EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
VF Corporation ("VF") is a leading marketer of apparel in the United States and
in many international markets. Management's vision is to grow VF by building
leading lifestyle brands that excite consumers around the world. VF owns a
diversified portfolio of brands with strong market positions in several consumer
product categories. And, we market occupational apparel to distributors and
major employers. We are organized around our principal product categories, and
major brands within those categories. These groupings of businesses, referred to
as "coalitions," are summarized as follows:
PRODUCT CATEGORY VF-OWNED BRANDS
Jeanswear Lee(R), Wrangler(R), Riders(R), Rustler(R), Timber Creek by Wrangler(R)
Outdoor products The North Face(R), Vans(R), JanSport(R), Eastpak(R), Kipling(R), Napapijri(R)
Intimate apparel Vanity Fair(R), Lily of France(R), Vassarette(R), Bestform(R)
Sportswear Nautica(R), John Varvatos(R), Earl Jean(R)
Imagewear Lee Sport(R), Red Kap(R), Bulwark(R)
VF has a broad customer base, with products distributed through leading
specialty, department, chain and discount stores around the world. Approximately
23% of our 2004 sales were in international markets, and our ten largest
customers represented 38% of total 2004 sales.
LONG-TERM FINANCIAL TARGETS
We have established several long-term financial targets that guide us in our
strategic decisions. Attainment of these targets would be expected to drive
increases in shareholder value. These targets are summarized below:
1
- - SALES GROWTH OF 8% PER YEAR - Despite the apparel industry having been
relatively flat in terms of unit volume with generally flat to slightly
declining prices in recent years, our 2004 sales increased 16%, driven by
growth in our core (i.e., ongoing) businesses, the full year effect of our
2003 acquisition of Nautica Enterprises, Inc. ("Nautica") and four
acquisitions completed in 2004. We currently expect sales growth of 6 - 8%
in 2005, excluding any additional acquisitions. On a longer-term basis,
achieving our growth target will require a combination of core growth and
acquisitions.
In our search for acquisitions, we focus on branded apparel businesses
that satisfy our strategic and financial goals. Refer to the section
titled "Strategic Objectives" for further details.
- - OPERATING INCOME OF 14% OF SALES - In recent years, we have made progress
toward this goal, as demonstrated by attaining an operating margin of
12.8% in 2004.
Many of our businesses currently exceed the 14% benchmark, and nearly all
of our businesses have double digit margins. We continually evaluate our
existing businesses, which in 2004 resulted in the decision to exit our
Healthtex(R) and licensed Nike(R) childrenswear business ("VF Playwear")
as it no longer met our strategic and financial objectives. We believe
that our recently acquired companies can achieve the 14% target.
The improvement in operating margins in recent years was related, in part,
to specific actions taken to reduce our cost structure. These actions have
focused on lowering our product cost by moving our production to lower
cost locations around the world. We will continue to pursue cost reduction
opportunities in product cost, distribution and administrative areas.
- - RETURN ON INVESTED CAPITAL OF 17% - We believe that a high return on
capital is closely correlated with enhancing shareholder value. We
calculate return on invested capital as follows:
Income before net interest expense, after income taxes
------------------------------------------------------------------
Average short and long-term debt, plus common stockholders' equity
VF earned a 15.8% return on capital in 2004. We expect acquisition targets
will achieve returns in line with our 17% return on capital goal.
2
- - DEBT TO CAPITAL OF LESS THAN 40% - To maintain a conservative financial
position, we have established a goal of keeping our total debt to less
than 40% of our total capitalization, with capitalization defined as our
combined short and long-term debt plus common stockholders' equity. We
would, however, be willing to exceed this target ratio, on a short-term
basis, to support an appropriate investment opportunity. Despite
significant acquisition spending in the last two years, this ratio was
reduced to 28.5% at the end of 2004. And at year-end, we reported $485.5
million in cash and equivalents, demonstrating VF's ability to generate
strong cash flow from operations.
- - DIVIDEND PAYOUT RATIO OF 30% - Our target is to return 30% of our earnings
to our stockholders through a consistent dividend policy. We have
maintained this payout ratio on a long-term basis. VF has increased
dividends paid per share each year for the past 32 years. Our payout rate
was 24.9% for 2004. In the fourth quarter of 2004, we increased the
quarterly dividend to an indicated annual payout of $1.08 per share for
2005.
STRATEGIC OBJECTIVES
In early 2004, we developed a growth plan that we believe will enable VF to
achieve its long-term sales and earnings targets. Our growth strategy consists
of five drivers:
1. BUILD NEW GROWING LIFESTYLE BRANDS. Focus on building more growing, global
lifestyle brands with an emphasis on younger consumers and on female
consumers.
2. EXPAND OUR SHARE WITH WINNING CUSTOMERS. Adapt our organizational
structure to a more customer-specific focus to more successfully expand
market share and leverage new business opportunities with these successful
retailers.
3. STRETCH OUR BRANDS AND CUSTOMERS TO NEW GEOGRAPHIES. Grow our
international presence, particularly in rapidly expanding economies such
as those in the Far East.
4. FUEL THE GROWTH. Leverage our supply chain and information technology
capabilities across VF to drive costs and inventory levels lower, increase
productivity and integrate acquisitions efficiently.
5. BUILD NEW GROWTH ENABLERS. Support our growth plans by identifying and
developing high potential employees and by recruiting qualified leaders
with new skill sets.
HIGHLIGHTS OF 2004
There were several notable actions and results in 2004:
3
- - Sales, net income, earnings per share and cash flow were each at record
levels.
- - VF completed four acquisitions -- Vans(R) brand performance and casual
footwear and apparel for skateboarders and other action sports
participants and enthusiasts ("Vans"); Kipling(R) brand backpacks, bags
and accessories ("Kipling"); Napapijri(R) brand premium outdoor-based
sportswear ("Napapijri"); and a 51% interest in an intimate apparel
marketing company in Mexico. These are collectively referred to as the
"2004 Acquisitions."
- - Net sales increased 16% to $6,054.5 million. In addition to sales of the
2004 Acquisitions, contributing to this increase were a full year of sales
of Nautica (compared with four months in the prior year following its
acquisition) and organic sales growth in core businesses.
- - Net income increased 19% to $474.7 million, and earnings per share
increased 17% to $4.21. (All per share amounts are presented on a diluted
basis.) These increases resulted from improved operating performance in
most core businesses, plus profit contributions from our 2004 and 2003
acquisitions mentioned above.
- - We invested $40 million in specific growth and cost reduction initiatives
that will assist VF in meeting its long-term sales and earnings targets.
This spending was not originally planned for 2004.
- - We sold our VF Playwear business, which had been underperforming in recent
years.
- - Integration of our recent acquisitions is proceeding on or ahead of
schedule.
ANALYSIS OF RESULTS OF CONTINUING OPERATIONS
ACQUISITIONS
VF acquired Vans, Kipling and Napapijri in 2004. The Vans(R), Kipling(R) and
Napapijri(R) brands are lifestyle brands that we believe have global growth
potential. In addition, VF acquired a controlling interest in a newly formed
intimate apparel marketing company in Mexico to expand our presence in that
growing market.
The total cost of these acquisitions was $667.5 million in cash. These
acquisitions added $303.0 million to sales and $0.14 to earnings per share in
2004. These four businesses are expected to contribute at least $200 million in
additional sales and could contribute an additional $0.14 to earnings per share
in 2005.
See Note B to the Consolidated Financial Statements for more information on the
2004 Acquisitions and on the acquisition of Nautica in 2003.
4
CONSOLIDATED STATEMENTS OF INCOME
The following table presents a summary of the changes in our Net Sales in the
last two years:
2004 2003
Compared with Compared with
In millions 2003 2002
------------- -------------
Net sales - prior year $ 5,207 $ 5,084
Core businesses 235 (110)
Acquisitions in prior year (to anniversary date) 367 -
Acquisitions in current year 303 264
Disposition of VF Playwear (57) (31)
----------- ----------
Net sales - current year $ 6,055 $ 5,207
=========== ==========
Sales increased in most core businesses in 2004 due to unit volume increases,
particularly in our outdoor and intimate apparel businesses, and the favorable
effects of foreign currency translation. Substantially all of the sales decline
in our core businesses during 2003 was due to decreases in unit volume, offset
in part by the effects of foreign currency translation. Sales in core businesses
in 2003 declined by $126 million resulting from two major customers operating
under bankruptcy protection and their store closures: Kmart Corporation, which
filed for bankruptcy protection in January 2002 and emerged from bankruptcy in
May 2003 as Kmart Holding Corporation, and Ames Department Stores, Inc., which
operated under bankruptcy protection until its liquidation in the second half of
2002. Additional details on sales are provided in the section titled Information
by Business Segment.
The 2004 Acquisitions added 6% to sales in 2004. The acquisition of Nautica in
August 2003 added 7% (prior to the 2004 anniversary date of its acquisition) to
2004 sales and contributed 5% to 2003 sales.
In translating foreign currencies into the U.S. dollar, the weaker U.S. dollar
in relation to the functional currencies where VF conducts the majority of its
business (primarily the European euro countries) improved sales comparisons by
$96 million in 2004 relative to 2003. For 2003, sales comparisons benefited by
$128 million relative to 2002. The average translation rate for the euro was
$1.23 per euro during 2004, compared with $1.12 during 2003 and $0.94 during
2002. Based on the translation rate of $1.36 per euro at the end of 2004,
reported sales in 2005 may also receive a translation benefit compared with
2004.
5
The following table presents the percentage relationship to Net Sales for
components of our Consolidated Statements of Income:
2004 2003 2002
---- ---- ----
Gross margin (net sales less cost of goods sold) 39.8% 37.4% 36.0%
Marketing, administrative and general expenses (27.7) (25.6) (24.2)
Royalty income and other 0.7 0.6 0.4
---- ---- ----
Operating income 12.8% 12.4% 12.2%
==== ==== ====
Gross margins increased to 39.8% of sales in 2004, compared with 37.4% in 2003
and 36.0% in 2002. Approximately 1.8% of the 2004 increase was in our core
businesses, including changes in the mix of our businesses as we have
experienced sales growth in our higher margin outdoor businesses, benefits of
cost reduction actions and operating efficiencies. The additional 0.6% increase
in gross margin as a percent of sales was due to higher gross margins of the
2004 Acquisitions and the 2003 acquisition of Nautica (prior to its anniversary
date). Approximately 1.0% of the 2003 increase in gross margin was due to
changes in the mix of our businesses, as we experienced sales growth in our
higher margin outdoor and international jeans businesses, and from the
acquisition of Nautica. The remaining 0.4% improvement related to benefits of
our cost reduction initiatives and lower restructuring costs incurred relative
to 2002.
Over the last five years, we closed a significant number of manufacturing
facilities in the United States and shifted production to lower cost sources. As
a result of this shift in sourcing, the amount of sales in the United States
derived from products manufactured in lower cost locations outside the United
States has increased each year over the last three years. During 2004, 3% of the
units we sold in the United States were manufactured in VF-owned plants in the
United States. In contrast, at the end of 2000, approximately one-third of our
products sold in the United States were manufactured in our United States
plants. Today, of the total products supporting sales to customers in the United
States, 38% were manufactured in VF-owned facilities in Mexico and the Caribbean
Basin and 59% were obtained from contractors, primarily in Asia. We believe this
combination of VF-owned and contracted production from different geographic
regions provides a competitive advantage in our product sourcing.
Marketing, Administrative and General Expenses increased as a percent of sales
to 27.7% in 2004, compared with 25.6% in 2003 and 24.2% in 2002. During 2004,
approximately 1.4% of the increase was due to the higher cost to sales
relationship of the 2004 Acquisitions and Nautica
6
(prior to the anniversary date of its acquisition) than other VF businesses. The
remaining 0.7% is due to spending on the growth and cost reduction initiatives
discussed in the following paragraph, increased incentive compensation expense
and increased advertising as a percent of sales, offset in part by favorable
effects of higher volume and cost reduction efforts. During 2003, approximately
0.7% of the increase in these expenses as a percent of sales was due to changes
in the mix of our businesses, with a larger portion of sales coming from
businesses having a higher expense percentage. In addition, increased pension
cost in 2003 resulted in a 0.5% increase. The remaining 0.2% of the increase was
due to lower sales volume in our core businesses without a proportionate decline
in expenses.
Operating results in 2004 included $40 million of expense (0.7% of net sales)
related to growth and cost reduction initiatives. Of this total, approximately
$36 million related to Marketing, Administrative and General Expenses, with the
balance related to Cost of Goods Sold. Approximately 40% of this spending
related to new or expanded advertising programs and market research associated
with our Nautica(R) and other brands. Approximately 45% of the spending related
to cost reduction actions and consulting related to future cost reduction
opportunities. For example, we entered into an information technology
outsourcing agreement with a major third party service provider, and we incurred
charges for the closure of a production plant and for consolidation of
distribution centers. And finally, approximately 10% of the spending related to
additional positions to drive growth. We added four new executive positions, and
will be adding supporting staff positions, dedicated to working more closely
with our major customers, driving increased strategic planning for brand
development and pursuing targeted acquisition efforts.
We include cooperative advertising, retail store and distribution costs in
Marketing, Administrative and General Expenses, as stated in our significant
accounting policies in Note A to the Consolidated Financial Statements. Some
other companies may classify cooperative advertising costs as a reduction of Net
Sales, while some may classify retail store and distribution costs in Cost of
Goods Sold. Accordingly, our gross margins and operating expenses may not be
directly comparable with those companies.
Royalty Income and Other increased by $12.7 million in 2004 and $7.0 million in
2003. Net royalty income was $49.9 million in 2004, $28.6 million in 2003 and
$20.5 million in 2002. The increase in both years was primarily from higher
levels of licensing activity related to Nautica, acquired in August 2003. Also
included in this caption is $9.5 million of net charges related to the
disposition of VF Playwear in 2004.
7
Goodwill Impairment consisted of a charge of $2.3 million in our VF Playwear
reporting unit in 2002 based on a revised forecast of its profits and cash
flows.
Interest Expense (including amortization of debt discount, debt issuance costs
and gain/loss on interest rate hedging contracts) increased by $14.7 million in
2004 and decreased by $10.0 million in 2003. The increase in 2004 was primarily
due to higher average borrowings, and the decrease in 2003 was primarily due to
lower average interest rates. Average interest-bearing debt outstanding totaled
approximately $1,050 million for 2004, $810 million for 2003 and $770 million
for 2002. The weighted average interest rate was 7.0% for 2004, 7.3% for 2003
and 8.1% for 2002. Interest Income in 2003 included $5.7 million related to the
settlement of federal income tax issues.
The effective income tax rate for continuing operations was 33.3% in 2004,
compared with 33.5% in 2003 and 35.1% in 2002. The effective income tax rate
declined in 2004 relative to 2003 primarily due to increased income in
international jurisdictions that was taxed at lower rates. The effective tax
rate declined in 2003 relative to the prior year due to (1) higher nontaxable
income related to investments held for employee benefit plans, (2) lower foreign
operating losses with no related tax benefit and (3) favorable settlements in
2003 of prior years' federal and state income tax returns.
Income from continuing operations was $474.7 million ($4.21 per share) in 2004.
This compares with income from continuing operations of $397.9 million ($3.61
per share) in 2003 and $364.4 million ($3.24 per share) in 2002. Income from
continuing operations increased 19% in 2004, while earnings per share increased
17%, reflecting a larger number of shares outstanding due to exercises of stock
options. In 2003, income from continuing operations increased 9% over the prior
year, while earnings per share increased 11%, reflecting the benefit of shares
repurchased during 2003 and 2002. In translating foreign currencies into the
U.S. dollar, the weaker U.S. dollar had a $0.09 favorable impact on earnings per
share in 2004 compared with the prior year and a $0.14 favorable impact in 2003
compared with the prior year. The 2004 Acquisitions had a $0.14 favorable impact
on 2004 operating results, and the acquisition of Nautica in 2003 had a $0.16
per share favorable impact on 2003 results.
In 2002, VF exited the Private Label Knitwear and the Jantzen swimwear
businesses. Both businesses met the criteria for treatment as discontinued
operations. Accordingly, their operating results and cash flows are separately
presented as discontinued operations in the accompanying
8
consolidated financial statements. During 2002, these businesses contributed net
income of $8.3 million ($0.07 per share), primarily due to gains on disposal of
real estate.
VF adopted FASB Statement No. 142, Goodwill and Other Intangible Assets, at the
beginning of 2002. In adopting this Statement, we estimated the fair value of
our individual business reporting units on a discounted cash flow basis. This
evaluation, and the related valuation of net assets of each reporting unit,
indicated that recorded Goodwill exceeded its fair value at several business
units where performance had not met management's expectations established at
their acquisition dates. More specifically, the European intimate apparel,
childrenswear, occupational apparel and licensed sportswear business units had
been profitable in prior years but at a lower level than anticipated at the
dates of their respective acquisitions. The Latin American jeanswear business
units had not been profitable due to deteriorating economic conditions in South
America, but profitability was expected in the future. In each case, recorded
Goodwill was expected to be recoverable from future undiscounted operating cash
flows. The write-down of Goodwill upon adoption of this Statement was
attributable to differences between the fair value approach under this Statement
and the undiscounted cash flow approach used under previous accounting
literature. The adoption of this Statement resulted in a noncash charge of
$527.3 million in 2002, without tax benefit ($4.69 per share). See Note A to the
Consolidated Financial Statements for additional details.
VF reported net income of $474.7 million ($4.21 per share) in 2004, compared
with $397.9 million ($3.61 per share) in 2003. Including the effect of the above
accounting change and the discontinued operations discussed in the preceding
paragraphs, VF reported a net loss of $154.5 million ($1.38 per share) in 2002.
INFORMATION BY BUSINESS SEGMENT
VF's businesses are organized into five product categories, and by brands within
those product categories, for management and internal financial reporting
purposes. These groupings of businesses are referred to as "coalitions." Both
management and VF's Board of Directors evaluate operating performance at the
coalition level. These coalitions represent VF's reportable business segments.
For business segment reporting purposes, Coalition Sales and Coalition Profit
represent net sales and operating expenses under the direct control of an
individual coalition, royalty income for which it has responsibility,
amortization of acquisition-related intangible assets and its share of
centralized corporate expenses directly related to the coalition. Corporate
expenses not
9
apportioned to the coalitions and net interest expense are excluded from
Coalition Profit. Importantly, this basis of performance evaluation is
consistent with that used for management incentive compensation.
