VF CORPORATION 1997 10-K EXHIBIT 13 - ANNUAL REPORT TO SECURITY HOLDERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION ANALYSIS OF OPERATIONS The Company's earnings in 1997 and 1996 reflect the benefits from actions begun in late 1995 (refer to Note M to the consolidated financial statements) to (1) close a number of higher cost domestic manufacturing facilities and move a greater percentage of our manufacturing to lower cost offshore locations, (2) effect reductions in selling and administrative expenses and (3) reinvest a significant portion of the savings from these actions in increased advertising and other actions to support and build our brands. These initiatives contributed substantially to the Company's achievement of record earnings and strong cash flow during both 1997 and 1996. Consolidated net sales in 1997 increased by 2% over 1996. Unit sales increased by 1%, and the impact of changes in product mix and pricing increased sales by 2%. Offsetting these increases was the impact of a stronger U.S. dollar in 1997, which in translating foreign currencies into U.S. dollars had the effect of reducing total sales by 1% (and earnings by $.07 per share). Sales in the Company's growth categories - jeanswear, domestic intimate apparel, workwear and daypacks, where marketing efforts are focused to achieve sales increases - advanced at a higher rate than overall sales. Net sales in 1996 increased by 1% over 1995. Unit sales in 1996 declined by 2%, but average prices increased, primarily due to changes in product mix. Gross margins were 34.1% of sales in 1997, compared with 32.7% of sales in 1996 and 29.3% in 1995. Gross margins in 1995 included $109.8 million of special charges; excluding these charges, 1995 gross margins were 31.5%. The margin improvement in 1996 over 1995, after excluding the special charges in 1995, resulted from lower manufacturing costs attributable to the cost reduction initiatives of late 1995, plus lower provisions for inventory write-downs and manufacturing plant downtime. The margin improvement in 1997 over 1996 resulted from the continuing shift to lower cost sourcing, lower raw material costs and increased operating efficiencies. For the United States market, VF manufactures its products in owned domestic plants and offshore plants, primarily in Mexico. In addition, VF contracts the sewing of products from independent domestic and foreign contractors. There has been a shift over the last two years toward a more balanced sourcing mix, with more products being manufactured in and contracted from lower cost facilities in Mexico and the Caribbean Basin. The amount of domestic sales derived from products manufactured outside the United States has increased to 45% by the end of 1997 from approximately 30% during 1995. Similarly, in foreign markets, sourcing is being shifted from owned Western European plants to lower cost owned and contracted production outside of Western Europe. Marketing, administrative and general expenses were 22.5% of sales in 1997, compared with 21.8% and 22.3% in 1996 and 1995, respectively. Excluding special charges of $41.7 million in 1995, expenses were 21.5% of sales. Marketing and promotional expenses have been increased to support and build the Company's brands, particularly in the targeted growth areas of domestic and international jeanswear, domestic intimate apparel and daypacks. Accordingly, advertising expense increased to 5.9% of sales in 1997 from 5.3% in 1996 and 4.6% in 1995. Other operating income and expense includes goodwill amortization expense, offset by net royalty income. Amortization of goodwill declined in 1996 from expiring amortization periods. Net interest expense declined significantly in 1997 and 1996 as the high level of cash generated from operations was used to reduce short-term borrowing needs. In addition, interest income includes $10.5 million in 1997 and $2.6 million in 1996 relating to settlements of tax examinations of acquired companies. The effective income tax rate was 40.1% in 1997, 41.1% in 1996 and 44.6% in 1995. The effective rate declined in 1997 and 1996 due to reduced foreign operating losses with no current tax benefit and the decline in the relationship of these foreign operating losses and nondeductible goodwill expense to income before income taxes. ANALYSIS OF FINANCIAL CONDITION In managing its capital structure, VF balances financial leverage with equity to reduce its overall cost of capital, while providing the flexibility to pursue investment opportunities that may become available. It is management's goal to maintain a debt to capital ratio of less than 40%. Our debt to capital ratio remains within these guidelines: 22.5% at the end of 1997 and 21.4% at the end of 1996. Had the January 1998 acquisition of Bestform Group, Inc. (refer to Note B) occurred as of the end of 1997, the pro forma debt to capital ratio would have been only 27.1%, still well within our target and allowing continued flexibility to pursue similar opportunities for shareholder