration of the recently acquired companies. Segment profit in
1999 declined as a percent of sales from 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 and outdoor-related
businesses represented by the JanSport and Eastpak brands (backpacks and
daypacks) and The North Face branded products (outerwear and equipment). Sales
increased primarily from The North Face and Eastpak acquisitions in May 2000.
Segment profit, excluding $6.0 million of restructuring costs in 2000,
advanced only slightly from the prior year level because of the low level of
profitability of the newly acquired businesses. Sales and profit,
excluding restructuring costs, in the Company's knitwear business increased in
2000 from the 1999 levels. With difficult market conditions and pricing
pressures, our knitwear profitability continues to be below overall Company
averages.
ANALYSIS OF FINANCIAL CONDITION
In managing its capital structure, it is management's goal to maintain a debt to
capital ratio of less than 40%, while providing flexibility to pursue
investment opportunities that may become available. Our debt to capital ratio
remains within these guidelines: 34.7% at the end of 2000 and 30.1% at the end
of 1999.
Balance Sheets
Even with higher fourth quarter sales, accounts receivable decreased in 2000 due
to slightly lower day's sales outstanding. Inventories increased 17% in 2000.
Excluding businesses acquired in 2000, inventories increased by 6%, primarily
due to increases at domestic jeanswear as their sales have grown. Management has
targeted an inventory reduction of as much as $100 million during 2001.
Intangible assets increased during 2000 due to the acquisitions completed
during the year. This increase was partially offset by the reduction in
intangible assets related to disposition of the Wrangler business in Japan.
The increase in other accrued liabilities results from the restructuring
charges recorded in the fourth quarter of 2000.
18
Total long-term debt increased through the September 2000 issuance of $300.0
million of 8.10% notes due in 2005 and $200.0 million of 8.50% notes due in
2010. Proceeds from these debt obligations were used to repay short-term
borrowings. Current maturities of long-term debt increased as $114.0 million
becomes payable in 2001 and is expected to be funded by cash flow from
operations.
The accumulated other comprehensive loss component of Common Shareholders'
Equity increased during 2000 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 $1,103.9 million and the current ratio was 2.1 to 1 at the
end of 2000, compared with $763.9 million and 1.7 to 1 at the end of 1999. The
increase in 2000 was due to the increase in inventories and repayment of
short-term borrowings with the proceeds of the long-term debt offering.
The primary source of liquidity is the Company's strong cash flow
provided by operations, which was $443.3 million in 2000, $423.4 million in 1999
and $429.3 million in 1998.
Capital expenditures were $125.2 million in 2000, compared with $150.1
million and $189.1 million in 1999 and 1998, respectively. Capital expenditures
relate to ongoing investments in information systems and capital improvements in
our worldwide manufacturing and other facilities. Capital expenditures in 2001
are expected to be slightly higher than the 2000 level, but below historical
levels, and will be funded by cash flow from operations. Capital
expenditures have declined from the 1999/1998 levels due to slower expansion in
offshore manufacturing capacity, primarily in jeanswear.
During 2000, the Company purchased 4.0 million shares of its Common Stock in
open market transactions at a cost of $105.7 million. During 1999, the Company
purchased 4.0 million shares for $149.1 million. Under its current authorization
from the Board of Directors, the Company may purchase up to an additional 4.0
million shares. Depending on other opportunities that may arise, the Company
intends to purchase approximately one million shares per quarter during 2001.
Cash dividends totaled $.89 per common share in 2000, compared with $.85 in
1999 and $.81 in 1998. The dividend payout rate increased to 40% due to lower
2000 earnings (30% excluding the two unusual items), compared with a payout rate
of 28% in 1999 and 26% in 1998. The indicated annual dividend rate for 2001 is
$.92 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 2001, sales should rise slightly above 2000 levels, with the
sales increases from the 2000 acquisitions partially offset by the absence of
$101 million in sales related to the workwear, Wrangler Japan and other
businesses that we exited in 2000. Management believes that the benefits from
the restructuring initiatives described previously, as well as increased
profitability in the workwear businesses and in the recently acquired
companies, are necessary for the Company to achieve its long-term earnings
growth target of 8% to 10%. For 2001, that implies a range in earnings per share
of $3.21 to $3.28. We expect cash flow from operations to be approximately
$450 million to $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 December
2001, business transactions can be conducted in both the euro and the legacy
currencies, while cash transactions remain in the legacy currencies. After that
date, the euro will be the sole currency of the participating countries for
business transactions. Beginning in January 2002, new euro-denominated currency
will be issued by the participating countries, and their legacy currencies will
cease to be legal tender effective June 30, 2002. Approximately 9% of the
Company's 2000 sales were generated in the participating countries of the
European Union.
We have evaluated all information technology systems and have concluded that
they are euro compliant. We are also evaluating the strategic implications of
adopting 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
more uniform pricing in all European markets, including those that have not
adopted the euro as their common currency. The financial impact of the
conversion to the euro on the Company's operations will depend on the
competitive conditions 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.
19
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 value of marketable securities. The Company regularly
assesses these potential risks and manages its exposures to these risks through
its operating and financing activities and, when appropriate, through the use
of derivative financial instruments. The Company does not use derivative
instruments for trading or speculative purposes.
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 financial instruments to minimize its
interest rate risk. The primary interest rate exposure relates to changes in
interest rates on short-term domestic and foreign borrowings. These short-term
borrowings averaged $470 million during 2000 and $430 million during 1999.
Because a significant amount of short-term borrowings were repaid during the
fourth quarter with proceeds of $500 million of long-term debt issued in
September 2000, the average amount of short-term borrowings is expected to be
substantially less in 2001. The effect of a hypothetical 1% change in interest
rates on reported net income would be approximately $.02 per share.