See Note R to the Consolidated Financial Statements for composition of the
coalitions. Also see Note R for a summary of our results of operations and other
information by coalition, along with a reconciliation of Coalition Profit to
Consolidated Income from Continuing Operations before Income Taxes. Coalition
results are not necessarily indicative of the operating results that would have
been reported had each business coalition been an independent, stand-alone
entity during the periods presented. Further, VF's presentation of Coalition
Profit may not be comparable with similar measures used by other companies.
The following table presents a summary of the changes in our Net Sales by
coalition during the last two years:
Outdoor
Apparel and Intimate
In millions Jeanswear Equipment Apparel Imagewear Sportswear Other
--------- --------- ---------- --------- ---------- -------
Net sales - 2002 $ 2,789 $ 508 $ 840 $ 752 $ - $ 195
Core businesses (122) 73 (10) (40) - (11)
Acquisitions in current year - - - 15 249 -
Disposition of VF Playwear - - - - - (31)
------- ------- ------- ------ ------- -------
Net sales - 2003 2,667 581 830 727 249 153
Core businesses (5) 127 68 31 - 14
Acquisitions in prior year - - - 12 355 -
Acquisitions in current year - 296 6 - 1 -
Disposition of VF Playwear - - - - - (57)
------- ------- ------- ------- ------- -------
Net sales - 2004 $ 2,662 $ 1,004 $ 904 $ 770 $ 605 $ 110
======= ======= ======= ======= ======= =======
JEANSWEAR:
The Jeanswear coalition consists of our global jeanswear businesses, led by the
Wrangler(R) and Lee(R) brands. Overall jeanswear sales in 2004 declined
slightly, with a 3% decline in domestic jeanswear substantially offset by a 7%
increase in international jeanswear. Domestic jeanswear sales declined due to a
continued reduction in sales to Kmart Holding Corporation, which emerged from
bankruptcy protection in 2003, lower sales of off-price product and reduced
sales of Lee(R) branded women's products. Sales in international markets
benefited from $57 million
10
of favorable foreign currency translation. Increased sales in Canada, Latin
America and Mexico helped to offset declines in our European businesses. In
2003, overall jeanswear sales declined 4%. Domestic jeanswear sales declined 7%,
with the unit volume decline related to the two bankruptcies noted in the
previous section accounting for almost all of the sales dollar decline. The
balance was due to selected price reductions and changes in product mix.
International jeanswear sales increased 5% in 2003 due to a $72 million
favorable effect of foreign currency translation.
Jeanswear Coalition Profit increased 9% in 2004 due to lower sales of off-price
products and improvements in operating efficiencies, particularly in the United
States. Coalition Profit declined by 12% during 2003, with two-thirds of the
decline related to the bankruptcies mentioned above. Coalition Profit in 2003
also declined due to selected price decreases and a net change in product mix
(lower margin products), offset by benefits from previous years' restructuring
actions.
OUTDOOR APPAREL AND EQUIPMENT:
The Outdoor Apparel and Equipment coalition consists of VF's outdoor-related
businesses represented by The North Face(R) brand (apparel and equipment) and
the JanSport(R) and Eastpak(R) brands (apparel and daypacks). Acquisitions in
2004 added Vans(R) brand performance and casual footwear and apparel for
skateboarders and other action sports participants and enthusiasts, Kipling(R)
brand backpacks, bags and accessories and Napapijri(R) brand outdoor-based
sportswear, which collectively contributed $296 million to 2004 sales. Sales
increased in both 2004 and 2003 in the core businesses, with unit volume
increases at The North Face resulting from strong consumer demand for its
products in the United States and internationally. Sales in both years benefited
from the favorable effects of foreign currency translation - $23 million in 2004
and $31 million in 2003 relative to the respective prior year.
Coalition Profit increased 61% in 2004 over the prior year and increased 34% in
2003 over 2002. About one-half of the 2004 increase was due to the 2004
Acquisitions. The remainder of the 2004 increase and most of the 2003 increase
was due to volume increases at The North Face.
INTIMATE APPAREL:
The Intimate Apparel coalition consists of our global women's intimate apparel
businesses, led by the Vanity Fair(R), Lily of France(R), Vassarette(R) and
Bestform(R) brands in the United States. Sales increased 9% in 2004, with unit
volume growth in our private label business resulting from
11
new programs sold to a major private label customer and unit growth in our mass
market Vassarette(R) and Curvation(R) brands. Domestic intimate apparel sales in
2003 were flat in the department store and mass market channels, but overall
declined by 3% due to a decrease in private label programs. International
intimate apparel sales advanced in both 2004 and 2003. During 2004, the
comparison was helped by the acquisition of a new business in Mexico in 2004 and
favorable effects of foreign currency translation of $16 million. Currency
translation benefited 2003 by $25 million relative to the respective prior year.
Coalition Profit increased 37% in 2004 and declined 11% in 2003 from the
respective prior year. The 2004 increase was due to higher volume and improved
operating efficiencies. The decline in 2003 resulted from lower sales volume and
a $7.7 million charge related to a withdrawal liability for a multiemployer
union pension plan.
IMAGEWEAR:
The Imagewear coalition includes VF's occupational (industrial, career and
safety) apparel business, as well as our licensed sports apparel business.
Coalition Sales increased 6% in 2004 and declined 3% in 2003.
Occupational apparel sales increased 5% in 2004, primarily due to higher sales
of service uniforms to governmental agencies, compared with a sales decline of
9% in 2003. While sales of career and safety apparel have generally been
increasing in recent years, industrial workwear has been declining since 2000.
This decline in workwear resulted from (1) workforce reductions in the United
States manufacturing sector, which has impacted overall workwear uniform sales,
and (2) the ongoing consolidation of our industrial laundry customers and those
customers placing greater reliance on their in-house manufacturing and product
sourcing. Sales of the licensed sports business grew 15% in 2004 and 16% in
2003, led by increases in sales of products under license from the National
Football League, Major League Baseball and Harley-Davidson Motor Company, Inc.
Coalition Profit increased 14% in 2004 due to volume gains across most business
units, offset in part by a small loss in the distributor knitwear business.
Coalition Profit increased 18% in 2003 due to cost reduction benefits resulting
from prior years' restructuring actions, which allowed for a higher margin on a
lower sales volume, and the absence of restructuring charges in 2003.
SPORTSWEAR:
The Sportswear coalition consists of our Nautica(R) fashion sportswear, John
Varvatos(R) luxury
12
apparel and accessories and Earl Jean(R) fashion jeans brands, all acquired as
part of the Nautica acquisition in August 2003. Both Coalition Sales and
Coalition Profit include a full year of operating results for 2004, compared
with only four months in 2003. On a comparable full year basis and as
anticipated at the time of the acquisition, unit sales for the Nautica(R) brand
declined slightly due to fewer department store doors. Unit sales also declined
at Earl Jean but advanced at John Varvatos. Also on a comparable full year
basis, Coalition Profit for the Nautica(R) brand increased due to improved
retail performance resulting in fewer markdowns and returns, cost reductions,
the exit of an unprofitable product line and other operating efficiencies.
The operating plan for the Nautica business at the acquisition date was to (1)
restore and rebuild the brand's image, (2) stabilize its men's wholesale
sportswear business by designing product that was consistent with the brand's
image, (3) grow the other core businesses, including men's jeans, retail and
licensing, and (4) exit underperforming businesses. Several management team
changes were made to drive the needed changes in the business. The 2004 product
lines were returned to the more classic Nautica(R) brand styling, and we made
substantial progress toward achieving each of the four operating objectives set
forth above. We believe that Nautica is positioned for growth and increased
profitability in 2005, and we expect another year of significant growth in John
Varvatos.
OTHER:
The Other business segment consists primarily of VF Playwear. Trademarks and
certain operating assets of this business unit were sold in May 2004.
Inventories and other retained assets were liquidated during the remainder of
the year. The segment loss in 2004 included net charges of $9.5 million related
to the disposal of this business. See Note C to the Consolidated Financial
Statements for a summary of VF Playwear's sales and losses for the three years.
This segment also includes the VF Outlet business unit, which consists of
company-operated retail outlet stores in the United States that sell a broad
selection of products, primarily excess quantities of first quality VF products.
Sales and profit of non-VF products (primarily hosiery, underwear and
accessories to provide a broader selection of merchandise to attract consumer
traffic) are reported in this business segment. Sales and profit of VF products
are reported as part of the operating results of the respective coalitions.
RECONCILIATION OF COALITION PROFIT TO CONSOLIDATED INCOME BEFORE INCOME
TAXES:
There are two types of costs necessary to reconcile total Coalition Profit, as
discussed in the preceding paragraphs, to Consolidated Income from Continuing
Operations before Income
13
Taxes. These costs, discussed below, are Interest and Corporate and Other
Expenses. See Note R to the Consolidated Financial Statements.
Interest Expense, Net, was discussed in the previous "Consolidated Statements of
Income" section. Interest is excluded from Coalition Profit because
substantially all of our financing costs are managed at the corporate office and
are not under the control of coalition management.
Corporate and Other Expenses consists of corporate and similar costs that are
not apportioned to the operating coalitions. These expenses are summarized as
follows and discussed in the paragraphs below:
In millions 2004 2003 2002
------- ------- -------
Information systems $ 137.1 $ 125.1 $ 126.4
Less costs apportioned to segments (108.4) (102.1) (101.1)
------- ------- -------
28.7 23.0 25.3
Corporate headquarters' costs 69.6 46.7 47.5
Trademark maintenance and enforcement 12.9 10.3 11.3
Other (2.0) 1.5 19.4
------- ------- -------
Corporate and Other Expenses $ 109.2 $ 81.5 $ 103.5
======= ======= =======
- - INFORMATION SYSTEMS - Included are costs of our U.S.-based management
information systems and of our centralized shared services center.
Operating costs of information systems and shared services are charged to
the coalitions based on utilization of those services, such as minutes of
computer processing time, number of transactions or number of users.
However, costs to develop new computer applications that will be used
across VF are not allocated to the coalitions. The biggest factor in the
information systems cost increase in 2004 was $8.3 million of consulting,
severance and asset write-downs related to outsourcing certain of our
information technology needs to a major third party service provider.
- - CORPORATE HEADQUARTERS' COSTS - Headquarters' costs include compensation
and benefits of corporate management and staff, legal and professional
fees, and administrative and general expenses, which are not apportioned
to the coalitions. Costs increased in 2004 primarily due to a $15.0
million increase in incentive compensation related to VF's strong 2004
financial performance relative to its targets. Also included in 2004 was
$5.8 million of consulting and research expenses related to VF's growth
and cost saving initiatives.
14
- - TRADEMARK MAINTENANCE AND ENFORCEMENT - Legal and other costs of
registering, maintaining and enforcing VF's portfolio of trademarks, plus
costs of licensing administration, are controlled by a centralized
trademark and licensing staff and are not allocated to the coalitions.
- - OTHER - This category includes (1) adjustments to convert the earnings of
certain business units using the FIFO inventory valuation method for
internal reporting to the LIFO method for consolidated financial
reporting, (2) other consolidating adjustments and (3) miscellaneous costs
that result from corporate programs or corporate-managed decisions that
are not allocated to the business units for internal management reporting.
In 2002, this category included a special $8.0 million incentive
compensation payment covering most employees and an increase of $3.7
million in worker's compensation expense based on consultation with our
independent adviser. These charges were retained in corporate for internal
management reporting and not apportioned to the coalitions due to the
nature of these items and the inability of our coalition management to
influence them.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEETS
Accounts Receivable increased in 2004 primarily due to the 2004 Acquisitions.
The number of days' sales outstanding increased slightly in 2004 due to longer
terms offered to customers at certain of the 2004 Acquisitions.
Inventories increased in 2004 due to the 2004 Acquisitions. Inventory levels at
core businesses declined 3% from the end of 2003. Inventories have been
declining in recent years through more efficient sales forecasting and
production planning techniques. In addition, sales near the end of 2004 were
higher than forecasted, resulting in inventory levels below expectations.
Property, Plant and Equipment declined in 2004 because depreciation expense
during the year exceeded the sum of capital spending and assets acquired as part
of the 2004 Acquisitions. Intangible Assets and Goodwill each increased in 2004
due to the 2004 Acquisitions. See Notes B, F, G and H to the Consolidated
Financial Statements.
Deferred Income Taxes, recorded as noncurrent assets, declined in 2004 due to
the inclusion of $85.6 million of noncurrent deferred income tax credits arising
from the 2004 Acquisitions.
15
These deferred tax credits related primarily to Intangible Assets of the
acquired companies.
Accounts Payable increased in 2004 due to the 2004 Acquisitions and growth in
our businesses. Accrued Liabilities increased due to the 2004 Acquisitions and
an increase in accrued compensation related to increased incentive compensation
payable based on VF's strong 2004 performance relative to its targets.
Total Long-term Debt was relatively flat from 2003 to 2004, with $400.0 million
of notes reclassified to Current Portion of Long-term Debt based on debt
retirement schedules. Of the current portion, $100.0 million is due on June 1,
2005 and $300.0 million is due on October 1, 2005.
Other Liabilities increased in 2004 by $17.5 million. Included are increases of
$43.6 million in liabilities from growth in core businesses and $16.1 million in
deferred income taxes, offset by a $42.2 million reduction in our minimum
pension liability. See Note N to the Consolidated Financial Statements and the
following paragraph.
In VF's defined benefit pension plans, accumulated benefit obligations exceeded
the fair value of plan assets by $213.5 million at our plans' last valuation
date. At the end of 2004, VF had a minimum pension liability of $157.0 million
(net of a prepaid pension asset). The related charge to Accumulated Other
Comprehensive Income (Loss), net of income taxes, was $119.1 million in 2004. Of
the total minimum pension liability, $55.0 million was recorded as a current
liability based on our contribution to the plan in January 2005, and $102.0
million was recorded as a long-term liability. The minimum pension liability at
the end of 2004 compares with $199.2 million at the end of 2003 (of which $55.0
was classified as a current liability) and a related charge to Accumulated Other
Comprehensive Income (Loss), net of income taxes, of $160.9 million. The
reduction in underfunding at the end of 2004 resulted from growth in plan assets
and VF contributions made during the year.
LIQUIDITY AND CASH FLOWS
The financial condition of VF is reflected in the following:
16
Dollars in millions 2004 2003
----------- ----------
Working capital $ 1,006.4 $ 1,419.3
Current ratio 1.7 to 1 2.8 to 1
Debt to total capital 28.5% 33.7%
For the ratio of debt to total capital, debt is defined as short-term and
long-term borrowings, and total capital is defined as debt plus common
stockholders' equity. Our ratio of net debt to total capital, with net debt
defined as debt less cash and equivalents, was 17.0% at the end of 2004.
VF's primary source of liquidity is its strong cash flow provided by operations,
which was $730.3 million in 2004, $543.7 million in 2003 and $645.6 million in
2002. Cash flow from operations is primarily dependent on the level of operating
income and controlling investments in inventories and other working capital
components. Income from continuing operations increased significantly in 2004
over 2003, and in 2003 over 2002. The net change in working capital components
during 2004 and during 2002 resulted in $63.4 million and $50.0 million,
respectively, of cash provided by operations, compared with cash usage of $6.9
million in 2003. A major reason for the year-to-year cash impact from changes in
working capital over this three year period related to changes in incentive
compensation, as amounts earned in a year are paid early in the following year.
Cash provided by operating activities in 2004 included approximately $11 million
of cash provided by the 2004 Acquisitions (for the periods after their
acquisition), while 2003 included approximately $60 million of cash provided by
Nautica (for the period after its acquisition). Cash provided from operations
resulting from the liquidation of VF Playwear (but excluding proceeds from sale
of the business) was approximately $40 million during 2004 (see Note C to the
Consolidated Financial Statements).
In addition to cash flow from operations, VF is well-positioned to finance its
ongoing operations and meet unusual circumstances that may arise. VF has a
$750.0 million unsecured committed bank facility that expires in September 2008.
This bank facility supports a $750.0 million commercial paper program. Any
issuance of commercial paper would reduce the amount available under the bank
facility. At the end of 2004, $738.2 million was available for borrowing under
the credit agreement, with $11.8 million of standby letters of credit issued
under the agreement. Further, under a registration statement filed in 1994 with
the Securities and Exchange Commission, VF has the ability to offer, on a
delayed or continuous basis, up to
17
$300.0 million of additional debt, equity or other securities.
The principal investing and financing activities in 2004 and 2003 related to
acquisitions. We paid cash of $655.1 million and $578.0 million for acquisitions
in 2004 and 2003, respectively, net of cash balances in the acquired companies.
The acquisitions were funded with existing VF cash balances, short-term
commercial paper borrowings and, in 2003, $292.1 million borrowed in the
long-term capital markets. All commercial paper borrowings, plus debt of the
acquired companies of $28.8 million in 2004 and $14.9 million in 2003, were
repaid during the respective years, and we ended 2004 with $485.5 million in
cash and equivalents.
In April 2004, Standard & Poor's Ratings Services affirmed its `A minus'
long-term corporate credit and senior unsecured debt ratings for VF. Standard &
Poor's ratings outlook is `stable.' Also in April 2004, Moody's Investors
Service affirmed VF's long-term debt rating of `A3' and short-term debt rating
of `Prime-2' and continued the ratings outlook as `negative.' Based on current
conditions, we do not believe that the negative outlook by Moody's will have a
material impact on VF's ability to issue long or short-term debt. Existing debt
agreements do not contain acceleration of maturity clauses based on changes in
credit ratings.
Capital expenditures were $81.4 million in 2004, compared with $86.6 million and
$64.5 million in 2003 and 2002, respectively. Capital expenditures in each of
these years generally related to maintenance spending in our worldwide
manufacturing and other facilities. We expect that capital spending could reach
$120 million in 2005, with the increase related to distribution projects and to
higher retail store investments. Capital spending will be funded by cash flow
from operations.
As discussed in the previous section, accumulated benefit obligations in VF's
defined benefit pension plans exceeded the fair value of plan assets by $213.5
million at the plans' latest valuation date. We believe retirement benefits are
important for our associates, and accordingly, we are committed to maintaining a
well-funded pension plan. Although VF was not required by applicable law to make
any funding contribution to the qualified pension plan trust in 2004, 2003 and
2002 and will not be required to do so in 2005, we made cash contributions of
$55.0 million in each of January 2005 and 2004 and $75.0 million in 2003. These
contributions were significantly higher than our contributions of $20.0 million
in each of the prior two years. We will continue to monitor the funded status of
the plan and evaluate future funding levels. We believe VF has adequate
liquidity to meet future funding requirements.
18
During 2003, VF purchased 1.7 million shares of its Common Stock in open market
transactions at a cost of $61.4 million (average price of $36.55 per share) and
in 2002 purchased 3.0 million shares at a cost of $124.6 million (average price
of $41.54 per share). Under its current authorization from the Board of
Directors, VF may purchase an additional 5.3 million shares. We suspended the
share repurchase program during the second quarter of 2003 through the end of
2004 to fund acquisition spending. Our current intent is to repurchase 2.0
million shares during 2005 to offset dilution caused by exercises of stock
options. However, the actual number purchased during 2005 may vary depending on
funding required to support business acquisition opportunities.
Cash dividends totaled $1.05 per common share in 2004, compared with $1.01 in
2003 and $0.97 in 2002. Our target is to pay dividends totaling approximately
30% of our diluted earnings per share on a long-term basis. The dividend payout
rate was 24.9% in 2004 compared with payout rates of 28.0% in 2003 and 29.9% in
2002, based on income from continuing operations. The current indicated annual
dividend rate for 2005 is $1.08 per share.
In 2002, cash provided by discontinued operations totaled $69.9 million from the
sale of the Jantzen business and related assets and from liquidation of working
capital from the Jantzen and knitwear businesses.
Following is a summary of VF's fixed obligations at the end of 2004 that will
require the use of funds:
Payments Due or Forecasted by Period
----------------------------------------------------------------------------
In millions Total 2005 2006 2007 2008 2009 Thereafter
------- ------- ----- ---- ----- ----- ----------
Long-term debt * $ 1,622 $ 464 $ 69 $ 69 $ 36 $ 35 $ 949
Operating leases 415 98 84 66 53 39 75
Minimum royalty payments 66 14 17 16 14 5 -
Inventory obligations ** 817 682 15 15 15 15 75
Other obligations *** 885 221 111 91 88 87 287
------- ------- ----- ---- ----- ----- -------
Total $ 3,805 $ 1,479 $ 296 $257 $ 206 $ 181 $ 1,386
======= ======= ===== ==== ===== ===== =======
* Long-term debt service obligations include both principal and related
interest.
19
** Inventory purchase obligations represent commitments for raw material,
sewing labor and finished goods in the ordinary course of business that
are payable upon satisfactory receipt of the inventory by VF, plus a
commitment to purchase $15.0 million per year through 2013 of finished
goods from one supplier.
*** Other obligations represent other commitments for the expenditure of
funds, many of which do not meet the criteria for recognition as a
liability for financial statement purposes. These commitments include
forecasted amounts related to (1) contracts not involving the purchase of
inventories, such as advertising and the noncancelable portion of service
or maintenance agreements, (2) capital expenditures for approved projects
and (3) components of Other Liabilities, as presented and classified as
noncurrent liabilities in VF's Consolidated Balance Sheet, that will
require the use of cash. Projected cash requirements for components of
Other Liabilities include (1) portions of those liabilities recorded in
Current Liabilities, (2) discretionary funding contributions to our
pension plan trust of $55 million per year through 2009 based on
information provided by our independent actuary and management's current
intent and (3) payments of deferred compensation and other
employee-related benefits based on forecasted activity and prior
experience.
We have other financial commitments at the end of 2004 that may require the use
of funds under certain circumstances:
- - Shares of Series B Redeemable Preferred Stock have been issued to
participants as matching contributions under the Employee Stock Ownership
Plan ("ESOP"). If requested by the trustee of the ESOP, VF has an
obligation to redeem Preferred Stock held in participant accounts and to
pay each participant the value of his or her account. The amounts of these
redemptions vary based on the conversion value of the Preferred Stock. In
2004 and 2003, no funds were required as the ESOP trustee elected to
convert the Preferred Stock of withdrawing participants into shares of
Common Stock. Payments made for redemption of Preferred Stock were $5.8
million in 2002.
- - VF has entered into $80.5 million of surety bonds and standby letters of
credit representing contingent guarantees of performance under
self-insurance and other programs. These commitments would only be drawn
upon if VF were to fail to meet its claims obligations.
20
Management believes that VF's cash balances and funds provided by operations, as
well as unused committed bank credit lines, additional borrowing capacity and
access to equity markets, taken as a whole, provide (1) adequate liquidity to
meet all of its obligations when due, (2) adequate liquidity to fund capital
expenditures and to maintain our dividend payout policy and (3) flexibility to
meet investment opportunities that may arise. Specifically, we believe VF has
adequate liquidity to repay the $100.0 million and $300.0 million of long-term
debt obligations due in June and October 2005, respectively.
RISK MANAGEMENT
VF is exposed to a variety of market risks in the ordinary course of business.
We regularly assess these potential risks and manage our exposures to these
risks through our operating and financing activities and, when appropriate, by
utilizing natural hedges and by creating offsetting positions through the use of
derivative financial instruments. Derivative financial instruments are contracts
in which the payments are linked to changes in currency exchange rates, interest
rates or other financial measures. We do not use derivative financial
instruments for trading or speculative purposes.
We limit the risk of interest rate fluctuations on net income and cash flows by
managing our mix of fixed and variable interest rate debt. In addition, we may
also use derivative financial instruments to minimize our interest rate risk.
Since our long-term debt has fixed interest rates, our primary interest rate
exposure relates to changes in interest rates on short-term borrowings, which
averaged $96 million during 2004. However, any change in interest rates would
also affect interest income earned on VF's cash equivalents on deposit. Based on
average amounts of short-term borrowings and of cash on deposit during 2004, the
effect of a hypothetical 1.0% change in interest rates on reported net income
would not be material.
Approximately 23% of our business is conducted in international markets. Our
foreign businesses operate in functional currencies other than the United States
dollar (except in Turkey, where we use the United States dollar because of the
high inflation rate in that country). Assets and liabilities in these foreign
businesses are subject to fluctuations in foreign currency exchange rates.
Investments in these primarily European and Latin American businesses are
considered to be long-term investments, and accordingly, foreign currency
translation effects on those net assets are included in a component of
Accumulated Other Comprehensive Income (Loss) in Common Stockholders' Equity. We
do not hedge these net investments and do not hedge the translation of foreign
currency operating results into the United States dollar.
21
A growing percentage of the total product needs to support our businesses are
manufactured in our plants in foreign countries or by independent foreign
contractors. We monitor net foreign currency market exposures and may in the
ordinary course of business enter into foreign currency forward exchange
contracts to hedge specific foreign currency transactions or anticipated cash
flows. Use of these financial instruments allows us to reduce VF's overall
exposure to exchange rate movements, since gains and losses on these contracts
will offset losses and gains on the transactions being hedged. Our practice is
to hedge a portion of our net foreign currency cash flows (relating to
cross-border inventory purchases and production costs, product sales and
intercompany royalty payments anticipated during the following 12 months) by
buying or selling United States dollar contracts against various currencies.
If there were a hypothetical adverse change in foreign currency exchange rates
of 10% relative to the United States dollar, the expected effect on the fair
value of the hedging contracts outstanding at the end of 2004 would be
approximately $23 million. Based on changes in the timing and amount of foreign
currency exchange rate movements, actual gains and losses could differ.
VF is exposed to market risks for the pricing of cotton and other fibers, which
indirectly affects fabric prices. We manage our fabric prices by ordering denim
and other fabrics several months in advance, but we have not historically
managed commodity price exposures by using derivative instruments.
VF has nonqualified deferred compensation plans in which liabilities accrued for
the plans' participants are based on market values of investment funds that are
selected by the participants. The risk of changes in the market values of the
participants' underlying investment selections is hedged by VF's investments in
a portfolio of securities that substantially mirrors the investment selections
underlying the deferred compensation liabilities. These VF-owned investment
securities are held in irrevocable trusts. Increases and decreases in deferred
compensation liabilities are substantially offset by corresponding increases and
decreases in the market value of VF's investments, resulting in a negligible net
exposure to our operating results and financial position.
22
STOCK-BASED COMPENSATION; CHANGE IN ACCOUNTING POLICY EFFECTIVE IN 2005
We are currently evaluating FASB Statement No. 123 (R), Share-Based Payment,
which was issued in late 2004. This Statement requires that the cost of stock
options, based on the fair value of such options at the date of grant, be
recognized as compensation expense over the vesting period. This Statement also
changes the method of expense recognition for our performance-based restricted
stock units.
The new Statement, which must be adopted no later than the beginning of the
third quarter of 2005, has two methods of adoption. VF may elect to recognize
compensation expense for options granted prior to but not vested as of the date
of adoption, in which case prior periods would remain unchanged and pro forma
disclosures would continue to be provided for those periods. Alternatively, VF
may elect to restate either all prior periods presented, or all periods since
the beginning of 2005, by recognizing compensation expense in the amounts
previously reported in the pro forma disclosures.
Management has not yet determined which method of adoption it will use for the
new Statement. The estimated effect of adopting the new rules for all unvested
stock options and other stock-based compensation will be to reduce reported
earnings per share by approximately $0.05 for each quarter of 2005 following
adoption. In addition, if the first method above is selected, we would record a
noncash charge at the date of adoption for the cumulative effect of applying the
new rules for all unvested stock options, which we estimate to be approximately
$0.10 per share. Although the new rules will result in a reduction in future
earnings, there will be no impact on total Common Stockholders' Equity.
As described in Note A to the Consolidated Financial Statements, in accordance
with applicable accounting pronouncements to date, compensation expense has not
been recognized for stock options but has been recorded for other forms of
equity compensation. If compensation expense in 2004 and prior years had been
recognized for stock options based on the fair value-based method, reported
earnings per share would have been reduced by $0.11 in 2004 and $0.12 in 2003.
The pro forma effect in 2004 was slightly less than 2003 due primarily to the
reduced number of stock options granted in 2004, offset in part by the higher
fair value of those options.
Compensation expense recorded in the financial statements for performance-based
restricted stock units was $0.06 per share in 2004, compared with $0.01 per
share in 2003. Compensation expense increased for these performance-based
restricted stock units during 2004 due to (1) a
23
shift in the overall mix of long-term executive compensation, with an increased
number of restricted stock units granted in 2004 offset by a reduced number of
stock options granted, (2) the increased price of VF Common Stock and (3) the
high level of performance relative to targets previously established by the
Compensation Committee of the Board of Directors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have chosen accounting policies that we believe are appropriate to accurately
and fairly report VF's operating results and financial position in conformity
with accounting principles generally accepted in the United States. We apply
these accounting policies in a consistent manner. Our significant accounting
policies are summarized in Note A to the Consolidated Financial Statements.
The application of these accounting policies requires that we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures. These estimates and assumptions are based
on historical and other factors believed to be reasonable under the
circumstances. We evaluate these estimates and assumptions on an ongoing basis
and may retain outside consultants to assist in our evaluation. If actual
results ultimately differ from previous estimates, the revisions are included in
results of operations in the period in which the actual amounts become known.
We believe the following accounting policies involve the most significant
management judgments and estimates used in preparation of our Consolidated
Financial Statements or are the most sensitive to change from outside factors.
We have discussed the application of these critical accounting policies and
estimates with the Audit Committee of our Board of Directors.
- - INVENTORIES - Our inventories are stated at the lower of cost or market
value. Cost includes all material, labor and overhead costs incurred to
manufacture or purchase the finished goods. We review all of our inventory
each quarter on the basis of individual style-size-color stockkeeping
units ("SKUs") to identify excess or slow moving products, discontinued
and to-be-discontinued products, and off-quality merchandise. This review
covers inventory on hand, as well as current production or purchase
commitments. For those units in inventory that are so identified, we
estimate their market value or expected selling price based on historical
and current realization trends. This evaluation, performed using a
systematic and consistent methodology, requires forecasts of future
demand, market conditions and selling prices. If the forecasted selling
price is less than cost, we provide an allowance to reflect the lower
value of that inventory. This methodology recognizes inventory exposures,
on an
24
individual SKU basis, at the time such losses are evident rather than at
the time goods are actually sold.
- - LONG-LIVED ASSETS - Our depreciation policies for our property, plant and
equipment and our amortization policies for our definite-lived intangible
assets reflect judgments on the estimated economic lives of these assets.
We review these assets for possible impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
fully recoverable. We measure recoverability of the carrying value of
these assets by comparison with undiscounted cash flows expected to be
generated by the assets. These evaluations have not resulted in any
significant impairment adjustments during the past three years.
In connection with our adoption of FASB Statement No. 142, Goodwill and
Other Intangible Assets, as of the beginning of 2002, we performed a
review of our goodwill for possible impairment. The review required that
we estimate the fair value of our business units having goodwill. Fair
value was based on the present value of expected future cash flows, which
required judgment and estimation about future market conditions, future
sales and profitability, and a discount rate commensurate with the risk
inherent in each business unit. We engaged an independent valuation firm
to assist us in determining the fair value of these business units. The
write-down resulting from this review was recorded as the cumulative
effect of a change in accounting policy as of the beginning of 2002.
This Statement also requires us to reevaluate goodwill and
indefinite-lived intangible assets in all business units at least annually
or more frequently if there is an indication of possible impairment. For
2004 and 2003, the indicated fair value of the goodwill and
indefinite-lived intangible assets in the respective business units
exceeded the carrying amount of those assets. In 2002, we determined that
$2.3 million of goodwill in our VF Playwear business unit was impaired
and, accordingly, recorded an impairment charge for that amount.
We recorded Property, Plant and Equipment and Intangible Assets acquired
in our 2004 Acquisitions and in our 2003 acquisition of Nautica at the
fair value of those assets. We engage an independent valuation firm to
assist us in assigning fair values to our acquired Intangible Assets and,
as necessary, other assets.
- - PENSION OBLIGATIONS - VF sponsors defined benefit pension plans as a key
retirement benefit for most domestic employees. Since pension obligations
will ultimately be settled far in the
25
future, determination of accumulated and projected pension benefit
liabilities and of our annual pension expense is subject to assumptions
and estimation. The principal assumptions are summarized in Note N to the
Consolidated Financial Statements. We review these assumptions annually
and modify them based on current rates and trends. Actual results may vary
from the actuarial assumptions used.
One of the critical assumptions used in the actuarial model is the
discount rate. The discount rate is used to estimate the present value of
our accumulated and projected benefit obligations at each valuation date.
We evaluate our discount rate assumption each year and adjust it as
necessary based on current market interest rates. For our September 30,
2004 valuation, we decided, in consultation with our independent actuary,
to refine our approach for selecting a discount rate. We changed to a
method of estimating our discount rate based on matching high quality
corporate bond yields to the expected benefit payments and duration of
obligations for participants in our pension plans. Previously, we had
estimated our discount rate by reference to the Moody's Aa bond index.
This change was prompted by a significant change in the composition of
bonds in the Moody's Aa bond index during 2004, resulting in (1) a yield
for the revised index differing significantly from other high quality bond
indices and (2) the index becoming less reflective of our expected pension
payments. We believe our 2004 discount rate of 6.10% appropriately
reflects current market conditions and the long-term nature of projected
benefit payments to participants of our pension plans. Further, the
discount rate for our plans may be higher than rates used for plans at
some other companies because of our plans' higher percentage of females
with a longer life expectancy and higher percentage of inactive
participants with vested benefits who will not begin receiving benefits
for many years.
Another critical assumption of the actuarial model is the expected
long-term rate of return on investment assets in our pension trust.
Because the rate of return is a long-term assumption, it generally does
not change each year. This rate, determined in consultation with our
independent actuary, is based on several factors, including the plan's mix
of investment assets, historic and projected market returns on those
assets and current market conditions. We had been using an 8.75% return
assumption during 2003 and 2002, which was less than our actual compounded
annual return over the preceding 15 years. Based on a current
26
evaluation of the factors mentioned above, our investment return
assumption was reduced to 8.50% for 2004 and 2005.
The sensitivity of changes in these valuation assumptions on our annual
pension expense and on our plans' projected benefit obligations ("PBO"),
all other factors being equal, is illustrated by the following:
Increase (Decrease) in
---------------------------
Dollars in millions Pension Expense PBO
--------------- ---------
0.50% decrease in discount rate $ 14 $ 78
0.50% increase in discount rate (13) (73)
0.50% decrease in expected investment return 4
0.50% increase in expected investment return (4)
Differences between actual results and actuarial assumptions are
accumulated and amortized over future periods. During the last several
years, actual results have differed significantly from actuarial
assumptions, resulting in $267.7 million of accumulated net unrecognized
losses at our 2004 valuation date. These accumulated losses arose because
(1) our pension plan liabilities increased substantially as a result of
the overall decline in the discount rate from 8.00% in 2000 to 6.10% in
2004 and (2) although our actual investment return on pension plan assets
exceeded the actuarially assumed rate in 2003 and 2004, significant
investment losses were incurred in 2002 and 2001 due to the overall
decline in the securities markets. Our policy is to amortize these
unrecognized gains and losses to pension expense, as follows: amounts
totaling less than 10% of the lower of investment assets or PBO at the
beginning of the year are not amortized; amounts totaling 10% to 20% of
PBO are amortized over 10 years; and amounts in excess of 20% of PBO are
amortized over five years.
The cost of pension benefits earned by our employees (commonly called
"service cost") has averaged $19.7 million per year over the last three
years. However, pension expense recognized in our financial statements has
significantly exceeded the average annual service cost. Our recorded
pension expense for continuing operations was $57.8 million (including a
$7.1 million partial plan curtailment charge) in 2004, compared with $55.7
million in 2003 and $26.2 million in 2002 (including a $2.4 million
curtailment charge). Both the 2004 and the 2003 expense were higher than
the average annual service cost because those years
27
included a significant cost component for amortization of accumulated net
unrecognized losses. For 2005, our pension expense is expected to be
approximately $44 million.