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 and European businesses are manufactured in Company-owned plants in
foreign countries or by foreign contractors. The Company's primary net foreign
currency market exposures relate to the euro, the Mexican peso, the British
pound and the Canadian dollar. Management monitors net foreign currency
exposures and may in the ordinary course of business enter into foreign exchange
forward contracts related to specific foreign currency transactions or
anticipated cash flows occurring within twelve months. Use of derivative
financial instruments allows the Company to reduce its overall exposure to
exchange rate movements, since gains and losses on these contracts will offset
the losses and gains on the transactions being hedged. The amount of these
contracts, and related gains and losses, during 1999 and 2000 were not material.
Amounts accrued under a nonqualified deferred compensation plan 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. However, 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. These Company-owned investment securities
are held in grantor trusts. Increases and decreases in deferred compensation
liabilities are substantially offset by corresponding increases and decreases in
the market value of the Company's investments, resulting in a negligible 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; competitive
conditions in and financial strength of the retail industry; actions of
competitors that may impact the Company's business; completion of software
developed by outside vendors and the related implementation of the Company's
common systems project; 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.
20
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 December 30,
2000 and January 1, 2000, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended December 30,
2000, in conformity with accounting principles generally accepted in the United
States of America. 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 of America, 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 our opinion.
As discussed in Note A to the financial statements, the Company changed
its accounting policy for recognizing revenue in 2000.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 1, 2001
21
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
- -----------------------------------------------------------------------------------------------------------------------------------
2000 (restated**)
First quarter $1,355,184 $ 457,603 $ 71,069* $ .61* $ .60* $ .22
Second quarter 1,330,325 462,859 75,745 .65 .64 .22
Third quarter 1,599,864 543,602 103,361 .90 .88 .22
Fourth quarter 1,462,506 441,364 10,159* .08* .08* .23
- -----------------------------------------------------------------------------------------------------------------------------------
$5,747,879 $1,905,428 $ 260,334 $ 2.25 $ 2.21 $ .89
===================================================================================================================================
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
===================================================================================================================================
* The first quarter includes an aftertax charge of $6.8 million ($.06 per
share) for the cumulative effect of a change in accounting policy for
revenue recognition. In addition, in the fourth quarter, restructuring
charges of $119.9 million reduced net income by $76.7 million ($.67 per
share). See Notes A and M, respectively, to the consolidated financial
statements.
** Amounts presented for the first three quarters of 2000 have been restated
for a change in accounting policy for revenue recognition, as discussed in
Note A. The change has an insignificant impact on annual sales and net
income but does result in a shift in sales and earnings among the quarterly
periods. The effect of this change for each quarter of 2000, excluding the
cumulative effect of the change in accounting policy in the first quarter,
follows:
In thousands, Earnings Per Common Share
except per share amounts Net Sales Net Income Basic and Diluted
First quarter $(11,564) $ (2,726) $ (.02)
Second quarter (20,728) (5,059) (.05)
Third quarter 11,258 2,999 .03
Fourth quarter 17,436 4,862 .04
- --------------------------------------------------------------------------------------------------
$ (3,598) $ 76 $ -0-
==================================================================================================
[vf logo] 22
Consolidated Statements of Income
In thousands, except per share amounts Fiscal year ended December 30, 2000 January 1, 2000 January 2, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales $ 5,747,879 $ 5,551,616 $ 5,478,807
Costs and Operating Expenses
Cost of products sold 3,842,451 3,657,120 3,586,686
Marketing, administrative and general expenses 1,352,024 1,230,009 1,198,854
Other operating expense, net 43,411 11,855 9,098
- ---------------------------------------------------------------------------------------------------------------------------
5,237,886 4,898,984 4,794,638
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income 509,993 652,632 684,169
Other Income (Expense)
Interest income 7,684 8,936 6,411
Interest expense (88,716) (71,426) (62,282)
Miscellaneous, net 2,572 5,434 3,300
- ---------------------------------------------------------------------------------------------------------------------------
(78,460) (57,056) (52,571)
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Policy 431,533 595,576 631,598
Income Taxes 164,417 229,334 243,292
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Policy 267,116 366,242 388,306
Cumulative Effect on Prior Years of Change in Accounting Policy
for Revenue Recognition, Net of Income Taxes (6,782) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 260,334 $ 366,242 $ 388,306
===========================================================================================================================
Earnings Per Common Share - Basic
Income before cumulative effect of change in accounting policy $ 2.31 $ 3.04 $ 3.17
Net income 2.25 3.04 3.17
Earnings Per Common Share - Diluted
Income before cumulative effect of change in accounting policy $ 2.27 $ 2.99 $ 3.10
Net income 2.21 2.99 3.10
Cash Dividends Per Common Share $ .89 $ .85 $ .81
===========================================================================================================================
Consolidated Statements of Comprehensive Income
In thousands Fiscal year ended December 30, 2000 January 1, 2000 January 2, 1999
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 260,334 $ 366,242 $ 388,306
Other Comprehensive Income (Loss)
Foreign currency translation:
Amount arising during year (36,758) (60,180) 16,109
Less income tax effect 12,049 21,063 (5,638)
Reclassification to net income from disposal of subsidiaries 2,030 -- --
Less income tax effect (711) -- --
Unrealized gains (losses) on marketable securities:
Amount arising during year (1,176) -- --
Less income tax effect 431 -- --
Reclassification to net income for losses realized 1,613 -- --
Less income tax effect (597) -- --
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 237,215 $ 327,125 $ 398,777
=======================================================================================================================
See notes to consolidated financial statements
23
Consolidated Balance Sheets