Our accumulated benefit obligations exceeded the fair value of plan assets
at our most recent valuation date. Accordingly, we have recorded a minimum
pension liability of $157.0 million (net of a prepaid pension asset). The
amount of the liability, along with the related charge to Common
Stockholders' Equity, could change significantly in future years depending
on securities market fluctuations affecting actual earnings of the pension
plan assets, interest rates and the level of VF contributions to the plan.
To improve the funded status of the plan, we have increased our level of
contributions to the plan, with cash contributions of $55.0 million in
January 2005 and 2004 and $75.0 million in 2003.
Effective December 31, 2004, VF's domestic defined benefit plans were
amended to close the existing plans to new entrants. The amendments did
not affect the benefits of current plan participants or their accrual of
future benefits. Domestic employees hired after that date, plus employees
at recently acquired businesses not covered by those plans, will
participate in a new defined contribution arrangement with VF contributing
amounts based on a percentage of eligible compensation. Funds contributed
under this new arrangement will be invested as directed by the
participants. This new defined contribution feature will not have an
impact on the 2005 expense for our defined benefit pension plans. Over a
period of years, however, the expense of our defined benefit plans is
expected to decline as a percentage of our total retirement benefit
expense. In addition, the year-to-year variability of our retirement
benefit expense should also decrease.
- - RESTRUCTURING CHARGES - We have provided restructuring charges related to
actions taken to reduce our manufacturing, marketing and administrative
cost structure and to exit underperforming businesses. We have also
recognized liabilities at newly acquired businesses related to our intent
to exit certain activities or positions as we integrate the operations of
the acquired businesses with those of VF. These liabilities relate
primarily to workforce reduction and consolidation and elimination of
facilities. Severance and related charges are accrued based on estimates
of amounts that will be paid to affected employees. Asset impairment
charges related to consolidation or closure of manufacturing or
distribution facilities are based on estimates of expected sales proceeds
for the real estate and equipment. Plans to exit facilities may result in
charges for lease termination and losses for future lease payments, net of
estimated sublease income. Losses may also result from termination of
existing contracts.
28
We reassess these liabilities at the end of each reporting period. If
circumstances change, causing current estimates to differ from prior
estimates, adjustments are recorded in the period of change.
- - INCOME TAXES - VF's income tax returns are regularly examined by federal,
state and foreign tax authorities. These audits may result in proposed
adjustments. We, in consultation with our independent advisers, have
reviewed all issues raised upon examination and other possible exposures
and have recorded amounts that reflect our best estimates of the probable
outcomes related to these matters. We do not anticipate any material
impact on earnings from their ultimate resolution.
We have recorded deferred income tax assets related to operating loss
carryforwards and, when necessary, have recorded valuation allowances to
reduce those assets to amounts expected to be ultimately realized. An
adjustment to income tax expense would be required in a future period if
we determine that the amount of deferred tax assets to be realized differs
from the net recorded amount.
We have not provided United States income taxes on a portion of our
foreign subsidiaries' undistributed earnings because we intend to invest
those earnings indefinitely. If we were to decide to remit those earnings
to the United States in a future period, our provision for income taxes
could increase in that period. The American Jobs Creation Act of 2004
contained provisions for a temporary incentive for repatriation of foreign
earnings during 2005. We are evaluating our foreign undistributed earnings
and studying the impact of the changes in tax law. If we were to decide to
remit some or all of these earnings, the incremental income tax expense
related to the repatriation would be recognized in 2005, along with any
effects on our deferred income tax assets and liabilities.
The balance sheet classifications and amounts of accrued and deferred
income taxes related to assets and liabilities of acquired companies were
based on assumptions that could change depending on the ultimate
resolution of certain tax matters. Since these income tax accruals and
deferrals were established in the allocation of the purchase price of the
acquired businesses, future changes in these amounts could result in
adjustments to Goodwill.
29
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, we 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. These
include statements concerning plans, objectives, projections and
expectations relating to VF's operations or economic performance, and
assumptions related thereto.
Forward-looking statements are made based on our expectations and beliefs
concerning future events impacting VF and therefore involve a number of
risks and uncertainties. We caution 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 VF to differ include, but are not limited to, the
overall level of consumer spending for apparel; changes in trends in the
segments of the market in which VF competes; ongoing selling price and
cost pressures in the worldwide apparel industry; financial strength and
competitive conditions, including consolidation, of our customers and of
our suppliers; actions of competitors, customers, suppliers, service
providers and licensees that may impact VF's business; our ability to make
and integrate acquisitions successfully; our ability to achieve expected
sales and earnings growth from ongoing businesses and acquisitions; our
ability to achieve planned cost savings; terrorist actions; natural
disasters; and the impact of economic and political factors in the markets
where VF competes or from which VF imports products, such as recession or
changes in interest rates, currency exchange rates, price levels, capital
market valuations and other factors over which we have no control.
30
EXHIBIT 13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of VF Corporation:
We have completed an integrated audit of VF Corporation's January 1, 2005
consolidated financial statements and of its internal control over financial
reporting as of January 1, 2005 and audits of its January 3, 2004 and January 4,
2003 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based
on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, cash flows and common
stockholders' equity present fairly, in all material respects, the financial
position of VF Corporation and its subsidiaries at January 1, 2005 and January
3, 2004, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended January 1, 2005 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements 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.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing on
page 68 of the 2004 Annual Report to Stockholders, that the Company maintained
effective internal control over financial reporting as of January 1, 2005 based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is
fairly stated, in all material respects, based on those criteria. Furthermore,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of January 1, 2005, based on
criteria established in Internal Control - Integrated Framework issued by the
COSO. The Company's management is responsible for maintaining effective internal
control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP Greensboro, North Carolina
PricewaterhouseCoopers LLP March 7, 2005
2
VF CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER
---------------------------
In thousands, except share amounts 2004 2003
------------ -----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 485,507 $ 514,785
Accounts receivable, less allowance for doubtful accounts of $60,790
in 2004 and $65,769 in 2003 751,582 633,863
Inventories 973,248 932,985
Deferred income taxes 99,338 92,828
Other current assets 68,893 34,070
------------ -----------
Total current assets 2,378,568 2,208,531
PROPERTY, PLANT AND EQUIPMENT 572,254 591,680
INTANGIBLE ASSETS 639,520 318,634
GOODWILL 1,031,594 700,972
DEFERRED INCOME TAXES 12,476 117,436
OTHER ASSETS 369,866 308,299
------------ -----------
$ 5,004,278 $ 4,245,552
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 42,830 $ 33,948
Current portion of long-term debt 401,232 1,144
Accounts payable 369,937 315,219
Accrued liabilities 558,215 438,939
------------ -----------
Total current liabilities 1,372,214 789,250
LONG-TERM DEBT 556,639 956,383
OTHER LIABILITIES 536,131 518,625
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK 26,053 29,987
COMMON STOCKHOLDERS' EQUITY
Common Stock, stated value $1; shares authorized, 300,000,000;
shares outstanding, 111,388,353 in 2004 and 108,170,091 in 2003 111,388 108,170
Additional paid-in capital 1,087,641 964,990
Accumulated other comprehensive income (loss) (113,071) (189,455)
Retained earnings 1,427,283 1,067,602
------------ -----------
Total common stockholders' equity 2,513,241 1,951,307
------------ -----------
$ 5,004,278 $ 4,245,552
============ ===========
See notes to consolidated financial statements.
3
VF CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER
---------------------------------------
In thousands, except per share amounts 2004 2003 2002
----------- ----------- -----------
NET SALES $ 6,054,536 $ 5,207,459 $ 5,083,523
COSTS AND OPERATING EXPENSES
Cost of goods sold 3,644,255 3,262,375 3,254,008
Marketing, administrative and general expenses 1,676,769 1,331,814 1,229,902
Royalty income and other (44,276) (31,619) (24,587)
Goodwill impairment - - 2,276
----------- ----------- -----------
5,276,748 4,562,570 4,461,599
----------- ----------- -----------
OPERATING INCOME 777,788 644,889 621,924
OTHER INCOME (EXPENSE)
Interest income 7,151 11,456 7,397
Interest expense (76,087) (61,368) (71,325)
Miscellaneous, net 3,268 3,529 3,732
----------- ----------- -----------
(65,668) (46,383) (60,196)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 712,120 598,506 561,728
INCOME TAXES 237,418 200,573 197,300
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 474,702 397,933 364,428
DISCONTINUED OPERATIONS - - 8,283
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING POLICY - - (527,254)
----------- ----------- -----------
NET INCOME (LOSS) $ 474,702 $ 397,933 $ (154,543)
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income from continuing operations $ 4.30 $ 3.67 $ 3.26
Discontinued operations - - .08
Cumulative effect of a change in accounting policy - - (4.83)
Net income (loss) 4.30 3.67 (1.49)
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income from continuing operations $ 4.21 $ 3.61 $ 3.24
Discontinued operations - - .07
Cumulative effect of a change in accounting policy - - (4.69)
Net income (loss) 4.21 3.61 (1.38)
CASH DIVIDENDS PER COMMON SHARE $ 1.05 $ 1.01 $ .97
See notes to consolidated financial statements.
4
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER
--------------------------------------
In thousands 2004 2003 2002
----------- ---------- -----------
NET INCOME (LOSS) $ 474,702 $ 397,933 $ (154,543)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation
Amount arising during year 61,716 89,000 40,693
Less income tax effect (31,647) (40,157) (15,252)
Minimum pension liability adjustment
Amount arising during year 65,969 (52,691) (205,080)
Less income tax effect (24,257) 20,335 78,239
Derivative financial instruments
Amount arising during year (9,924) (14,492) (15,802)
Less income tax effect 3,802 5,536 6,168
Reclassification to net income for
losses realized 8,803 15,817 280
Less income tax effect (3,372) (6,042) (107)
Unrealized gains and losses on marketable securities
Amount arising during year 9,808 13,730 (3,184)
Less income tax effect (3,842) (5,369) 1,255
Reclassification to net income for
(gains) losses realized (1,105) (1,613) 2,763
Less income tax effect 433 632 (1,074)
----------- ---------- -----------
COMPREHENSIVE INCOME (LOSS) $ 551,086 $ 422,619 $ (265,644)
=========== ========== ===========
See notes to consolidated financial statements.
5
VF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
--------------------------------
In thousands 2004 2003 2002
--------- --------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 474,702 $ 397,933 $ (154,543)
Adjustments to reconcile net income (loss)
to cash provided by operating activities
of continuing operations:
Discontinued operations - - (8,283)
Cumulative effect of a change in accounting policy - - 527,254
Restructuring costs - - 26,342
Depreciation 110,868 104,463 107,398
Amortization and impairment 29,849 13,675 16,285
Provision for doubtful accounts 3,516 11,197 18,490
Pension funding in excess of expense (236) (21,785) 3,770
Deferred income taxes 16,172 30,961 70,849
Stock-based compensation 10,956 1,584 1,003
Other, net 20,984 12,543 (12,990)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (20,301) 47,502 (24,077)
Inventories 51,450 61,596 43,253
Other current assets (19,006) 22,865 (135)
Accounts payable 3,812 (60,636) 54,123
Accrued compensation 48,897 (42,823) 28,697
Other accrued liabilities (1,407) (35,371) (51,852)
--------- --------- ----------
Cash provided by operating activities of
continuing operations 730,256 543,704 645,584
INVESTING ACTIVITIES
Capital expenditures (81,410) (86,619) (64,503)
Business acquisitions, net of cash acquired (655,089) (578,038) (1,342)
Software purchases (13,018) (12,775) (12,141)
Sale of property, plant and equipment 12,900 17,964 25,731
Sale of VF Playwear business 4,517 - -
Other, net (103) (51) 7,675
--------- --------- ----------
Cash used by investing activities of
continuing operations (732,203) (659,519) (44,580)
FINANCING ACTIVITIES
Decrease in short-term borrowings (19,056) (30,080) (16,586)
Proceeds from long-term debt - 292,110 -
Payments on long-term debt (3,494) (16,183) (301,564)
Purchase of Common Stock - (61,400) (124,623)
Cash dividends paid (117,731) (111,258) (108,773)
Proceeds from issuance of Common Stock 106,613 32,631 39,753
Other, net (730) (510) (8,290)
--------- --------- ----------
Cash provided (used) by financing activities of
continuing operations (34,398) 105,310 (520,083)
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (3,320) (1,417) 69,899
EFFECT OF FOREIGN CURRENCY RATE CHANGES ON CASH 10,387 30,340 13,498
--------- --------- ----------
NET CHANGE IN CASH AND EQUIVALENTS (29,278) 18,418 164,318
CASH AND EQUIVALENTS - BEGINNING OF YEAR 514,785 496,367 332,049
--------- --------- ----------
CASH AND EQUIVALENTS - END OF YEAR $ 485,507 $ 514,785 $ 496,367
========= ========= ==========
See notes to consolidated financial statements.
6
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
In thousands STOCK CAPITAL INCOME (LOSS) EARNINGS
---------- ----------- -------------- ----------
BALANCE, DECEMBER 2001 $ 109,998 $ 884,638 $ (103,040) $1,221,200
Net loss - - - (154,543)
Cash dividends:
Common Stock - - - (106,018)
Series B Redeemable Preferred Stock - - - (2,755)
Tax benefit from Preferred Stock dividends - - - 12
Redemption of Preferred Stock - - - (5,780)
Conversion of Preferred Stock 182 - - 3,332
Purchase of treasury shares (3,000) - - (121,623)
Stock compensation plans, net 1,345 45,494 - (381)
Common Stock held in trust for
deferred compensation plans - - - (112)
Foreign currency translation - - 25,441 -
Minimum pension liability adjustment - - (126,841) -
Derivative financial instruments - - (9,461) -
Unrealized losses on marketable securities - - (240) -
---------- ----------- ------------- ----------
BALANCE, DECEMBER 2002 108,525 930,132 (214,141) 833,332
Net income - - - 397,933
Cash dividends:
Common Stock - - - (109,020)
Series B Redeemable Preferred Stock - - - (2,238)
Conversion of Preferred Stock 358 - - 6,556
Purchase of treasury shares (1,680) - - (59,720)
Stock compensation plans, net 943 34,858 - (333)
Common Stock held in trust for
deferred compensation plans 24 - - 1,092
Foreign currency translation - - 48,843 -
Minimum pension liability adjustment - - (32,356) -
Derivative financial instruments - - 819 -
Unrealized gains on marketable securities - - 7,380 -
---------- ----------- -------------- ----------
BALANCE, DECEMBER 2003 $ 108,170 $ 964,990 $ (189,455) $1,067,602
========== =========== ============== ==========
Continued
7
VF CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(continued)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
In thousands STOCK CAPITAL INCOME (LOSS) EARNINGS
--------- ----------- ------------- -----------
BALANCE, DECEMBER 2003 $ 108,170 $ 964,990 $ (189,455) $ 1,067,602
Net income - - - 474,702
Cash dividends:
Common Stock - - - (115,900)
Series B Redeemable Preferred Stock - - - (1,831)
Conversion of Preferred Stock 205 - - 3,729
Stock compensation plans, net 3,026 122,651 - (273)
Common Stock held in trust for
deferred compensation plans (13) - - (746)
Foreign currency translation - - 30,069 -
Minimum pension liability adjustment - - 41,712 -
Derivative financial instruments - - (691) -
Unrealized gains on marketable securities - - 5,294 -
--------- ----------- ------------- -----------
BALANCE, DECEMBER 2004 $ 111,388 $ 1,087,641 $ (113,071) $ 1,427,283
========= =========== ============= ===========
See notes to consolidated financial statements.
8
VF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 2004
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: VF Corporation ("VF") is a multinational consumer
apparel company based in the United States ("U.S."). VF, through its
subsidiaries, designs and manufactures or sources from independent contractors a
variety of apparel for all ages. VF has significant market shares in jeanswear,
sportswear, intimate apparel and outdoor apparel marketed primarily under
VF-owned brand names. VF is also a leader in occupational apparel and in
daypacks, backpacks and technical outdoor equipment.
VF markets these products to a broad customer base of specialty, department and
discount stores throughout the world. VF's ten largest customers, all U.S.-based
retailers, accounted for 38% of consolidated 2004 sales and 29% of total
accounts receivable at the end of 2004. Sales are made on an unsecured basis
under customary terms that may vary by channel of distribution or by geographic
region. VF continuously monitors the creditworthiness of its customers and has
established internal policies regarding customer credit limits. The breadth of
product offerings, combined with the large number and geographic diversity of
its customers, limits VF's concentration of risks.
FISCAL YEAR AND BASIS OF PRESENTATION: VF operates and reports using a 52/53
week fiscal year ending on the Saturday closest to December 31 of each year. All
references to "2004", "2003" and "2002" relate to the fiscal years ended on
January 1, 2005 (52 weeks), January 3, 2004 (52 weeks) and January 4, 2003 (53
weeks), respectively. For presentation purposes herein, all fiscal years are
presented as ended in December.
The financial position, results of operations and cash flows of two businesses
that were disposed of during 2002 have been presented as discontinued operations
for all periods. See Note C.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of VF and its wholly-owned and majority-owned subsidiaries, after
elimination of intercompany transactions and profits. Minority ownership
interests are not significant. Investments in 50%-owned joint ventures, in which
VF does not exercise control, are accounted for using the equity method of
accounting.
FOREIGN CURRENCY TRANSLATION: Financial statements of most foreign subsidiaries
are measured using the local currency as the functional currency. Assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
using exchange rates in effect at the balance sheet date, and revenues and
expenses are translated at average exchange rates during the year. Translation
gains and losses are reported in Accumulated Other Comprehensive Income (Loss).
For foreign subsidiaries that use the U.S. dollar as their functional currency,
the effects of remeasuring assets and liabilities into U.S. dollars is included
in the Consolidated Statements of Income. Net transaction gains of $0.5 million
in 2004, $5.3 million in 2003 and $3.1 million in 2002 arising from transactions
denominated in a currency other than the functional currency of a particular
entity are included in the Consolidated Statements of Income.
CASH AND EQUIVALENTS includes demand deposits and temporary investments that are
readily convertible into cash and will mature within three months of their
purchase.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Trade accounts
receivable are recorded at invoiced amounts, less amounts accrued for returns,
discounts and sales incentive programs. Royalty receivables are recorded at
amounts earned based on sales of licensed products, subject in some cases to
9
minimum amounts from individual licensees. VF maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of customers
and licensees to make required payments. All accounts are subject to ongoing
review for ultimate collectibility. An allowance is provided for specific
customer accounts where collection is doubtful and for the inherent risk in
ultimate collectibility of total balances due at any point in time. Receivables
are charged off against the allowance when it is probable the amounts will not
be recovered. There is no off-balance sheet credit exposure related to customer
receivables.
INVENTORIES are stated at the lower of cost or market. Cost is determined on the
first-in, first-out ("FIFO") method for 71% of total 2004 inventories and 66% of
total 2003 inventories. For remaining inventories, cost is determined on the
last-in, first-out ("LIFO") method (primarily due to Internal Revenue Service
conformity requirements where LIFO is used for income tax purposes). The LIFO
method is used for jeanswear, wholesale sportswear and occupational apparel
inventories located in the United States and Canada. The value of inventories
stated on the LIFO method is not significantly different from the value
determined under the FIFO method.
LONG-LIVED ASSETS: Property, plant and equipment and intangible assets are
stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, ranging from 3 to 10 years for machinery
and equipment and up to 40 years for buildings. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the lease term.
Intangible assets, other than those having indefinite lives, are amortized over
their estimated useful lives using straight-line or accelerated methods
consistent with the expected realization of benefits to be received. The useful
lives of property and intangible assets are reviewed annually.
VF's policy is to evaluate property, intangible assets and goodwill for possible
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. An
impairment loss is recorded for property or intangible assets with identified
useful lives (and therefore are being amortized) if projected undiscounted cash
flows to be generated by the asset or asset group are not expected to be
adequate to recover the assets' carrying value. An impairment loss is recorded
for intangible assets with indefinite lives (and therefore are not being
amortized) or goodwill if the assets' carrying value is in excess of its fair
value.
GOODWILL represents the excess of costs over the fair value of net tangible
assets and identifiable intangible assets of businesses acquired. Effective at
the beginning of 2002, VF adopted Financial Accounting Standards Board ("FASB")
Statement No. 142, Goodwill and Other Intangible Assets. Under this Statement,
goodwill and intangible assets with indefinite useful lives are not amortized,
and other intangible assets are amortized over their estimated useful lives.
In adopting the Statement, VF engaged an independent valuation firm to assist
management in its review of the fair value of its business units and, where
there was an indication that the recorded amount of goodwill might be greater
than its fair value, to assist management in determining the amount of the
possible write-down in value. This evaluation indicated that recorded goodwill
exceeded its fair value at several business units where performance had not met
management's expectations at the time of their acquisition. The resulting
write-downs of goodwill were attributable to differences between the fair value
approach under this Statement and the undiscounted cash flow approach used under
previous accounting literature. The amount of write-downs, and the business
units accounting for the charges, are summarized by reportable segment as
follows (in thousands):
10
BUSINESS SEGMENT AMOUNT BUSINESS UNIT
- ---------------- -------- ------------------------------
Jeanswear $ 63,199 Latin American jeanswear
Intimate Apparel 109,751 European intimate apparel
Imagewear 295,128 Workwear and licensed knitwear
Other 59,176 Childrenswear
Accordingly, VF recorded a noncash charge of $527.3 million ($4.69 per diluted
share), which was recognized as the Cumulative Effect of a Change in Accounting
Policy in the Consolidated Statement of Income at the beginning of 2002. There
was no income tax effect for this charge.
ACCRUED SELF-INSURANCE: VF is primarily self-insured for employee group medical,
workers' compensation, vehicle, property and general liability exposures.
Liabilities for self-insured exposures are accrued on a discounted basis, in
consultation with an independent actuary, based on historical trends and
actuarial data for projected settlements of claims filed and for incurred but
not yet reported claims. Accruals for self-insured exposures are included in
current and noncurrent liabilities based on the expected period of payment.
Excess liability insurance has been purchased to cover claims in excess of
self-insured amounts.
REVENUE RECOGNITION: Sales to wholesale customers are recognized when the risks
and rewards of ownership have been transferred, which is when the product is
received by the customer. Shipping and handling costs billed to customers are
included in Net Sales. Allowances for estimated returns, discounts and sales
incentive programs are recognized as reductions of sales when the sales are
recorded. Sales incentive programs with retailers include stated discounts and
discounts based on the retailer agreeing to advertise or promote VF products.
Sales incentive programs directly with consumers include rebate and coupon
offers. Allowances are based on customer commitments, specific product
circumstances and historical claim rates. Sales at VF-owned and operated retail
stores are recognized at the time of purchase of products by consumers.
COST OF GOODS SOLD for VF-manufactured goods includes all materials, labor and
overhead costs incurred in the production process. Overhead allocated to
manufactured product is based on the normal capacity of our plants and does not
include amounts related to idle capacity or abnormal production inefficiencies.
Cost of Goods Sold for contracted or purchased finished goods includes the
purchase costs and related overhead. In both cases, overhead includes all costs
related to obtaining the finished goods, including costs of planning,
purchasing, quality control, freight and duties. For product lines having a
lifetime warranty, a provision for estimated future repair or replacement costs,
based on historical experience, is recorded when these products are sold.
MARKETING, ADMINISTRATIVE AND GENERAL EXPENSES includes marketing and
advertising, VF-operated retail store costs, warehousing, shipping and handling,
administrative and general expenses. Advertising costs are expensed as incurred
and totaled $314.1 million in 2004, $258.6 million in 2003 and $244.7 million in
2002. Advertising costs include cooperative advertising payments made to VF's
customers as direct reimbursement of advertising costs incurred by those
retailers for advertising VF's products. Cooperative advertising costs were
$43.4 million in 2004, $42.0 million in 2003 and $40.0 million in 2002. Shipping
and handling costs totaled $199.0 million in 2004, $183.3 million in 2003 and
$177.0 million in 2002.
ROYALTY INCOME AND OTHER: Royalty income is recognized at rates specified in the
licensing contracts, based on the licensees' sales of licensed products. Royalty
income was $49.9 million in 2004, $28.6 million in 2003 and $20.5 million in
2002, net of related expenses (including amortization of licensing intangible
assets) of $18.2 million in 2004, $7.6 million in 2003 and $4.6 million in 2002.
This category also includes the equity in
11
income of 50%-owned joint ventures and, in 2004, charges of $9.5 million related
to disposal of a business unit (Note C).
INCOME TAXES are provided on Net Income for financial reporting purposes. Income
taxes are based on amounts of taxes payable or refundable in the current year
and on expected future tax consequences of events that are recognized in
financial statements in different periods than they are recognized in tax
returns. As a result of timing of recognition and measurement differences
between financial accounting standards and income tax laws, temporary
differences arise between the amounts of pretax financial statement income and
taxable income and between reported amounts of assets and liabilities in the
Consolidated Balance Sheets and their respective tax bases. Net deferred income
tax assets reported in the Consolidated Balance Sheets reflect estimated future
tax effects attributable to these temporary differences and carryforwards, based
on tax rates in effect for the years in which the differences are expected to
reverse. Valuation allowances are used to reduce these net deferred tax assets
to amounts considered likely to be realized. U.S. deferred income taxes are not
provided on undistributed income of foreign subsidiaries where such earnings are
considered to be permanently invested. The provision for Income Taxes also
includes estimated interest expense related to tax deficiencies and assessments.
STOCK-BASED COMPENSATION is accounted for under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees.
Compensation expense is not required for stock options, as all options have an
exercise price equal to the market value of the underlying common stock at the
date of grant. For grants of performance-based restricted stock units,
compensation expense equal to the market value of the shares expected to be
issued is recognized over the three year performance period being measured. For
grants of restricted stock, compensation expense equal to the market value of
the shares at the date of grant is recognized over the vesting period. The
following table presents the effects on net income and earnings per share if VF
had applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to all stock-based employee
compensation:
In thousands, except per share amounts 2004 2003 2002
----------- ----------- -----------
Net income (loss), as reported $ 474,702 $ 397,933 $ (154,543)
Add employee compensation expense for performance-based
restricted stock units and restricted stock included in
reported net income, net of income taxes 6,793 990 627
Less total stock-based employee compensation expense
determined under the fair value-based method,
net of income taxes (18,757) (13,648) (15,512)
----------- ----------- -----------
Pro forma net income (loss) $ 462,738 $ 385,275 $ (169,428)
=========== =========== ===========
Earnings (loss) per common share:
Basic - as reported $ 4.30 $ 3.67 $ (1.49)
Basic - pro forma 4.19 3.55 (1.63)
Diluted - as reported $ 4.21 $ 3.61 $ (1.38)
Diluted - pro forma 4.10 3.49 (1.52)
Details of the stock compensation plans and of the fair value assumptions used
above for stock options are described in Note P.
12
In the fourth quarter of 2004, the FASB issued Statement No. 123 (R),
Share-Based Payment. This revision to Statement No. 123 requires that
compensation expense be recognized for the fair value of stock options over
their vesting period and changes the method of expense recognition for
performance-based stock awards. The Statement is required to be adopted no later
than the third quarter of 2005 and applies to all outstanding stock options and
stock awards that have not yet vested at the date of adoption. Management is
evaluating the effects of this Statement.
DERIVATIVE FINANCIAL INSTRUMENTS are measured at their fair value and are
recognized as Other Current Assets or Accrued Liabilities in the Consolidated
Balance Sheets. VF formally documents hedged transactions and hedging
instruments, and assesses, both at the inception of a contract and on an ongoing
basis, whether the hedging instruments are effective in offsetting changes in
cash flows of the hedged transactions. VF does not use derivative financial
instruments for trading or speculative purposes.
If certain criteria are met, a derivative may be specifically designated and
accounted for as (1) a hedge of the exposure to variable cash flows for a
forecasted transaction or (2) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment. The
criteria used to determine if hedge accounting treatment is appropriate are (1)
to designate and identify the appropriate hedging instrument to be used to
reduce an identified exposure and (2) to determine if there is a high
correlation between the value of the hedging instrument and the identified
exposure. Changes in the fair value of derivatives accounted for as cash flow
hedges are deferred in Other Comprehensive Income and recognized in Net Income
as an offset to the earnings impact of the hedged transaction at the time in
which the hedged transaction affects earnings. Changes in the fair value of
derivatives accounted for as fair value hedges are recognized in Miscellaneous
Income or Expense as an offset to the earnings impact of the hedged item. The
changes in fair value, as evaluated and adjusted each quarter, are deferred in
Other Comprehensive Income or reported in earnings, depending on the nature and
effectiveness of the hedged item or the risk. Any ineffectiveness in a hedging
relationship is recorded immediately in earnings. For those limited number of
derivatives that do not meet the criteria for hedge accounting, changes in fair
value are recognized in Miscellaneous Income or Expense as they occur.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
with the 2004 presentation.
LEGAL AND TAX CONTINGENCIES: VF is involved in legal and tax proceedings and
claims arising from time to time. Management, in connection with outside
advisers, periodically assesses liabilities and contingencies in connection with
these matters, based on the latest information available. For those matters
where it is probable that a loss has been or will be incurred, we record the
loss, or a reasonable estimate of the loss, in the consolidated financial
statements. As additional information becomes available, estimates of probable
losses are adjusted based on an assessment of the circumstances. Management
believes that the outcome of these matters, individually and in the aggregate,
will not have a material adverse effect on the consolidated financial
statements.
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
During 2004, VF acquired the following four businesses for a total cash cost,
including transaction costs, of $667.5 million (collectively referred to as the
"2004 Acquisitions"):
- - The most significant transaction was the acquisition on June 30, 2004 of
100% of the common stock of Vans, Inc. ("Vans") at a price of $20.55 per
share, for a total cost of $373.1 million. Vans designs and markets
Vans(R) performance and casual footwear and apparel for skateboarders and
other action sports participants and enthusiasts. In its most recent
fiscal year, Vans had sales of $344 million (unaudited), with
13
sales being split approximately equally among domestic wholesale accounts,
domestic retail stores and international operations.
- - A subsidiary of VF acquired the operating assets of Kipling(R) bags,
backpacks and accessories ("Kipling") on June 14, 2004. Including the
acquisition of the brand rights in the United States in late 2004, the
total cost was $185.0 million. Based in Belgium, Kipling had sales of $69
million (unaudited) in its most recent year.
- - On May 31, 2004, VF acquired 100% of the common stock of Green Sport Monte
Bianco S.p.A., makers of Napapijri(R) premium casual outdoor sportswear
("Napapijri"), for a total cost of $103.4 million. Based in Italy,
Napapijri had sales of $76 million (unaudited) in its most recent year.
- - VF acquired 51% ownership of a newly formed company in Mexico for $6.0
million. This company will market several of VF's intimate apparel brands,
as well as the Ilusion(R) brand licensed from the minority partner, to
discount stores and department stores in Mexico.
The Vans, Kipling and Napapijri businesses add lifestyle brands having global
growth potential. Their brands are targeted to specific consumer groups, and
their products extend across multiple categories. Vans and Kipling provide
expertise and growth opportunities in two new product categories for VF - -
footwear and women's accessories. In addition, the sportswear design talent at
Napapijri is being used to assist in the European launch of Nautica(R) apparel
in 2005.
On August 27, 2003, VF acquired all of the common stock of Nautica Enterprises,
Inc. ("Nautica") for a total cash cost of $587.6 million, including transaction
costs. Nautica designs, sources and markets sportswear under the Nautica(R)
brand. The Nautica(R) brand is licensed for apparel and accessories in the
United States and internationally and for home furnishings in the United States.
The Nautica acquisition (1) provided a growth platform for sportswear, which was
a new product category for VF, (2) provided broader lifestyle product
capabilities and (3) significantly expanded VF's presence in the department
store and specialty store channels of distribution. The Nautica acquisition also
included a chain of 115 Nautica(R) retail outlet stores, the premium Earl
Jean(R) brand of jeans and sportswear and the John Varvatos(R) brand of designer
sportswear. In a separate transaction, VF acquired from a former officer of
Nautica his rights to receive 50% of Nautica's net royalty income, along with
other rights in the Nautica(R) name, trademarks and intellectual property owned,
held or used by Nautica. Under this agreement, VF paid $38.0 million at closing
and will pay $33.0 million on each of the third and fourth anniversaries of the
closing. The future amounts do not bear interest and were recorded at their
present value of $58.3 million. As additional consideration, VF will pay 31.7%
of Nautica's gross royalty revenues in excess of $34.7 million in any year
through 2008, with such excess payments to be recorded as Goodwill. Gross
royalty revenues were $33.7 million in 2004. The acquisitions of Nautica and of
the former officer's rights are collectively referred to herein as the "Nautica
Acquisition."
Operating results of these acquisitions have been included in the consolidated
financial statements since their respective dates of acquisition.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed for these transactions at their respective dates of
acquisition. The purchase price allocation for the 2004 Acquisitions is subject
to adjustment over the first half of 2005 as VF management finalizes their
integration plans. In addition, management is awaiting information from outside
counsel on litigation related to one of the acquisitions.
14
2004 NAUTICA
In thousands ACQUISITIONS ACQUISITION
------------ -----------
Cash and equivalents $ 59,899 $ 75,597
Other current assets 159,343 247,675
Property, plant and equipment 20,034 52,197
Intangible assets 323,500 319,700
Other assets 48,867 10,954
------------ -----------
Total assets acquired 611,643 706,123
------------ -----------
Current liabilities 171,979 172,751
Long-term debt 1,619 18,092
Other liabilities, primarily deferred income taxes 86,745 48,595
------------ -----------
Total liabilities assumed 260,343 239,438
------------ -----------
Net assets acquired 351,300 466,685
Goodwill 316,199 217,178
------------ -----------
Purchase price $ 667,499 $ 683,863
============ ===========
Amounts assigned to intangible assets were based on management's evaluation of
their fair values, with assistance from an independent valuation firm.
Management believes that amounts assigned to major trademarks and tradenames
have an indefinite life. Amounts assigned to amortizable intangible assets for
the 2004 Acquisitions totaled $90.4 million and consisted principally of $57.2
million of customer relationships and $24.4 million of licensing contracts.
These assets were determined to have weighted average useful lives of 21 years
and 8 years, respectively, and are being amortized primarily using accelerated
methods. Amortizable intangible assets for the Nautica Acquisition totaled
$102.3 million and consisted principally of $89.5 million of licensing contracts
and $9.7 million of customer relationships. These assets have weighted average
useful lives of 30 years and 24 years, respectively, and are being amortized
using accelerated methods.
Factors that contributed to the recognition of Goodwill for the 2004
Acquisitions and the Nautica Acquisition included (1) expected growth rates and
profitability of the acquired companies, (2) their experienced workforce, (3)
VF's strategies for growth in sales, income and cash flows in the various
wholesale, retail and licensing businesses and (4) expected synergies with
existing VF business units. Goodwill of $48.0 million related to the 2004
Acquisitions and of $51.6 million related to the Nautica Acquisition is expected
to be deductible for income tax purposes.
The following unaudited pro forma results of operations assume that the 2004 and
the 2003 acquisitions had occurred at the beginning of 2003. These pro forma
amounts should not be relied on as an indication of the results of operations
that VF would have achieved had the acquisitions taken place at a different date
or of future results that VF might achieve:
15
In thousands, except per share amounts 2004 * 2003 *
----------- -----------
Net sales $ 6,278,790 $ 6,062,955
Net income 460,311 343,726
Earnings per common share:
Basic $ 4.17 $ 3.17
Diluted 4.08 3.12
* Pro forma operating results for 2004 include expenses totaling $59.6
million ($0.41 basic and $0.40 diluted per share) and for 2003 include
expenses totaling $35.6 million ($0.24 basic and $0.23 diluted EPS) for
settlement of stock options, management contracts and other transaction
expenses incurred by the acquired businesses related to their acquisition
by VF.
VF completed two other acquisitions during 2003 for a total consideration of
$3.7 million. Contingent consideration of up to $1.3 million related to one of
these acquisitions is payable if certain sales targets are achieved over each of
the years through 2006. Accordingly, in each of 2004 and 2003, $0.3 million of
contingent consideration was earned and capitalized as additional licensing
intangible assets. Pro forma operating results for prior periods are not
presented due to immateriality.