In thousands December 30, 2000 January 1, 2000
- --------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and equivalents $ 118,891 $ 79,861
Accounts receivable, less allowances of $54,918 in 2000
and $54,477 in 1999 716,299 732,502
Inventories 1,124,438 964,040
Deferred income taxes 118,314 74,067
Other current assets 32,154 26,946
- --------------------------------------------------------------------------------------------------
Total current assets 2,110,096 1,877,416
Property, Plant and Equipment 776,015 804,422
Intangible Assets 1,101,876 992,463
Other Assets 370,169 352,213
- --------------------------------------------------------------------------------------------------
$ 4,358,156 $ 4,026,514
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 147,005 $ 408,932
Current portion of long-term debt 113,999 4,751
Accounts payable 340,127 332,666
Accrued liabilities 405,069 367,124
- --------------------------------------------------------------------------------------------------
Total current liabilities 1,006,200 1,113,473
Long-term Debt 905,036 517,834
Other Liabilities 214,590 194,113
Redeemable Preferred Stock 48,483 51,544
Deferred Contributions to Employee Stock Ownership Plan (7,966)
(14,268)
- --------------------------------------------------------------------------------------------------
40,517 37,276
Common Shareholders' Equity
Common Stock, stated value $1; shares
authorized, 300,000,000; shares outstanding,
112,258,556 in 2000 and 116,204,655 in 1999 112,259 116,205
Additional paid-in capital 833,441 831,054
Accumulated other comprehensive income (loss) (87,875) (64,756)
Retained earnings 1,333,988 1,281,315
- --------------------------------------------------------------------------------------------------
Total common shareholders' equity 2,191,813 2,163,818
- --------------------------------------------------------------------------------------------------
$ 4,358,156 $ 4,026,514
==================================================================================================
See notes to consolidated financial statements
24
Consolidated Statements of Cash Flows
In thousands Fiscal year ended December 30, 2000 January 1, 2000 January 2, 1999
- -----------------------------------------------------------------------------------------------------------
Operations
Net income $ 260,334 $ 366,242 $ 388,306
Adjustments to reconcile net income
to cash provided by operations:
Cumulative effect of change in accounting policy 6,782 -- --
Restructuring costs 117,770 -- --
Depreciation 137,022 134,335 128,495
Amortization of intangible assets 36,400 33,097 32,890
Other, net 5,358 5,341 27,764
Changes in current assets and liabilities:
Accounts receivable 329 (12,379) (48,771)
Inventories (73,871) 43,655 (52,406)
Accounts payable (20,554) (21,414) (17,013)
Other, net (26,256) (125,516) (29,983)
- -----------------------------------------------------------------------------------------------------------
Cash provided by operations 443,314 423,361 429,282
Investments
Capital expenditures (125,224) (150,076) (189,059)
Business acquisitions (308,062) (156,587) (299,900)
Other, net (9,953) (13,114) (16,943)
- -----------------------------------------------------------------------------------------------------------
Cash invested (443,239) (319,777) (505,902)
Financing
Increase (decrease) in short-term borrowings (244,041) 145,768 212,457
Proceeds from long-term debt 495,185 1,032 4,132
Payment of long-term debt (5,058) (3,269) (2,998)
Purchase of Common Stock (105,723) (149,075) (147,398)
Cash dividends paid (104,920) (104,302) (101,660)
Proceeds from issuance of Common Stock 1,317 25,323 45,689
Other, net 4,493 1,269 2,115
- -----------------------------------------------------------------------------------------------------------
Cash provided (used) by financing 41,253 (83,254) 12,337
Effect of Foreign Currency Rate Changes on Cash (2,298) (3,677) 3,397
- -----------------------------------------------------------------------------------------------------------
Net Change in Cash and Equivalents 39,030 16,653 (60,886)
Cash and Equivalents - Beginning of Year 79,861 63,208 124,094
- -----------------------------------------------------------------------------------------------------------
Cash and Equivalents - End of Year $ 118,891 $ 79,861 $ 63,208
===========================================================================================================
See notes to consolidated financial statements.
25
Consolidated Statements of Common Shareholders' Equity
Common Additional Accumulated Other Retained
In thousands Stock Paid-in Capital Comprehensive Income (Loss) Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
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)
Stock compensation plans, net 1,697 57,403 -- (124)
Common Stock held in trust for
deferred compensation plans (233) -- -- (6,728)
Foreign currency translation -- -- 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)
Stock compensation plans, net 813 29,543 -- (187)
Common Stock held in trust for
deferred compensation plans (74) -- -- (3,486)
Foreign currency translation -- -- (39,117) --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2000 116,205 831,054 (64,756) 1,281,315
Net income -- -- -- 260,334
Cash dividends:
Common Stock -- -- -- (101,584)
Series B Preferred Stock -- -- -- (3,336)
Tax benefit from Preferred Stock dividends -- -- -- 280
Redemption of Preferred Stock -- -- -- (1,102)
Purchase of treasury shares (4,000) -- -- (101,723)
Stock compensation plans, net 59 2,387 -- (163)
Common Stock held in trust for
deferred compensation plans (5) -- -- (33)
Foreign currency translation -- -- (23,390) --
Unrealized gains on marketable securities -- -- 271 --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 30, 2000 $ 112,259 $ 833,441 $ (87,875) $ 1,333,988
=================================================================================================================================
See notes to consolidated financial statements.
26
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 47% of total 2000 inventories and 42% in
1999. 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 $306.7
million and $270.5 million in 2000 and 1999. 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: During the fourth quarter of 2000, the Company changed its
accounting policy for recognizing sales in accordance with the SEC's Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
Previously, sales were recorded upon shipment of goods to the customer. The new
policy recognizes that the risks of ownership in some transactions do not
substantively transfer to customers until the product has been received by them,
without regard to when legal title has transferred. The cumulative effect of
this change in policy for periods prior to January 2000 of $6.8 million (net of
income taxes of $4.1 million), or $.06 per share, is shown in the Consolidated
Statements of Income. The accounting change has an insignificant impact on
annual sales and income (before cumulative effect). However, due to seasonal
shipping patterns, the change in accounting policy results in a shift of sales
and earnings among the Company's quarterly periods. As a result, the Company has
restated its operating results for the first three quarters of 2000. (See
Quarterly Results of Operations on page 22 for more information.) Pro forma
results for prior fiscal years are not presented due to immateriality.