VF accrued various restructuring charges in connection with the 2003 and 2004
acquisitions. Remaining cash payments related to these actions will be
substantially completed during 2005.
Activity in the restructuring accruals for the 2004 Acquisitions is summarized
as follows:
FACILITIES LEASE
In thousands SEVERANCE EXIT COSTS TERMINATION TOTAL
--------- ---------- ----------- --------
Accrual for 2004 acquisitions $ 24,562 $ 811 $ 1,593 $ 26,966
Cash payments (20,667) - (176) (20,843)
--------- ---------- ----------- --------
Balance, December 2004 $ 3,895 $ 811 $ 1,417 $ 6,123
========= ========== =========== ========
Activity in the restructuring accruals for the 2003 acquisitions is summarized
as follows:
FACILITIES LEASE
In thousands SEVERANCE EXIT COSTS TERMINATION TOTAL
--------- ---------- ----------- --------
Accrual for 2003 acquisitions $ 6,564 $ 403 $ 13,603 $ 20,570
Cash payments (520) - (655) (1,175)
--------- ---------- ----------- --------
Balance, December 2003 6,044 403 12,948 19,395
Additional accrual 3,682 - - 3,682
Write-off of assets - (376) - (376)
Cash payments (4,322) (27) (12,948) (17,297)
--------- ---------- ----------- --------
Balance, December 2004 $ 5,404 $ - $ - $ 5,404
========= ========== =========== ========
16
NOTE C - DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
In 2001, management announced a plan to exit the Private Label knitwear business
and the Jantzen swimwear business. The Jantzen(R) trademarks and certain other
assets of this swimwear business were sold in 2002 for $24.0 million.
Liquidation of the Private Label knitwear business and of the remaining Jantzen
inventories and other assets was completed during 2002. Both the Private Label
knitwear and the Jantzen businesses are accounted for as discontinued operations
in accordance with FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Accordingly, the results of operations and cash
flows of these businesses are separately presented as discontinued operations in
the accompanying financial statements. Summarized operating results for these
discontinued businesses for 2002 were net sales of $98.0 million; income before
taxes of $13.5 million (including gain on disposal of $1.4 million); income
taxes of $5.2 million; and income of $8.3 million.
VF's children's playwear business ("VF Playwear") consisted of the Healthtex(R)
and licensed Nike(R) apparel products. Certain assets of VF Playwear were sold
in May 2004 for cash and notes totaling $17.1 million. VF Playwear retained all
inventories and other working capital and continued to ship products through the
end of the third quarter. Under the sale agreement, VF agreed to purchase $150.0
million of branded childrenswear from the purchaser over a 10 year period for
sale in its outlet stores. Due to this ongoing involvement, VF Playwear does not
qualify for treatment as a discontinued operation. VF Playwear contributed sales
of $87.1 million, $144.0 million and $175.5 million and operating losses of
$(14.0) million, $(7.7) million and $(3.2) million in 2004, 2003 and 2002,
respectively. Operating results include net charges of $9.5 million related to
the disposal of the business in 2004 and a $2.3 million goodwill impairment
charge in 2002.
Assets and liabilities of VF Playwear included in the respective captions of the
Consolidated Balance Sheets are summarized as follows:
In thousands 2004 2003
-------- --------
Accounts receivable, net $ 4,363 $ 12,958
Inventories - 35,082
Property, plant and equipment, net 6,249 14,305
Other, primarily deferred income taxes 4,181 7,521
-------- --------
$ 14,793 $ 69,866
======== ========
Accounts payable $ - $ 11,162
Accrued liabilities 15,129 7,274
-------- --------
$ 15,129 $ 18,436
======== ========
At the end of 2004, Accrued Liabilities related primarily to expected losses on
formerly occupied leased premises.
17
NOTE D - ACCOUNTS RECEIVABLE
In thousands 2004 2003
---------- ----------
Trade $ 758,882 $ 646,332
Other 53,490 53,300
---------- ----------
Total accounts receivable 812,372 699,632
Less allowance for doubtful accounts 60,790 65,769
---------- ----------
$ 751,582 $ 633,863
========== ==========
NOTE E - INVENTORIES
In thousands 2004 2003
---------- ----------
Finished products $ 744,517 $ 714,867
Work in process 99,669 91,593
Materials and supplies 129,062 126,525
---------- ----------
$ 973,248 $ 932,985
========== ==========
NOTE F - PROPERTY, PLANT AND EQUIPMENT
In thousands 2004 2003
---------- ----------
Land $ 52,989 $ 52,124
Buildings and improvements 502,369 479,725
Machinery and equipment 984,132 1,027,997
---------- ----------
1,539,490 1,559,846
Less accumulated depreciation 967,236 968,166
---------- ----------
$ 572,254 $ 591,680
========== ==========
18
NOTE G - INTANGIBLE ASSETS
DECEMBER 2004
------------------------------------
WEIGHTED GROSS NET
AVERAGE CARRYING ACCUMULATED CARRYING
Dollars in thousands LIFE AMOUNT AMORTIZATION AMOUNT
-------- --------- ------------ ---------
Amortizable intangible assets*:
License agreements 25 years $ 114,623 $ 7,343 $ 107,280
Customer relationships 21 years 71,305 2,797 68,508
Trademarks, backlog and other 6 years 13,111 7,646 5,465
---------
Amortizable intangible assets, net 181,253
Indefinite-lived intangible assets:
Trademarks and tradenames 458,267
---------
Intangible assets, net $ 639,520
=========
DECEMBER 2003
------------------------------------
WEIGHTED GROSS NET
AVERAGE CARRYING ACCUMULATED CARRYING
Dollars in thousands LIFE AMOUNT AMORTIZATION AMOUNT
-------- --------- ------------ ---------
Amortizable intangible assets*:
License agreements 30 years $ 89,500 $ 1,148 $ 88,352
Customer relationships 24 years 10,200 233 9,967
Trademarks, backlog and other 5 years 5,090 2,175 2,915
---------
Amortizable intangible assets, net 101,234
Indefinite-lived intangible assets:
Trademarks and tradenames 217,400
---------
Intangible assets, net $ 318,634
=========
* Amortization of license agreements and customer relationships - accelerated
methods; other - straight-line method.
Amortization expense was $15.4 million in 2004 (including an impairment charge
of $1.1 million for a miscellaneous intangible asset) and $3.6 million in 2003.
Estimated amortization expense for the years 2005 through 2009 is $14.6 million,
$14.2 million, $13.5 million, $10.4 million and $8.1 million, respectively.
19
NOTE H - GOODWILL
Activity is summarized by business segment as follows:
OUTDOOR
JEANSWEAR APPAREL AND INTIMATE
In thousands APPAREL EQUIPMENT APPAREL IMAGEWEAR SPORTSWEAR OTHER
--------- ----------- --------- --------- ---------- ---------
Balance, December 2001 $ 253,841 $ 110,036 $ 221,343 $ 351,374 $ - $ 61,452
Change in accounting policy
(Note A) (63,199) - (109,751) (295,128) - (59,176)
Adjustments to purchase
price allocation (275) (924) - - - -
Impairment loss (Note C) - - - - - (2,276)
Currency translation 6,038 - - - - -
--------- ---------- --------- --------- ---------- ---------
Balance, December 2002 196,405 109,112 111,592 56,246 - -
2003 acquisitions - - - - 217,178 -
Currency translation 10,439 - - - - -
--------- ---------- --------- --------- ---------- ---------
Balance, December 2003 206,844 109,112 111,592 56,246 217,178 -
2004 acquisitions - 310,175 6,000 - 24 -
Adjustments to purchase
price allocation - - - - (2,934) -
Currency translation 4,411 12,946 - - - -
--------- ---------- --------- --------- ---------- ---------
Balance, December 2004 $ 211,255 $ 432,233 $ 117,592 $ 56,246 $ 214,268 $ -
========= ========== ========= ========= ========== =========
NOTE I - OTHER ASSETS
In thousands 2004 2003
-------- --------
Investment securities held for deferred compensation plans $167,715 $158,074
Other investment securities 45,116 36,800
Computer software, net of accumulated amortization
of $45,057 in 2004 and $35,343 in 2003 63,810 61,499
Pension plan intangible asset (Note N) 46,960 17,919
Other 46,265 34,007
-------- --------
$369,866 $308,299
======== ========
Investment securities held for deferred compensation plans consist of marketable
securities and life insurance contracts. These securities substantially mirror
the participant-directed investment selections underlying the deferred
compensation liabilities (Note M). These securities, held in an irrevocable
trust, are recorded at fair value. Realized and unrealized gains and losses on
these investment securities are recorded in the Consolidated Statements of
Income and substantially offset changes in deferred compensation liabilities to
participants.
20
Other investment securities are held primarily to support liabilities under the
supplemental defined benefit pension plan (Note M). These securities, held in an
irrevocable trust, are recorded at fair value. Realized gains and losses are
recorded in the Consolidated Statements of Income, and unrealized gains and
losses, net of income taxes, are recorded in Accumulated Other Comprehensive
Income (Loss).
VF is the beneficiary of life insurance policies mentioned above on certain
current and former members of VF management. Policy loans against the cash value
of these policies are not significant.
NOTE J - SHORT-TERM BORROWINGS
Short-term borrowings, all from foreign banks, had a weighted average interest
rate of 7.0% at the end of 2004 and at the end of 2003.
The Company maintains a $750.0 million unsecured committed revolving bank credit
agreement that supports issuance of up to $750.0 million in commercial paper or
is otherwise available for general corporate purposes. This agreement, which
expires in September 2008, requires VF to pay a facility fee of .09% per year
and contains a financial covenant requiring VF's ratio of consolidated
indebtedness to consolidated capitalization to remain below 60%. The agreement
also contains other covenants and events of default, including limitations on
liens, subsidiary indebtedness and sales of assets, and a $50.0 million
cross-acceleration event of default. If VF fails in the performance of any
covenant under this agreement (after giving effect to any applicable grace
period), the banks may terminate their obligation to lend, and any bank
borrowings outstanding under this agreement may become due and payable. At the
end of 2004, management believes that VF was in compliance with all covenants.
Also at the end of 2004, the entire amount of the credit agreement was available
for borrowing, except for $11.8 million of standby letters of credit issued
under the agreement on behalf of VF.
NOTE K - ACCRUED LIABILITIES
In thousands 2004 2003
-------- --------
Compensation $141,584 $ 89,856
Income taxes 39,750 21,520
Other taxes 51,829 32,432
Minimum pension liability (Note N) 55,000 55,000
Advertising 29,374 34,742
Insurance 25,831 18,212
Interest 14,989 14,789
Product warranty claims (Note M) 7,193 8,426
Other 192,665 163,962
-------- --------
$558,215 $438,939
======== ========
21
NOTE L - LONG-TERM DEBT
In thousands 2004 2003
-------- --------
6.75% notes, due 2005 $100,000 $100,000
8.10% notes, due 2005 300,000 300,000
8.50% notes, due 2010 200,000 200,000
6.00% notes, due 2033 292,230 292,133
Other 65,641 65,394
-------- --------
957,871 957,527
Less current portion 401,232 1,144
-------- --------
$556,639 $956,383
======== ========
The notes contain customary covenants and events of default, including
limitations on liens and sale-leaseback transactions and a cross-acceleration
event of default. The cross-acceleration is triggered for all notes if more than
$50.0 million of other debt is in default and has been accelerated by the
lenders, except for the 6.75% notes where the threshold is $5.0 million. If VF
fails in the performance of any covenant under the indenture that governs the
respective notes (after giving effect to any applicable grace period), the
trustee or lenders may declare the principal due and payable immediately. At the
end of 2004, management believes that VF was in compliance with all covenants.
VF may redeem the 8.10%, the 8.50% and the 6.00% obligations, in whole or in
part, at a price equal to 100% of the principal amount, plus accrued interest to
the redemption date and a premium (if any) relating to the then-prevailing
treasury yield over the remaining life of the obligations.
The 6.00% notes having a principal balance of $300.0 million were sold at an
original issue discount of $7.9 million. The notes are carried net of the
unamortized portion of the discount. These notes have an effective annual
interest cost of 6.19%, including amortization of the original issue discount,
deferred gain on the interest rate hedging contract (Note U) and debt issuance
costs.
Other debt includes $66.0 million payable to a former officer of Nautica, of
which $33.0 million is payable in each of 2006 and 2007 (Note B). These
noninterest-bearing installments were recorded at discounts of 3.25% and 3.84%,
respectively, reflecting VF's incremental borrowing rates for those periods. The
discounts are being amortized as Interest Expense over the lives of these
obligations. The carrying value of this debt was $61.1 million at the end of
2004 and $59.0 million at the end of 2003.
The scheduled payments of long-term debt are $34.1 million in 2006, $34.2
million in 2007, $0.8 million in 2008 and $0.2 million in 2009.
22
NOTE M - OTHER LIABILITIES
In thousands 2004 2003
-------- --------
Deferred compensation $186,834 $174,771
Minimum pension liability (Note N) 102,009 144,239
Accrued pension benefits (Note N) 56,512 49,375
Income taxes 83,033 70,201
Product warranty claims 26,976 20,426
Other 80,767 59,613
-------- --------
$536,131 $518,625
======== ========
VF maintains deferred compensation plans for the benefit of eligible employees.
These plans allow participants to defer compensation and, in some plans, receive
matching contributions by VF. Deferred compensation, including accumulated
earnings on the participant-directed investment options, is distributable in
cash at employee-specified dates or upon retirement, death, disability or
termination of employment. See Note I for investment securities owned by VF to
fund liabilities under certain of these deferred compensation plans.
Activity relating to accrued product warranty costs is summarized as follows:
In thousands 2004 2003 2002
-------- -------- --------
Balance, beginning of year $ 28,852 $ 25,782 $ 21,698
Balances of acquired businesses 347 - -
Accrual for products sold during the year 10,788 10,597 8,548
Repair or replacement costs incurred (6,840) (8,552) (5,293)
Currency translation 1,022 1,025 829
-------- -------- --------
Balance, end of year 34,169 28,852 $ 25,782
========
Less current portion (Note K) 7,193 8,426
-------- --------
Long-term accrual $ 26,976 $ 20,426
======== ========
NOTE N - BENEFIT PLANS
VF sponsors a noncontributory qualified defined benefit pension plan covering
most full-time domestic employees other than employees of companies acquired in
2004 and 2003. VF also sponsors an unfunded supplemental defined benefit pension
plan that provides benefits computed under VF's principal benefit plan that
exceed limitations imposed by income tax regulations. These defined benefit
plans provide pension benefits based on compensation levels and years of
service. The effect of these plans on income was as follows:
23
Dollars in thousands 2004 2003 2002
-------- -------- ----------
Service cost - benefits earned during the year $ 22,470 $ 18,475 $ 18,240
Interest cost on projected benefit obligations 59,272 53,883 51,734
Expected return on plan assets (59,728) (48,225) (50,433)
Curtailment charge 7,100 - 2,388
Amortization of:
Prior service cost 3,960 3,138 4,243
Actuarial loss 24,697 28,425 1,370
-------- -------- ----------
Total pension expense 57,771 55,696 27,542
Amount allocable to discontinued operations - - 1,317
-------- -------- ----------
Pension expense - continuing operations $ 57,771 $ 55,696 $ 26,225
======== ======== ==========
Assumptions used to determine pension expense:
Discount rate 6.00% 6.75% 7.50%
Expected long-term return on plan assets 8.50% 8.75% 8.75%
Rate of compensation increase 3.75% 4.00% 4.00%
The $7.1 million partial pension plan curtailment charge in 2004 related to
reductions in the number of plan participants, including $2.9 million related to
the disposition of VF Playwear (Note C).
The following provides a reconciliation of the changes in fair value of the
pension plans' assets and projected benefit obligations, and their funded
status, based on a September 30 measurement date:
24
Dollars in thousands 2004 2003
----------- -----------
Fair value of plan assets, beginning of year $ 647,723 $ 519,013
Actual return on plan assets 68,583 86,290
VF contributions 57,947 77,481
Benefits paid (40,447) (35,061)
----------- -----------
Fair value of plan assets, end of year 733,806 647,723
----------- -----------
Projected benefit obligations, beginning of year 957,437 797,173
Service cost 22,470 18,475
Interest cost 59,272 53,883
Plan amendments 25,783 501
Partial plan curtailment (3,188) -
Actuarial (gain) loss (14,897) 122,466
Benefits paid (40,447) (35,061)
----------- -----------
Projected benefit obligations, end of year 1,006,430 957,437
----------- -----------
Funded status, end of year (272,624) (309,714)
Unrecognized net actuarial loss 267,727 321,375
Unrecognized prior service cost 32,642 17,919
----------- -----------
Pension asset, net $ 27,745 $ 29,580
=========== ===========
Amounts included in Consolidated Balance Sheets:
Noncurrent assets $ 46,960 $ 17,919
Current liabilities (55,000) (55,000)
Noncurrent liabilities (158,521) (193,614)
Accumulated other comprehensive income (loss) 194,306 260,275
----------- -----------
$ 27,745 $ 29,580
=========== ===========
Assumptions used to determine benefit obligations:
Discount rate 6.10% 6.00%
Rate of compensation increase 3.75% 3.75%
Differences between actual results and amounts determined using actuarial
assumptions are deferred and will affect future years' pension expense. Net
deferred gains and losses totaling less than 10% of the lower of investment
assets or projected benefit obligations at the beginning of a year are not
amortized. Net deferred gains and losses that represent 10 to 20% of projected
benefit obligations are amortized over ten years, while those in excess of 20%
of projected benefit obligations are amortized over five years.
Management's investment strategy is to invest the plan's assets in a diversified
portfolio of domestic and international equity, fixed income and real estate
securities to provide long-term growth in plan assets. This
25
strategy, the resulting allocation of plan assets and the selection of
independent investment managers are reviewed periodically.