Advertising Costs are expensed as incurred and were $251.7 million in 2000,
$257.6 million in 1999 and $287.5 million in 1998.
Shipping Costs to customers are included in Marketing, Administrative and
General Expenses and were $54.1 million in 2000, $51.0 million in 1999 and $44.4
million in 1998.
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. The components of Accumulated Other Comprehensive Income
(Loss) include the effects of foreign currency translation and unrealized gains
and losses on marketable securities.
New Accounting Pronouncement: The Company will adopt FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, and related
amendments at the beginning of its 2001 fiscal year. This statement requires
all derivatives to be recognized as assets or liabilities on the balance sheet
and measured at fair value. Changes in the fair value of derivatives will be
recognized in either net income or other comprehensive income, depending on the
designated purpose of the derivative. The cumulative effect of adopting this new
statement will be an increase in reported net income of $.4 million at the
beginning of fiscal year 2001.
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
The Company acquired the common stock of The North Face, Inc. and acquired the
Eastpak backpack and daypack business in May 2000. The Company also acquired the
trademark rights to the Chic and Gitano brands and, in October 2000, acquired
85% of the common stock of H.I.S. Sportswear AG. The aggregate cost for these
businesses was $206.5 million, plus repayment of $107.7 million of indebtedness.
Intangible assets related to these acquisitions totaled $171.2 million.
In 1999, the Company acquired three workwear and four
jeanswear businesses for an aggregate cost of $136.1 million, plus repayment of
$23.3 million in debt. Intangible assets related to these acquisitions totaled
$87.4 million. During 1998, the Company acquired Bestform Group, Inc. for $184.3
million in cash, plus repayment of $44.4 million in debt, and acquired three
other businesses for an aggregate cost of $76.1 million. Intangible assets
related to these acquisitions totaled $168.5 million.
The Company accrued various restructuring charges in connection with the 1999
and 2000 acquisitions. The charges relate to severance, closure of manufacturing
and distribution facilities, and
27
lease and contract termination costs. Cash payments related to these actions
will be substantially completed during 2001. Charges are summarized as follows:
Facilities Lease and
Exit Contract
In thousands Severance Costs Termination Total
- -----------------------------------------------------------------------------------------------------
1999 Activity:
Accrual for 1999 acquisitions $ 5,061 $ 1,622 $ 17,948 $ 24,631
Cash payments (1,362) (208) (2,218) (3,788)
- -----------------------------------------------------------------------------------------------------
Estimated remaining costs,
January 1, 2000 3,699 1,414 15,730 20,843
2000 Activity:
Accrual for 2000 acquisitions 7,971 967 3,558 12,496
Cash payments (6,411) (831) (6,588) (13,830)
Adjustments to acquisition costs (2,037) (711) (723) (3,471)
- -----------------------------------------------------------------------------------------------------
Estimated remaining costs,
December 30, 2000 $ 3,222 $ 839 $ 11,977 $ 16,038
=====================================================================================================
The following unaudited pro forma results of operations assume that
acquisitions during the last two years had occurred at the beginning of 1999:
In thousands, except per share amounts 2000 1999
- --------------------------------------------------------------------
Net sales $5,927,634 $6,043,873
Net income 229,556 316,644
Earnings per common share:
Basic $ 1.98 $ 2.62
Diluted 1.95 2.58
====================================================================
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 2000 1999
- -----------------------------------------------------------------
Finished products $ 710,158 $575,617
Work in process 194,194 171,275
Materials and supplies 220,086 217,148
- -----------------------------------------------------------------
$1,124,438 $964,040
=================================================================
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.
NOTE D Property, Plant and Equipment
In thousands 2000 1999
- -----------------------------------------------------------------
Land $ 57,961 $ 46,626
Buildings 504,816 478,372
Machinery and equipment 1,302,549 1,289,064
- -----------------------------------------------------------------
1,865,326 1,814,062
Less accumulated depreciation 1,089,311 1,009,640
- -----------------------------------------------------------------
$ 776,015 $ 804,422
=================================================================
NOTE E Short-term Borrowings
In thousands 2000 1999
- -----------------------------------------------------------------
Commercial paper $ 56,855 $319,033
Banks 90,150 89,899
- -----------------------------------------------------------------
$147,005 $408,932
=================================================================
The weighted average interest rate for short-term borrowings was 9.0% at the end
of 2000 and 6.5% at the end of 1999. 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 December 30, 2000, there were no borrowings
under the agreement.
NOTE F Accrued Liabilities
In thousands 2000 1999
- -----------------------------------------------------------------
Income taxes $ 45,548 $ 59,242
Compensation 86,521 71,798
Restructuring costs (Note M) 37,393 -
Other 235,607 236,084
- -----------------------------------------------------------------
$405,069 $367,124
=================================================================
NOTE G Long-term Debt
In thousands 2000 1999
- -----------------------------------------------------------------
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
8.10% notes, due 2005 300,000 -
8.50% notes, due 2010 200,000 -
9.25% debentures, due 2022 100,000 100,000
Other 19,035 22,585
- -----------------------------------------------------------------
1,019,035 522,585
Less current portion 113,999 4,751
- -----------------------------------------------------------------
$ 905,036 $517,834
=================================================================
The scheduled payments of long-term debt are $1.8 million in 2002, $100.8
million in 2003, $100.3 million in 2004 and $400.3 million in 2005. The Company
paid interest of $77.1 million in 2000, $73.4 million in 1999 and $59.5 million
in 1998.
28
NOTE H Other Liabilities
In thousands 2000 1999
- -----------------------------------------------------------------
Deferred compensation $192,768 $179,321
Other 21,822 14,792
- -----------------------------------------------------------------
$214,590 $194,113
=================================================================
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 pension plans on income is as follows:
In thousands 2000 1999 1998
- -------------------------------------------------------------------
Service cost - benefits earned
during the year $ 20,863 $ 22,174 $ 20,391
Interest cost on projected
benefit obligation 47,630 41,166 38,584
Expected return on plan assets (57,945) (50,692) (45,270)
Amortization of:
Transition asset - - (3,068)
Prior service cost 6,352 5,359 5,667
Actuarial (gain) loss (2,156) (831) 610
- -------------------------------------------------------------------
Pension expense $ 14,744 $ 17,176 $ 16,914
===================================================================
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 2000 1999
- -----------------------------------------------------------------------------
Fair value of plan assets, beginning of year $ 667,295 $ 553,591
Actual return on plan assets 80,443 112,848
Company contributions 1,445 24,000
Acquired company plan 5,647 --
Benefits paid (26,441) (23,144)
- -----------------------------------------------------------------------------
Fair value of plan assets, end of year 728,389 667,295
- -----------------------------------------------------------------------------
Benefit obligations, beginning of year 585,850 591,726
Service cost 20,863 22,174
Interest cost 47,630 41,166
Plan amendments 19,277 --
Acquired company plan 4,917 --
Actuarial (gain) loss (28,274) (44,831)
Benefits paid (26,441) (24,385)
- -----------------------------------------------------------------------------
Benefit obligations, end of year 623,822 585,850
- -----------------------------------------------------------------------------
Funded status, end of year 104,567 81,445
Unrecognized net actuarial (gain) loss (137,164) (88,095)
Unrecognized prior service cost 43,729 29,911
- -----------------------------------------------------------------------------
Pension asset, net $ 11,132 $ 23,261
=============================================================================
Amount included in:
Other Assets $ 42,516 $ 47,633
Other Liabilities (31,384) (24,372)
- -----------------------------------------------------------------------------
$ 11,132 $ 23,261
=============================================================================
For the unfunded supplemental defined benefit pension plan, the
projected benefit obligation and the accumulated benefit obligation were
$50.5 million and $39.3 million, respectively, at the end of 2000 and $50.2
million and $37.6 million, respectively, at the end of 1999. To support these
benefit liabilities, the Company has purchased life insurance contracts and
marketable securities. These investments are held in irrevocable trusts and are
included in Other Assets. The cash value of life insurance and the market value
of other investments was $25.3 million in 2000 and $27.9 million in 1999.
The projected benefit obligation was determined using an assumed discount
rate of 8.0% in 2000, 7.8% in 1999 and 6.8% in 1998. The assumption for
compensation increases was 4.0% in each year, 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 $7.2 million in
2000, $6.9 million in 1999 and $6.5 million in 1998. Plan expense was $4.7
million in 2000, $5.2 million in 1999 and $5.5 million in 1998, after giving
effect to dividends on the Series B Preferred Stock of $3.3 million in 2000,
$3.5 million in 1999 and $3.7 million in 1998.
The Company also sponsors other savings and retirement plans for certain
domestic and foreign employees. Expense for these plans totaled $5.2 million in
2000, $6.2 million in 1999 and $6.5 million in 1998.
NOTE J Capital
Common shares outstanding are net of shares held in treasury, and
in substance retired, of 25,139,897 in 2000, 21,136,952 in 1999 and 17,134,370
in 1998. In addition, 311,608 shares of VF Common Stock at the end of 2000,
306,698 shares 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 $10.6 million,
$10.5 million and $7.0 million, respectively at the end of the last three years.
There are 25,000,000 authorized shares of Preferred Stock,
$1 par value. As of December 30, 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 1,570,301 shares of Series B Preferred Stock outstanding at
December 30, 2000, 1,669,444 outstanding at January 1, 2000, and 1,760,119
outstanding at January 2, 1999, after share redemptions.
29
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 income on this loan was $1.7
million in 2000, $2.6 million in 1999 and $3.3 million in 1998. 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
2000, 1,312,345 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 generally 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 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
Options granted 2,213,025 26.20
Options exercised (51,130) 21.60
Options canceled (294,500) 34.46
- ----------------------------------------------------------------------
Balance December 30, 2000 8,498,891 $34.17
====================================================================
Stock options outstanding at December 30, 2000 are summarized as follows:
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- -----------------------------------------------------------------------
$16 - 20 41,220 .9 years $17.95
21 - 25 599,586 3.7 years 23.48
26 - 30 3,264,335 7.0 years 26.46
31 - 35 1,081,100 5.9 years 34.49
40 - 45 3,512,650 7.7 years 43.25
- -----------------------------------------------------------------------
$16 - 45 8,498,891 6.9 years $34.17
======================================================================
All above options are exercisable, except for those granted in 2000. There
are 2,665,734 shares available for future grants of stock options and stock
awards, of which no more than 968,356 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 $10.5 million ($.09 per share) in 2000, $11.9 million ($.10
per share) in 1999 and $9.7 million ($.08 per share) in 1998.
The fair value of options granted during 2000 was $7.66 per share, during
1999 was $9.97 per share and during 1998 was $8.78 per share. Fair value is
estimated based on the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 2.0%; expected volatility of 36% in 2000, 26% in
1999 and 20% in 1998; risk-free interest rates of 6.8% in 2000, 4.8% in 1999 and
5.4% in 1998; and expected lives of 4 years.
The Company has granted to key employees 69,706 shares of restricted stock
that vest in periods through 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 $.6 million in 2000, $.3 million in 1999 and $.2
million in 1998.
In 2000 and 1999, the Company granted stock awards to certain key employees
under a stock award plan that replaced a portion of the cash incentive
compensation for those employees. The stock
30
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 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 39,923 shares and 44,962 shares of VF Common Stock were
earned for the three year performance periods ended in 2000 and 1999,
respectively. At the end of 2000, there are 33,875 stock awards outstanding for
the performance period ending in 2001 and 54,711 for the performance period
ending in 2002. Compensation expense equal to the market value of the shares to
be issued is recognized over each three year performance period. Expense of $1.8
million and $2.0 million was recognized for this plan in 2000 and 1999,
respectively. A total of 37,911 shares of Common Stock are issuable in future
years to participants who have elected to defer receipt of their shares earned.