The expected long-term rate of return on plan assets was based on the weighted
average of the expected returns for the major asset classes in which the plan
invests. Expected returns by asset class were developed through analysis of
historical market returns, current market conditions, inflation expectations and
other economic factors. The assumed rate of return on plan assets of 8.50% in
2004 is lower than actual long-term historical returns. The target allocation by
asset class, and the actual asset allocations at the latest measurement dates,
were as follows:
SEPTEMBER 30
TARGET -----------
ALLOCATION 2004 2003
---------- ---- ----
Equity securities 65% 71% 61%
Fixed income securities 30 21 31
Real estate securities 5 8 8
--- --- ---
Total 100% 100% 100%
=== === ===
VF makes contributions to the plan sufficient to meet the minimum funding
requirements under applicable laws, plus additional amounts as recommended by
VF's independent actuary. Although VF was not required to make a contribution to
the plan during 2005 under applicable regulations, VF contributed $55.0 million
to its qualified pension plan in January 2005. Estimated future benefit
payments, including benefits attributable to estimated future employee service,
are approximately $42 million in 2005, $43 million in 2006, $46 million in 2007,
$48 million in 2008, $51 million in 2009 and $312 million for the years 2010
through 2014.
Accumulated benefit obligations earned through the respective measurement dates
for these plans totaled $947.3 million in 2004 and $896.3 million in 2003. The
excess of accumulated benefit obligations over the sum of the fair value of plan
assets and previously accrued pension liabilities ("minimum pension liability")
was $157.0 million in 2004 and $199.2 million in 2003. The offset to this
minimum pension liability is recorded, after income tax effect, as a component
of Accumulated Other Comprehensive Income (Loss). At the end of both 2004 and
2003, $55.0 million of the minimum pension liability was classified as a current
liability because VF contributed that amount to the pension plan in early 2005
and 2004, respectively.
VF sponsors an Employee Stock Ownership Plan ("ESOP") as part of a 401(k)
savings plan covering most domestic salaried employees. Cash contributions made
by VF to the 401(k) plan are based on a specified percentage of employee
contributions. By the end of 2002, all VF stock had been allocated to the ESOP
accounts of the participating employees. VF also sponsors other savings and
retirement plans for certain domestic and foreign employees. Expense for these
plans totaled $7.0 million in 2004, $6.5 million in 2003 and $7.1 million in
2002.
VF participates in multiemployer retirement benefit plans for certain of its
union employees. Contributions are made to these plans in amounts provided by
the collective bargaining agreements and totaled $0.1 million in 2004, $0.2
million in 2003 and $0.6 million in 2002. If there were a significant reduction
in union employees, VF may be required to pay a potential withdrawal liability
if the respective plans were underfunded at the time of withdrawal. During 2003,
VF recognized a $7.7 million expense when it was determined that a probable
withdrawal liability existed due to reductions in union-based employment. An
additional $1.0 million expense was recognized during 2004.
26
NOTE O - CAPITAL
COMMON STOCK outstanding is net of shares held in treasury, and in substance
retired. There were 1,098,172 treasury shares at the end of 2004, 1,297,953
treasury shares at the end of 2003 (after retirement of 32,000,000 shares during
the year) and 32,233,996 treasury shares at the end of 2002. The excess of the
cost of treasury shares acquired over the $1 per share stated value of Common
Stock is charged to Retained Earnings. In addition, 256,088 shares of VF Common
Stock at the end of 2004, 242,443 shares at the end of 2003 and 266,146 shares
at the end of 2002 were held in trust for deferred compensation plans. These
additional shares are treated for financial reporting purposes as treasury
shares at a cost of $9.2 million, $8.4 million and $9.3 million at the end of
2004, 2003 and 2002, respectively.
PREFERRED STOCK consists of 25,000,000 authorized shares at $1 par value.
Series A Preferred Stock: At the end of 2004, 2,000,000 shares are designated as
Series A Preferred Stock, of which none has been issued. Each outstanding share
of Common Stock has one Series A 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
VF 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 $0.01 per right prior
to their becoming exercisable.
Series B Redeemable Preferred Stock: At the end of 2004, 2,105,263 shares are
designated as 6.75% Series B Redeemable Preferred Stock, which were purchased by
the ESOP in 1990. (See Note N.) Changes in shares of Preferred Stock outstanding
are summarized as follows:
2004 2003 2002
-------- --------- ----------
Balance, beginning of year 971,250 1,195,199 1,477,930
Conversion to Common Stock (127,436) (223,949) (113,527)
Redemption of Preferred Stock - - (169,204)
-------- --------- ----------
Balance, end of year 843,814 971,250 1,195,199
======== ========= ==========
Each share of Series B Redeemable Preferred Stock has a redemption value and
liquidation 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. Dividends are accrued and paid in cash each quarter. The
trustee for the ESOP may convert the preferred shares to Common Stock at any
time or may cause VF to redeem the preferred shares under certain circumstances.
The Series B Redeemable Preferred Stock also has preference in liquidation over
all other stock issues. By the end of 2002, all Preferred Stock had been
allocated to the ESOP accounts of the participating employees.
ACCUMULATED OTHER COMPREHENSIVE INCOME: Other comprehensive income consists of
certain changes in assets and liabilities that are not included in Net Income
under generally accepted accounting principles but are instead reported within a
separate component of Common Stockholders' Equity. Amounts comprising
Accumulated Other Comprehensive Income (Loss) in the Consolidated Balance
Sheets, net of related income taxes, are summarized as follows:
27
In thousands 2004 2003
--------- --------
Foreign currency translation $ (1,816) $ (31,885)
Minimum pension liability adjustment (119,138) (160,850)
Derivative financial instruments (5,141) (4,450)
Unrealized gains on marketable securities 13,024 7,730
--------- ---------
$(113,071) $(189,455)
========= =========
NOTE P - STOCK-BASED COMPENSATION
VF may grant nonqualified stock options, restricted stock units and restricted
stock to officers, key employees and nonemployee members of VF's Board of
Directors under a stock compensation plan approved by stockholders. Stock
options are granted at prices not less than fair market value on the date of
grant. Options become exercisable from one to three years after the date of
grant and expire ten years after the date of grant. Stock option activity is
summarized as follows:
SHARES UNDER WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------ ----------------
Balance, December 2001 9,009,981 $ 35.87
Options granted 2,453,000 40.90
Options exercised (1,326,026) 30.29
Options canceled (343,265) 41.16
----------- ----------------
Balance, December 2002 9,793,690 37.70
Options granted 2,448,480 34.75
Options exercised (921,710) 29.99
Options canceled (417,850) 41.70
----------- ----------------
Balance, December 2003 10,902,610 37.54
Options granted 1,755,890 44.80
Options exercised (3,015,044) 36.78
Options canceled (13,500) 38.20
----------- ----------------
Balance, December 2004 9,629,956 $ 39.10
===========
Stock options outstanding at the end of 2004 are summarized as follows:
28
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING YEARS EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------- ----------- ---------------- -------- ----------- --------
$ 25 - 30 624,700 4.5 $ 26.16 624,700 $ 26.16
30 - 35 1,966,340 6.1 34.58 1,439,676 34.57
35 - 40 1,413,446 7.2 35.87 1,353,446 35.89
40 - 45 5,625,470 6.8 42.93 3,616,550 42.17
---------- --- -------- --------- --------
$ 25 - 45 9,629,956 6.6 $ 39.10 7,034,372 $ 37.98
========== =========
Options to purchase 7,664,766 shares were exercisable at the end of 2003 at a
weighted average exercise price of $38.23. At the end of 2002, there were
options exercisable to purchase 6,061,240 shares at a weighted average exercise
price of $36.20. At the end of 2004, there were 9,186,248 shares available for
future grants of stock options and stock awards, of which no more than 2,582,575
may be grants of restricted stock or shares delivered in settlement of
restricted stock units.
VF has granted performance-based restricted stock units to certain key employees
as a long-term incentive under the stock compensation plan. The restricted stock
units entitle the participants to receive shares of VF Common Stock at the end
of a three year performance period. Each restricted stock unit has a final value
ranging from zero to two shares of VF Common Stock. For the 2004 grants, the
number of shares to be earned is based on achievement of preestablished
performance goals set by the Compensation Committee of the Board of Directors.
For grants in prior years, the number of shares to be earned was based on three
year stockholder return comparisons of VF Common Stock with a peer group of
apparel companies. Dividend equivalents, payable in additional shares of VF
Common Stock, accrue on the restricted stock units. Shares earned at the end of
each three year performance period are issued to participants in the following
year, unless they elect to defer receipt of the shares. VF granted 280,007
restricted stock units having a grant date fair value per unit of $43.18 in 2004
for the performance period ending in 2006; similarly, 49,147 units were granted
at $36.10 in 2003 and 44,143 units at $39.27 in 2002. A total of 23,727, 25,064
and 57,188 shares of VF Common Stock were earned for the three year performance
periods ended in 2004, 2003 and 2002, respectively. At the end of 2004, there
were 49,147 restricted stock units outstanding for the performance period ending
in 2005 and 280,007 for the performance period ending in 2006. A total of
101,943 shares of Common Stock are issuable in future years to participants who
have elected to defer receipt of their shares earned.
At the end of 2004, VF had 62,611 shares of restricted stock outstanding that
vest in 2005, which had been granted to key employees in prior years. This total
included dividends payable in additional restricted shares of 1,328, 1,579 and
1,425 shares accrued in 2004, 2003 and 2002, respectively, on prior years'
grants of restricted stock.
Compensation expense recognized in the Consolidated Statements of Income for
restricted stock units and restricted stock totaled $11.0 million in 2004, $1.6
million in 2003 and $1.0 million in 2002. Since all stock options are granted at
market value, compensation expense is not required. Note A presents pro forma
net income and earnings per share that would have resulted if compensation had
been recorded based
29
on the fair value method for all stock-based compensation. Fair value for stock
options, as presented in Note A, was estimated using the Black-Scholes
option-pricing model. The resulting weighted average fair value of stock options
granted during 2004 was $11.64 per share, during 2003 was $8.33 per share and
during 2002 was $10.51 per share, based on the following assumptions:
2004 2003 2002
---- ---- ----
Risk-free interest rate 2.6% 2.6% 4.0%
Expected dividend yield 2.4% 2.9% 2.7%
Expected volatility 35% 36% 36%
Expected life (years) 4 4 4
NOTE Q - INCOME TAXES
The provision for Income Taxes was computed based on the following amounts of
Income from Continuing Operations before Income Taxes and Cumulative Effect of a
Change in Accounting Policy:
In thousands 2004 2003 2002
--------- --------- ---------
Domestic $ 545,516 $ 459,507 $ 439,744
Foreign 166,604 138,999 121,984
--------- --------- --------
$ 712,120 $ 598,506 $ 561,728
========= ========= =========
The provision for Income Taxes for continuing operations consists of:
In thousands 2004 2003 2002
--------- --------- ---------
Current:
Federal $ 170,649 $ 132,160 $ 95,738
Foreign 38,703 29,912 28,935
State 11,895 7,540 1,778
--------- --------- ---------
221,247 169,612 126,451
Deferred, primarily federal 16,172 30,961 70,849
--------- --------- ---------
$ 237,419 $ 200,573 $ 197,300
========= ========= =========
30
The reasons for the difference between income taxes computed by applying the
statutory federal income tax rate for continuing operations and income tax
expense in the financial statements are as follows:
In thousands 2004 2003 2002
---------- ---------- ----------
Tax at federal statutory rate $ 249,242 $ 209,477 $ 196,605
State income taxes,
net of federal tax benefit 5,525 7,459 9,918
Foreign operating losses
with no current benefit 7,276 2,476 7,531
Foreign rate differences (18,311) (9,674) (16,989)
Change in valuation allowance (6,297) (3,068) (6,115)
Other, net (16) (6,097) 6,350
---------- ---------- ----------
$ 237,419 $ 200,573 $ 197,300
========== ========== ==========
Deferred income tax assets and liabilities consist of the following:
In thousands 2004 2003
--------- ----------
Deferred income tax assets:
Employee benefits $ 50,126 $ 41,993
Inventories 19,036 22,280
Other accrued expenses 162,584 159,663
Minimum pension liability 73,985 99,425
Operating loss carryforwards 110,446 91,720
Foreign currency translation - 26,214
--------- ----------
416,177 441,295
Valuation allowance (67,475) (67,810)
--------- ----------
Deferred income tax assets 348,702 373,485
--------- ----------
Deferred income tax liabilities:
Depreciation 34,346 39,636
Intangible assets 158,841 87,538
Other 64,262 36,047
--------- ----------
Deferred income tax liabilities 257,449 163,221
--------- ----------
Net deferred income tax assets $ 91,253 $ 210,264
========= ==========
31
In thousands 2004 2003
--------- ---------
Amounts included in Consolidated Balance Sheets:
Current assets $ 99,338 $ 92,828
Current liabilities (4,468) -
Noncurrent assets 12,476 117,436
Noncurrent liabilities (16,093) -
--------- ---------
$ 91,253 $ 210,264
========= =========
As of the end of 2004, VF has not provided deferred U.S. income taxes on $318.0
million of undistributed earnings of international subsidiaries where such
earnings are considered to be permanently invested. Such undistributed earnings
would become taxable in the United States if it becomes advantageous for
business, tax or foreign exchange reasons to remit foreign cash balances to the
United States. VF has undertaken initiatives resulting in a reduced effective
tax rate on earnings of one of VF's foreign subsidiaries. The income tax benefit
from this tax status was $16.5 million ($0.15 per diluted share) in 2004, $10.8
million ($0.10 per share) in 2003 and $13.3 million ($0.12 per share) in 2002.
The tax status providing this benefit is scheduled to expire at the end of 2009.
VF has $190.2 million of foreign operating loss carryforwards expiring $6.9
million in 2005, $17.5 million in 2006, $9.5 million in 2007, $1.0 million in
2008 and $4.2 million in 2009, with the remainder having an unlimited
carryforward life. A valuation allowance has been provided where it is more
likely than not, based on an evaluation of currently available information, that
the deferred tax assets relating to those loss carryforwards will not be
realized. Interest income in 2003 included $5.7 million related to settlement of
federal income tax issues.
The American Jobs Creation Act of 2004 ("the Act") was signed into law in late
2004. The Act contains a temporary incentive for repatriation of foreign
earnings during 2005 at a 5.25% effective income tax rate. At the end of 2004,
VF had approximately $375 million of accumulated foreign earnings subject to
repatriation. If VF were to decide to remit some or all of these earnings during
2005, it would result in an additional one-time income tax expense ranging up to
$16 million. Management is evaluating its unremitted foreign earnings and the
provisions of the Act.
NOTE R - BUSINESS SEGMENT INFORMATION
From an organizational standpoint, VF's businesses are organized into product
categories, and by brands within those product categories, for management and
internal reporting purposes. These groupings of businesses are referred to as
"coalitions." These coalitions, as described below, represent VF's reportable
business segments:
- - Jeanswear - Jeanswear and related products
- - Outdoor Apparel and Equipment - Outerwear and adventure apparel, footwear,
daypacks and bags, and technical equipment
- - Intimate Apparel - Women's intimate apparel
- - Imagewear - Occupational apparel, licensed sports apparel and distributor
knitwear.
- - Sportswear - Fashion sportswear
- - Other - Primarily VF Playwear, which was sold in 2004 (Note C)
Business segment information presented for 2003 and 2002 has been restated to
conform with this organizational structure. In addition, segment profit in 2003
and 2002 has been restated to include restructuring
32
charges in the appropriate coalition. Previously, these expenses had not been
included in the operating results of the business units.
The Vans, Kipling and Napapijri businesses acquired in 2004 are part of the
Outdoor Apparel and Equipment coalition. The operations of Nautica, John
Varvatos and Earl Jean, acquired in August 2003, comprise the Sportswear
coalition, except that the golf apparel product line is part of the Imagewear
coalition.
Management at each of the coalitions has direct control over and responsibility
for their sales, operating income and assets, hereinafter termed Coalition
Sales, Coalition Profit and Coalition Assets, respectively. VF management
evaluates operating performance and makes decisions based on Coalition Sales and
Coalition Profit. Accounting policies used for internal management reporting at
the individual coalitions are consistent with those stated in Note A, except as
stated below and except that inventories are valued on a first-in, first-out
basis. Common costs such as information processing, retirement benefits and
insurance are allocated to the coalitions based on appropriate metrics such as
usage or employment.
Corporate costs other than costs directly related to the coalitions and net
interest expense are not controlled by coalition management and are therefore
excluded from the Coalition Profit performance measure used for internal
management reporting. These items are separately presented in the reconciliation
of Coalition Profit to Consolidated Income from Continuing Operations before
Income Taxes.
Corporate and Other Expenses (presented separately in the following table)
consists of corporate headquarters expenses that are not allocated to the
coalitions (including compensation and benefits of corporate management and
staff, legal and professional fees, and administrative and general) and other
expenses related to but not allocated to the coalitions for internal management
reporting (including development costs for management information systems, costs
of maintaining and enforcing VF's trademarks, adjustments for the last-in,
first-out method of inventory valuation and consolidating adjustments).
Coalition Assets, for internal management purposes, are those used directly in
the operations of each business unit, such as accounts receivable, inventories
and property. Corporate assets include investments held in trusts for deferred
compensation and retirement benefit plans and information systems assets.