NOTE M Restructuring Costs
During the fourth quarter of 2000, the Company recorded pretax charges totaling
$119.9 million ($.67 per share) aimed at eliminating certain underperforming
businesses and reducing the Company's overall cost structure. These charges
related to exiting certain businesses and product lines, closing higher cost
manufacturing facilities, consolidating distribution and administrative
operations and writing down assets.
As part of the above charge, the Company recorded costs totaling $69.7
million to exit several underperforming businesses. Effective December 27, 2000,
the Company transferred its Wrangler business in Japan to a licensee and
recorded a pretax loss on disposition of $26.8 million, of which $23.8 million
related to the write-off of intangible assets. In the occupational apparel
business units, the Company discontinued its regional catalog and linens
businesses and exited other unprofitable product lines arising from certain of
the companies acquired in late 1998 and early 1999. Finally, the Company decided
to exit certain intimate apparel product lines having limited profit and growth
potential. Sales of these businesses included in the consolidated operating
results were $101 million in 2000, $138 million in 1999 and $92 million in 1998.
Also included are charges of $18.5 million to close certain higher cost North
American manufacturing facilities as part of the ongoing strategy of moving
toward lower cost, more flexible global sourcing. In other actions, the
Company recorded $31.7 million of other restructuring costs relating to closing
and consolidating distribution centers and administrative offices and
functions in the U.S., Europe and Latin America.
The restructuring costs were recorded in the Consolidated Statement of Income
in Cost of Products Sold - $55.9 million; Marketing, Administrative and General
- - $37.2 million; and Other Operating Expense - $26.8 million. A total of $22.4
million of the costs relate to personnel reductions, including severance and
related benefits. These actions affect approximately 2,700 of the Company's
employees. As of December 30, 2000, 400 employees have been terminated. The
remainder of the employees, all of whom have been notified, are generally
located at manufacturing facilities and will work through the plant closing
transition periods that end in 2001.
Activity in the restructuring accrual is summarized as follows:
Facilities Other Lease and
Exit Asset Contract
In thousands Severance Costs Write-downs Termination Total
- -------------------------------------------------------------------------------------------------------------
Total restructuring costs $ 22,367 $ 21,850 $ 59,996 $ 15,695 $ 119,908
Noncash charges:
Intangible assets -- -- (23,819) -- (23,819)
Inventories -- -- (22,392) -- (22,392)
Other -- (20,381) (13,785) -- (34,166)
Cash payments (1,976) (8) -- (154) (2,138)
- -------------------------------------------------------------------------------------------------------------
Balance
December 30, 2000 $ 20,391 $ 1,461 $ 0 $ 15,541 $ 37,393
=============================================================================================================
Remaining severance and other cash payments will be made into 2002.
NOTE N Income Taxes
The provision for income taxes is computed based on the following amounts of
income before income taxes and cumulative effect of change in accounting policy:
In thousands 2000 1999 1998
- -----------------------------------------------------------------
Domestic $429,453 $567,545 $582,128
Foreign 2,080 28,031 49,470
- -----------------------------------------------------------------
$431,533 $595,576 $631,598
=================================================================
The provision for income taxes consists of:
In thousands 2000 1999 1998
- -----------------------------------------------------------------
Current:
Federal $130,740 $175,052 $174,346
Foreign 23,957 14,113 35,082
State 17,753 19,607 14,757
- -----------------------------------------------------------------
172,450 208,772 224,185
Deferred, primarily federal (8,033) 20,562 19,107
- -----------------------------------------------------------------
$164,417 $229,334 $243,292
=================================================================
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 2000 1999 1998
- -----------------------------------------------------------------------------------------
Tax at federal statutory rate $ 151,037 $ 208,452 $ 221,059
State income taxes,
net of federal tax benefit 6,169 12,744 9,592
Amortization of intangible assets 8,812 8,241 7,916
Foreign operating losses
with no current benefit 20,613 13,871 8,988
Change in valuation allowance (4,951) (2,263) (4,273)
Other, net (17,263) (11,711) 10
- -----------------------------------------------------------------------------------------
$ 164,417 $ 229,334 $ 243,292
=========================================================================================
31
Deferred income tax assets and liabilities consist of the following:
In thousands 2000 1999
- ------------------------------------------------------------------------------
Deferred income tax assets:
Employee benefits $ 53,064 $ 51,582
Inventories 23,463 19,990
Other accrued expenses 117,511 79,767
Operating loss carryforwards 104,143 71,911
Foreign currency translation 46,372 34,869
- ------------------------------------------------------------------------------
344,553 258,119
Valuation allowance (57,033) (46,526)
- ------------------------------------------------------------------------------
Deferred income tax assets 287,520 211,593
- ------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation 45,985 56,103
Other 32,124 25,244
- ------------------------------------------------------------------------------
Deferred income tax liabilities 78,109 81,347
- ------------------------------------------------------------------------------
Net deferred income tax assets $ 209,411 $ 130,246
==============================================================================
Amount included in:
Current Assets $ 118,314 $ 74,067
Other Assets 91,097 56,179
- ------------------------------------------------------------------------------
$ 209,411 $ 130,246
==============================================================================
As of the end of 2000, the Company has not provided deferred U.S. income
taxes on $18.7 million of undistributed earnings of international subsidiaries
where such earnings are considered to be permanently invested. The Company has
$185.1 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 $183.4 million in 2000, $228.0
million in 1999 and $215.2 million in 1998.
NOTE O 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, outdoor
apparel and equipment, and daypack operations, which have different product or
economic characteristics than those in the other segments.
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 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Net sales:
Consumer Apparel $ 4,227,997 $ 4,276,809 $ 4,313,082
Occupational Apparel 661,635 640,227 482,931
All Other 858,247 634,580 682,794
- -------------------------------------------------------------------------------------------------
Consolidated net sales $ 5,747,879 $ 5,551,616 $ 5,478,807
=================================================================================================
Segment profit:
Consumer Apparel $ 605,197 $ 629,127 $ 693,638
Occupational Apparel 3,050 79,164 80,988
All Other 54,897 57,715 38,686
- -------------------------------------------------------------------------------------------------
Total segment profit 663,144 766,006 813,312
Interest, net (81,032) (62,490) (55,871)
Amortization of intangible assets (36,400) (33,097) (32,890)
Corporate and other expenses (114,179) (74,843) (92,953)
- -------------------------------------------------------------------------------------------------
Consolidated income before
income taxes $ 431,533 $ 595,576 $ 631,598
=================================================================================================
Segment assets:
Consumer Apparel $ 1,780,493 $ 1,783,225 $ 1,858,873
Occupational Apparel 348,134 379,004 247,734
All Other 457,195 332,850 377,155
- -------------------------------------------------------------------------------------------------
Total segment assets 2,585,822 2,495,079 2,483,762
Cash and equivalents 118,891 79,861 63,208
Intangible assets 1,101,876 992,463 951,562
Corporate assets 551,567 459,111 338,134
- -------------------------------------------------------------------------------------------------
Consolidated assets $ 4,358,156 $ 4,026,514 $ 3,836,666
=================================================================================================
Capital expenditures:
Consumer Apparel $ 68,115 $ 97,196 $ 129,532
Occupational Apparel 11,072 20,845 19,362
All Other 14,920 8,358 11,480
Corporate 31,117 23,677 28,685
- -------------------------------------------------------------------------------------------------
Consolidated capital expenditures $ 125,224 $ 150,076 $ 189,059
=================================================================================================
Depreciation expense:
Consumer Apparel $ 83,260 $ 89,313 $ 83,382
Occupational Apparel 15,515 14,958 11,769
All Other 24,295 23,555 26,165
Corporate 13,952 6,509 7,179
- -------------------------------------------------------------------------------------------------
Consolidated depreciation expense $ 137,022 $ 134,335 $ 128,495
=================================================================================================
32
The 2000 restructuring costs (Note M) were incurred as follows: Consumer Apparel
- - $71.0 million; Occupational Apparel - $34.6 million; All Other - $6.0 million;
and Corporate - $8.3 million.
Information by geographic area is presented below, with sales based on the
location of the customer:
In thousands 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net sales:
United States $4,803,872 $4,605,624 $4,552,785
Foreign, primarily Europe 944,007 945,992 926,022
- --------------------------------------------------------------------------------------------------------------
Consolidated net sales $5,747,879 $5,551,616 $5,478,807
==============================================================================================================
Long-lived assets, primarily property, plant and equipment:
U.S $ 610,287 $ 650,577 $ 634,231
Mexico 85,762 71,627 60,400
Other foreign, primarily Europe 80,777 83,029 83,842
- --------------------------------------------------------------------------------------------------------------
Total long-lived assets $ 776,826 $ 805,233 $ 778,473
==============================================================================================================
Worldwide sales by product category are as follows:
In thousands 2000 1999 1998
- ---------------------------------------------------------------------------------
Jeanswear and related products $2,985,975 $2,936,196 $2,962,790
Intimate apparel 894,580 981,798 965,782
Occupational apparel 661,635 640,227 482,931
Knitwear 472,298 453,103 506,365
Other 733,391 540,292 560,939
- ---------------------------------------------------------------------------------
Total $5,747,879 $5,551,616 $5,478,807
=================================================================================
Sales to one domestic discount store group comprise 13.9% of consolidated
sales in 2000, 13.0% in 1999 and 12.3% in 1998.
NOTE P Leases
The Company leases certain facilities and equipment under noncancelable
operating leases. Rental expense was $67.1 million in 2000, $59.3 million in
1999 and $64.3 million in 1998. Future minimum lease payments are $55.8 million,
$45.4 million, $36.2 million, $27.8 million and $22.1 million for the years 2001
through 2005 and $62.4 million thereafter.
NOTE Q Earnings Per Share
In thousands, except per share amounts 2000 1999 1998
- -----------------------------------------------------------------------------------
Basic earnings per share:
Net income $260,334 $366,242 $388,306
Less Preferred Stock dividends
and redemption premium 4,158 6,394 5,912
- -----------------------------------------------------------------------------------
Net income available for
Common Stock $256,176 $359,848 $382,394
===================================================================================
Weighted average Common
Stock outstanding 114,075 118,538 120,744
===================================================================================
Basic earnings per share $ 2.25 $ 3.04 $ 3.17
===================================================================================
Diluted earnings per share:
Net income $260,334 $366,242 $388,306
Increased ESOP expense if
Preferred Stock were converted
to Common Stock 925 1,036 1,136
- -----------------------------------------------------------------------------------
Net income available for
Common Stock and dilutive
securities $259,409 $365,206 $387,170
===================================================================================
Weighted average Common
Stock outstanding 114,075 118,538 120,744
Additional Common Stock
resulting from dilutive securities:
Preferred Stock 2,561 2,724 2,854
Stock options and other 582 996 1,397
- -----------------------------------------------------------------------------------
Weighted average Common
Stock and dilutive securities
outstanding 117,218 122,258 124,995
===================================================================================
Diluted earnings per share $ 2.21 $ 2.99 $ 3.10
===================================================================================
Outstanding options to purchase 6.5 million shares of Common Stock have been
excluded from the computation of diluted earnings per share in 2000 and 2.1
million shares in 1999 because the option exercise prices were greater than the
average market price of the Common Stock.