Financial information for VF's reportable segments is as follows:
In thousands 2004 2003 2002
----------- ----------- -----------
Coalition sales:
Jeanswear $ 2,661,946 $ 2,666,815 $ 2,788,486
Outdoor Apparel and Equipment 1,003,851 580,663 508,020
Intimate Apparel 903,552 830,225 839,786
Imagewear 769,552 727,223 751,893
Sportswear 604,879 248,967 -
Other 110,756 153,566 195,338
----------- ----------- -----------
Consolidated net sales $ 6,054,536 $ 5,207,459 $ 5,083,523
=========== =========== ===========
33
In thousands 2004 2003 2002
----------- ----------- -----------
Coalition profit:
Jeanswear $ 452,160 $ 415,572 $ 472,816
Outdoor Apparel and Equipment 154,256 95,720 71,447
Intimate Apparel 118,733 86,671 97,675
Imagewear 116,123 101,475 85,934
Sportswear 59,745 35,215 -
Other (10,727) (4,770) 1,288
----------- ----------- -----------
Total coalition profit 890,290 729,883 729,160
Corporate and other expenses (109,234) (81,465) (103,504)
Interest, net (68,936) (49,912) (63,928)
----------- ----------- -----------
Consolidated income from continuing operations
before income taxes $ 712,120 $ 598,506 $ 561,728
=========== =========== ===========
Coalition assets:
Jeanswear $ 1,075,739 $ 1,002,910 $ 1,052,447
Outdoor Apparel and Equipment 414,343 217,473 147,990
Intimate Apparel 345,292 332,754 331,528
Imagewear 288,537 304,927 310,882
Sportswear 135,394 205,450 -
Other 76,979 111,705 124,391
----------- ----------- -----------
Total coalition assets 2,336,284 2,175,219 1,967,238
Cash and equivalents 485,507 514,785 496,367
Intangible assets and goodwill 1,671,114 1,019,606 473,355
Deferred income taxes 111,814 208,391 258,589
Corporate assets 399,559 327,551 307,602
----------- ----------- -----------
Consolidated assets $ 5,004,278 $ 4,245,552 $ 3,503,151
=========== =========== ===========
34
In thousands 2004 2003 2002
-------- -------- --------
Capital expenditures:
Jeanswear $ 37,587 $ 41,495 $ 33,819
Outdoor Apparel and Equipment 8,237 6,889 5,318
Intimate Apparel 7,269 7,660 7,189
Imagewear 3,441 1,578 1,951
Sportswear 8,871 2,845 -
Other 6,567 3,512 3,903
Corporate 9,438 22,640 12,323
-------- -------- --------
Total $ 81,410 $ 86,619 $ 64,503
======== ======== ========
Depreciation expense:
Jeanswear $ 52,317 $ 53,830 $ 54,068
Outdoor Apparel and Equipment 8,617 3,860 9,545
Intimate Apparel 10,207 9,860 11,358
Imagewear 8,869 13,724 12,275
Sportswear 8,369 2,976 -
Other 10,108 9,538 9,554
Corporate 12,381 10,855 10,598
-------- -------- --------
Total $110,868 $104,643 $107,398
======== ======== ========
Information by geographic area is presented below, with sales based on the
location of the customer:
In thousands 2004 2003 2002
---------- ---------- ----------
Net sales:
United States $4,678,593 $4,090,749 $4,078,385
Foreign, primarily Europe 1,375,943 1,116,710 1,005,138
---------- ---------- ----------
Total $6,054,536 $5,207,459 $5,083,523
========== ========== ==========
Property, plant and equipment:
United States $ 354,274 $ 381,619 $ 346,637
Mexico 94,489 109,681 125,525
Other foreign, primarily Europe 123,491 100,380 94,384
---------- ---------- ----------
Total $ 572,254 $ 591,680 $ 566,546
========== ========== ==========
35
Worldwide sales by product category are as follows:
In thousands 2004 2003 2002
----------- ----------- -----------
Jeans and related apparel $ 2,661,946 $ 2,666,815 $ 2,788,486
Outdoor products 1,003,851 580,663 508,020
Intimate apparel 903,552 830,225 839,786
Sportswear 604,879 248,967 -
Occupational apparel 471,176 450,511 492,798
Other apparel 409,132 430,278 454,433
----------- ----------- -----------
Total $ 6,054,536 $ 5,207,459 $ 5,083,523
=========== =========== ===========
Sales to Wal-Mart Stores, Inc., substantially all in the Jeanswear and Intimate
Apparel coalitions, comprised 15.0% of consolidated sales in 2004, 16.5% in 2003
and 16.2% in 2002. Trade receivables from this customer totaled $93.2 million at
the end of 2004 and $75.4 million at the end of 2003.
NOTE S - COMMITMENTS
VF enters into noncancelable operating leases for retail stores and other
facilities and for equipment. Leases for real estate typically have initial
terms ranging from 5 to 15 years, some with renewal options. Leases for
equipment typically have initial terms ranging from 2 to 5 years. Most leases
have fixed rentals; expense for leases having lease incentives or escalating
rentals are recorded on a straight-line basis over the minimum lease terms.
Certain of the leases contain requirements for additional rental payments based
on sales volume or for payments of real estate taxes and other occupancy costs.
Rent expense included in the Consolidated Statements of Income was as follows:
In thousands 2004 2003 2002
-------- -------- --------
Minimum rent expense $ 95,103 $ 74,367 $ 62,408
Contingent rent 3,669 1,953 381
-------- -------- --------
Rent expense $ 98,772 $ 76,320 $ 62,789
======== ======== ========
Future minimum lease payments are $97.7 million, $83.7 million, $65.8 million,
$52.8 million and $38.6 million for the years 2005 through 2009, respectively,
and $76.6 million thereafter.
VF enters into licensing agreements that provide VF rights to market products
under trademarks owned by other parties. Royalties under these agreements are
recognized in Cost of Goods Sold in the Consolidated Statements of Income.
Certain of these agreements contain provisions for the payment of minimum
royalties. Future minimum royalty payments, including any required minimum
advertising payments, are $14.3 million, $16.6 million, $16.2 million, $13.8
million and $4.7 million for the years 2005 through 2009, respectively.
VF in the ordinary course of business enters into purchase commitments for raw
materials, sewing labor and finished products inventories. These agreements,
typically ranging from 2 to 6 months in duration, require total payments of
$667.2 million in 2005. In addition, VF has committed to purchase $15.0 million
of finished product in each of the next 10 years in connection with the sale of
a business (Note C).
36
VF has also entered into commitments for capital spending, advertising and
service and maintenance agreements for its management information systems.
Future payments under these agreements are $90.0 million, $8.0 million, $3.2
million, $1.4 million and $0.1 million for the years 2005 through 2009,
respectively.
The trustee of the Employee Stock Ownership Plan may require VF to redeem Series
B Redeemable Preferred Stock held in participant accounts and to pay each
participant the value of their account, upon retirement or withdrawal from the
ESOP. The amounts of these redemptions vary based on the conversion value of the
Preferred Stock. Since 2002, no redemption payments have been required as the
ESOP trustee has converted shares of Series B Redeemable Preferred Stock for
withdrawing participants into shares of Common Stock.
VF has entered into $80.5 million of surety bonds and standby letters of credit
representing contingent guarantees of performance under self-insurance and other
programs. These commitments would only be drawn upon if VF were to fail to meet
its claims obligations.
NOTE T - EARNINGS PER SHARE
In thousands, except per share amounts 2004 2003 2002
--------- --------- ---------
Basic earnings per share:
Income from continuing operations $ 474,702 $ 397,933 $ 364,428
Less Preferred Stock dividends
and redemption premium 1,832 2,238 8,523
--------- --------- ---------
Income available for Common Stock $ 472,870 $ 395,695 $ 355,905
========= ========= =========
Weighted average Common Stock outstanding 109,872 107,713 109,167
========= ========= =========
Basic earnings per share
from continuing operations $ 4.30 $ 3.67 $ 3.26
========= ========= =========
37
In thousands, except per share amounts 2004 2003 2002
-------- -------- --------
Diluted earnings per share:
Income from continuing operations $474,702 $397,933 $364,428
Increased ESOP expense if Preferred Stock
were converted to Common Stock - - 652
-------- -------- --------
Income available for Common Stock and
dilutive securities $474,702 $397,933 $363,776
======== ======== ========
Weighted average Common Stock outstanding 109,872 107,713 109,167
Effect of dilutive securities:
Preferred Stock 1,406 1,674 2,103
Stock options and other 1,452 936 1,066
-------- -------- --------
Weighted average Common Stock
and dilutive securities outstanding 112,730 110,323 112,336
======== ======== ========
Diluted earnings per share
from continuing operations $ 4.21 $ 3.61 $ 3.24
======== ======== ========
Outstanding options to purchase 5.0 million shares of Common Stock were excluded
from the computation of diluted earnings per share in 2003 and 5.6 million
shares in 2002 because the option exercise prices were greater than the average
market price of the Common Stock. Earnings per share for Discontinued
Operations, for the Cumulative Effect of a Change in Accounting Policy and for
Net Income (Loss) in 2002 are computed using the same weighted average shares
described above.
NOTE U - FINANCIAL INSTRUMENTS
The carrying amount and fair value of financial instrument assets (liabilities)
are as follows:
2004 2003
------------------------------ -------------------------
CARRYING FAIR CARRYING FAIR
In thousands AMOUNT VALUE AMOUNT VALUE
------------ ------------ ---------- ------------
Long-term debt $ (957,871) $ (1,027,331) $ (957,527) $ (1,038,544)
Series B Redeemable Preferred Stock (26,053) (74,769) (29,987) (66,169)
The fair value of VF's long-term debt was estimated based on quoted market
prices or values of comparable borrowings. The fair value of the Series B
Redeemable Preferred Stock was based on a valuation by an independent financial
consulting firm. The carrying amounts of cash and equivalents, accounts
receivable, marketable securities and life insurance contracts, short-term
borrowings and foreign currency exchange contracts approximates their fair
value.
VF monitors net foreign currency exposures and may in the ordinary course of
business enter into foreign currency forward exchange contracts with major
financial institutions. These contracts hedge against the effects of exchange
rate fluctuations on anticipated cash flows relating to a portion of VF's
significant foreign currency cash flows for inventory purchases and production
costs, product sales and intercompany royalty
38
payments anticipated for the following 12 months. Other contracts hedge against
the effects of exchange rate fluctuations on specific foreign currency
transactions, primarily intercompany financing arrangements. Use of hedging
contracts allows VF to reduce its overall exposure to exchange rate movements
since gains and losses on these contracts will offset losses and gains on the
transactions being hedged.
The following summarizes, by major currency, the net U.S. dollar equivalent
amount of VF's foreign currency forward exchange contracts:
2004 2003
-------------------------------- ---------------------------------------
NOTIONAL FAIR NOTIONAL FAIR
VALUE - VALUE - VALUE - VALUE -
In thousands BOUGHT (SOLD) ASSET (LIABILITY) BOUGHT (SOLD) ASSET (LIABILITY)
------------- ----------------- --------------- -----------------
European euro $ (210,914) $ (9,877) $ (73,439) $ (8,189)
Mexican peso 76,925 2,788 69,762 208
Canadian dollar (39,463) (2,842) (25,980) (1,302)
Other 8,465 - (11,928) -
----------------- -----------------
$ (9,931) $ (9,283)
================= =================
VF recognized net pretax losses of $8.8 million during 2004, $15.8 million
during 2003 and $0.3 million during 2002, primarily in Cost of Goods Sold in the
Consolidated Statements of Income, for foreign currency hedging contracts that
had matured. At the end of 2004, net pretax losses of $11.7 million were
deferred in Accumulated Other Comprehensive Income. These net deferred losses
are expected to be reclassified into earnings during 2005 at the time the
underlying hedged transactions are realized. Hedge ineffectiveness was not
significant in any period.
VF may also enter into derivative financial instrument contracts to hedge
interest rate risks. VF entered into a contract to hedge the interest rate risk
for a notional amount of $150.0 million shortly before the issuance of $300.0
million of long-term debt in 2003 (Note L). This contract was settled concurrent
with the issuance of the debt, with the gain of $3.5 million deferred in
Accumulated Other Comprehensive Income.
In addition, as a result of the interest rate hedging contract mentioned above,
VF recognized a pretax gain of $0.1 million during 2004 and during 2003 as a
reduction of Interest Expense. At the end of 2004, a pretax gain of $3.3 million
was deferred in Accumulated Other Comprehensive Income, which will be
reclassified into earnings over the 30 year term of the notes issued in 2003.
39
NOTE V - SUPPLEMENTAL CASH FLOW INFORMATION
In thousands 2004 2003 2002
--------- --------- ---------
Income taxes paid $ 186,223 $ 128,770 $ 132,645
Interest paid 73,171 56,148 72,182
Noncash transactions:
Notes received for sale of assets 13,664 - -
Notes issued in acquisition - 58,300 -
Debt assumed in acquisitions 28,842 18,758 -
Conversion of Redeemable Preferred
Stock to Common Stock 3,934 6,914 3,514
Issuance of Common Stock for
compensation plans 647 1,004 973
NOTE W - SUBSEQUENT EVENTS
A subsidiary of VF acquired substantially all of the net assets of Holoubek,
Inc., a business having rights to manufacture and market apparel products under
license from Harley-Davidson Motor Company, Inc. The purchase price was $26.4
million, with an additional maximum of $2.5 million in contingent consideration.
VF also sold a 20% interest in its John Varvatos(R) luxury sportswear business
to Mr. Varvatos, reducing VF's ownership to 80%.
40
Quarterly Results of Operations (Unaudited)
In thousands, except per share amounts
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ----------- -----------
2004
Net sales $ 1,432,669 $ 1,269,537 $ 1,792,569 $ 1,559,761 $ 6,054,536
Gross profit 554,276 499,829 719,828 636,348 2,410,281
Net income 103,874 90,088 155,437 125,303 474,702
Earnings per share:
Basic $ 0.95 $ 0.82 $ 1.41 $ 1.13 $ 4.30
Diluted 0.93 0.80 1.38 1.10 4.21
Dividends per common share $ 0.26 $ 0.26 $ 0.26 $ 0.27 $ 1.05
----------- ----------- ----------- ----------- -----------
2003
Net sales $ 1,250,055 $ 1,134,742 $ 1,435,403 $ 1,387,259 $ 5,207,459
Gross profit 468,763 420,731 537,078 518,512 1,945,084
Net income 92,066 74,945 125,289 105,633 397,933
Earnings per share:
Basic $ 0.84 $ 0.69 $ 1.16 $ 0.97 $ 3.67
Diluted 0.83 0.68 1.14 0.96 3.61
Dividends per common share $ 0.25 $ 0.25 $ 0.25 $ 0.26 $ 1.01
----------- ----------- ----------- ----------- -----------
2002
Net sales $ 1,212,262 $ 1,160,256 $ 1,400,389 $ 1,310,616 $ 5,083,523
Gross profit 427,894 435,180 529,272 437,169 1,829,515
Income from continuing operations 77,047 88,480 128,564 70,337 364,428
Net income (loss) (448,258) 88,866 128,249 76,600 (154,543)
Earnings per share
from continuing operations:
Basic $ 0.67 $ 0.79 $ 1.16 $ 0.64 $ 3.26
Diluted 0.67 0.79 1.15 0.63 3.24
Dividends per common share $ 0.24 $ 0.24 $ 0.24 $ 0.25 $ 0.97
----------- ----------- ----------- ----------- -----------
VF Corporation Financial Summary
Dollars in thousands, except per share amounts 2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
SUMMARY OF OPERATIONS
Net sales $ 6,054,536 $ 5,207,459 $ 5,083,523 $ 5,220,417 $ 5,403,123
Operating income 777,788 644,889 621,924 454,427 505,558
Income from continuing operations 474,702 397,933 364,428 217,278 265,951
Discontinued operations - - 8,283 (79,448) 1,165
Cumulative effect of change in accounting policy - - (527,254) - (6,782)
Net income (loss) 474,702 397,933 (154,543) 137,830 260,334
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic
Income from continuing operations $ 4.30 $ 3.67 $ 3.26 $ 1.90 $ 2.29
Discontinued operations - - 0.08 (0.71) 0.01
Cumulative effect of change in accounting policy - - (4.83) - (0.06)
Net income (loss) 4.30 3.67 (1.49) 1.19 2.25
Earnings (loss) per common share - diluted
Income from continuing operations $ 4.21 $ 3.61 $ 3.24 $ 1.89 $ 2.26
Discontinued operations - - 0.07 (0.69) 0.01
Cumulative effect of change in accounting policy - - (4.69) - (0.06)
Net income (loss) 4.21 3.61 (1.38) 1.19 2.21
Dividends per share 1.05 1.01 .97 .93 .89
Average number of common shares outstanding 109,872 107,713 109,167 111,294 114,075
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital $ 1,006,354 $ 1,419,281 $ 1,199,696 $ 1,217,587 $ 1,103,896
Current ratio 1.7 2.8 2.4 2.5 2.1
Total assets $ 5,004,278 $ 4,245,552 $ 3,503,151 $ 4,103,016 $ 4,358,156
Long-term debt 556,639 956,383 602,287 904,035 905,036
Redeemable preferred stock 26,053 29,987 36,902 45,631 48,483
Common stockholders' equity 2,513,241 1,951,307 1,657,848 2,112,796 2,191,813
Debt to capital ratio (1) 28.5% 33.7% 28.6% 31.7% 34.7%
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS (3)
Operating margin 12.8% 12.4% 12.2% 8.7% 9.4%
Return on capital (1) (2) 15.8% 16.6% 16.9% 8.0% 9.6%
Return on average common stockholders' equity 21.2% 22.3% 22.1% 9.8% 12.1%
Return on average total assets 10.1% 10.5% 10.4% 5.0% 6.1%
Cash provided by operations $ 730,256 $ 543,704 $ 645,584 $ 600,556 $ 434,381
Purchase of Common Stock - 61,400 124,623 146,592 105,723
Dividends 117,731 111,258 108,773 106,864 104,920
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET DATA (3)
Market price range $55.61 - 42.06 $44.08 - 32.62 $45.64 - 31.50 $42.70 - 28.15 $36.90 - 20.94
Book value per common share 22.56 18.04 15.28 19.21 19.52
Price earnings ratio - high-low (4) 13.2 - 10.0 12.2 - 9.0 14.1 - 9.7 22.6 - 14.9 16.3 - 9.3
Rate of payout (5) 24.9% 28.0% 29.9% 49.2% 39.4%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Capital is defined as average common stockholders' equity plus short-term
and long-term debt.
(2) Return on capital is based on operating income plus miscellaneous income
(expense), net of income taxes.
(3) Operating statistics and market data are based on continuing operations.
(4) Market price divided by income from continuing operations per diluted
share.
(5) Dividends per share divided by earnings from continuing operations per
diluted share.
INVESTOR INFORMATION
COMMON STOCK
Listed on the New York Stock Exchange and Pacific Exchange - trading symbol VFC.
SHAREHOLDERS OF RECORD
As of February 11, 2005, there were 5,539 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 EquiServe Trust Company, N.A. 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
EquiServe.
QUARTERLY COMMON STOCK PRICE INFORMATION
The high and low sales prices on a calendar quarter basis for the periods
indicated were as follows:
2004 2003 2002
High Low High Low High Low
First Quarter $ 47.04 $ 42.06 $ 39.35 $ 32.62 $ 44.98 $ 39.00
Second Quarter 50.45 43.50 40.17 33.51 45.64 38.20
Third Quarter 51.02 45.87 41.59 33.43 43.07 33.88
Fourth Quarter 55.61 47.15 44.08 38.81 39.35 31.50