NOTE R Financial Instruments
The carrying amount and fair value of financial instruments included in the
balance sheets are as follows:
In thousands 2000 1999
- ----------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------
Financial liabilities:
Short-term borrowings $ 147,005 $ 147,005 $ 408,932 $ 408,932
Long-term debt 1,019,035 1,028,460 522,585 507,297
Series B Preferred Stock 48,483 91,052 51,544 80,133
==============================================================================================
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. The amounts of the contracts, and
related gains and losses, are not material. The fair value of foreign currency
financial instruments is not significant.
33
VF Corporation Financial Summary
In thousands, except per share amounts 2000(4) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales $ 5,747,879 $ 5,551,616 $ 5,478,807 $ 5,222,246
Cost of products sold 3,842,451 3,657,120 3,586,686 3,440,611
- ------------------------------------------------------------------------------------------------------------------------------------
Gross margin 1,905,428 1,894,496 1,892,121 1,781,635
Marketing, administrative and other 1,395,435 1,241,864 1,207,952 1,176,562
Operating income 509,993 652,632 684,169 605,073
Interest, net (81,032) (62,490) (55,871) (25,877)
Miscellaneous, net (8,279) 5,434 3,300 6,684
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 420,682 595,576 631,598 585,880
Income taxes 160,348 229,334 243,292 234,938
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 260,334 $ 366,242 $ 388,306 $ 350,942
- ------------------------------------------------------------------------------------------------------------------------------------
Per share of Common Stock(1)
Earnings - basic $ 2.25 $ 3.04 $ 3.17 $ 2.76
Earnings - diluted 2.21 2.99 3.10 2.70
Dividends .89 .85 .81 .77
Average number of common shares outstanding 114,075 118,538 120,744 125,504
Net income as % of average common shareholders' equity 11.7% 17.3% 19.7% 18.2%
Net income as % of average total assets 6.0% 8.9% 10.2% 10.1%
====================================================================================================================================
Financial Position
Accounts receivable, net $ 716,299 $ 732,502 $ 705,734 $ 587,934
Inventories 1,124,438 964,040 954,007 774,755
Total current assets 2,110,096 1,877,416 1,848,152 1,601,466
Property, plant and equipment, net 776,015 804,422 776,091 705,990
Total assets 4,358,156 4,026,514 3,836,666 3,322,782
Total current liabilities 1,006,200 1,113,473 1,033,006 765,908
Long-term debt 905,036 517,834 521,657 516,226
Common shareholders' equity 2,191,813 2,163,818 2,066,308 1,866,769
====================================================================================================================================
Other Statistics
Working capital $ 1,103,896 $ 763,943 $ 815,146 $ 835,558
Current ratio 2.1 1.7 1.8 2.1
Debt to capital ratio(2) 34.7% 30.1% 27.1% 22.5%
Dividends $ 104,920 $ 104,302 $ 101,660 $ 100,141
Purchase of Common Stock 105,723 149,075 147,398 391,651
Cash provided by operations 443,314 423,361 429,282 460,652
Capital expenditures (excluding acquisitions) 125,224 150,076 189,059 154,262
Depreciation and amortization 173,422 167,432 161,385 156,252
====================================================================================================================================
Market Data
Market price range(1) $36.90-20.94 $55.00-27.44 $54.69-33.44 $48.25-32.25
Book value per common share(1) 19.52 18.62 17.30 15.40
Price earnings ratio - high-low 16.4-9.3 18.1-9.0 17.3-10.5 17.5-11.7
Rate of payout(3) 39.6% 28.0% 25.6% 27.9%
====================================================================================================================================
(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.
(4) 2000 includes a $76.7 million ($.67 per share) restructuring charge and a
$6.8 million ($.06 per share) charge for the cumulative effect of a change
in accounting policy for revenue recognition.
34
In thousands, except per share amounts 1996
- --------------------------------------------------------------------------
Summary of Operations
Net sales $ 5,137,178
Cost of products sold 3,458,166
- --------------------------------------------------------------------------
Gross margin 1,679,012
Marketing, administrative and other 1,121,729
Operating income 557,283
Interest, net (49,387)
Miscellaneous, net 512
- --------------------------------------------------------------------------
Income before income taxes 508,408
Income taxes 208,884
- --------------------------------------------------------------------------
Net income $ 299,524
- --------------------------------------------------------------------------
Per share of Common Stock(1)
Earnings - basic $ 2.32
Earnings - diluted 2.28
Dividends .73
Average number of common shares outstanding 127,292
Net income as % of average common shareholders' equity 16.2%
Net income as % of average total assets 8.6%
==========================================================================
Financial Position
Accounts receivable, net $ 592,942
Inventories 730,823
Total current assets 1,706,326
Property, plant and equipment, net 721,524
Total assets 3,449,535
Total current liabilities 766,267
Long-term debt 519,058
Common shareholders' equity 1,973,739
==========================================================================
Other Statistics
Working capital $ 940,059
Current ratio 2.2
Debt to capital ratio(2) 21.4%
Dividends $ 97,036
Purchase of Common Stock 61,483
Cash provided by operations 711,454
Capital expenditures (excluding acquisitions) 138,747
Depreciation and amortization 160,578
==========================================================================
Market Data
Market price range(1) $34.94-23.81
Book value per common share(1) 15.44
Price earnings ratio - high-low 15.1-10.3
Rate of payout(3) 31.5%
==========================================================================
35
Investor Information
Common Stock
Listed on the New York Stock Exchange and Pacific Exchange - trading symbol VFC.
Shareholders of Record
As of February 16, 2001, there were 6,667 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:
2000 1999 1998
- -----------------------------------------------------------------------------
High Low High Low High Low
- -----------------------------------------------------------------------------
First quarter $30.38 $20.94 $50.81 $40.88 $53.25 $40.75
Second quarter 31.25 22.88 55.00 37.50 54.69 49.69
Third quarter 27.81 21.81 43.38 30.00 52.25 36.63
Fourth quarter 36.90 22.50 32.63 27.44 50.69 33.44