growth. BALANCE SHEETS Inventories are higher at the end of 1997 than at 1996, reflecting a slight slowdown in sales near the end of 1997 due to actions taken to exit some lower profitability business and the effects of conservative inventory planning by our retail customers. Inventories at the end of both 1997 and 1996 are at low historical levels. During 1996, the Company repaid all short-term borrowings, except for certain foreign lines of credit, and called for redemption $100 million of its long-term debt originally due in 1999. No further debt reductions were made in 1997 or 1996, despite cash availability, as there are no long-term debt maturities until the year 2001. LIQUIDITY AND CASH FLOW Working capital was $835.6 million and the current ratio was 2.1 to 1 at the end of 1997, comparable to the levels at the end of 1996. Cash provided by operations was $455 million in 1997, compared with $711 million in 1996. The record level in 1996 resulted from reductions in accounts receivable due to the timing of the year-end, historically low inventory levels and an increase in current liabilities during 1996. Capital expenditures were $154 million in 1997, compared with $139 million and $155 million in 1996 and 1995, respectively. Capital expenditures relate to expansion of offshore manufacturing capacity, investments in information systems and ongoing maintenance requirements of our worldwide manufacturing and other facilities. Capital expenditures in 1998 should be somewhat higher than the level of the past three years, due to continuing investments in the Company's information systems, and are expected to be funded by cash flows from operations. Beginning in late 1994 and continuing through 1997, the Company purchased 15.8 million shares of its Common Stock in open market transactions, including 9.1 million shares purchased during 1997 for $392 million. These share repurchases were funded by operating cash flows. In February 1998, the Board of Directors authorized the Company to purchase up to an additional 5.0 million shares. Cash dividends totaled $.77 per common share in 1997, compared with $.73 in 1996 and $.69 in 1995. The dividend payout rate was 28% in 1997, compared with 31% in 1996 and, due to lower earnings, 57% in 1995. The indicated annual dividend rate for 1998 is $.80 per share. VF has paid dividends on its Common Stock annually since 1941 and intends to maintain a long-term payout rate of 30%. The Company's strong financial position, including existing cash balances, unused credit lines and a low debt ratio, provides substantial capacity to meet investment opportunities that may arise. OTHER MATTERS Over 16% of our 1997 sales and operating income were derived from foreign operations. VF's financial position and operating results can be influenced by economic conditions in countries where VF conducts business and by changing foreign currency exchange rates. Management monitors foreign currency exposures and may in the ordinary course of business enter into foreign currency forward exchange contracts related to specific foreign currency transactions or anticipated cash flows. These contracts, generally for periods less than six months on certain European currencies, are not material. VF does not hedge the translation of foreign currencies into the U.S. dollar. The Company is addressing the Year 2000 issue, in which some computer systems will not properly recognize date-sensitive information when the year changes to 2000. A Year 2000 problem could result in system failure or miscalculations, either in a company's computer systems or in systems of third parties with which a company conducts business. VF believes that, with modifications to existing software and conversion to new software, the Year 2000 issue will not create significant operational problems for the Company's computer systems. The Company's movement toward common computer systems, including modifications and testing related to the Year 2000 issue, is expected to be completed in early 1999. All costs incurred to address the Year 2000 issue are being expensed. Such costs are not expected to significantly affect future operating results. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Certain statements included in this Annual Report are "forward-looking statements" within the meaning of the federal securities laws. This includes statements concerning plans and objectives of management relating to the Company's operations or economic performance, and assumptions related thereto. These forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations or financial condition of the Company to differ include, but are not necessarily limited to, the overall level of consumer spending for apparel; changes in trends in the segments of the market in which the Company competes; the financial strength of the retail industry; actions of competitors that may impact the Company's business; and the impact of unforeseen economic changes in the markets where the Company competes, such as changes in interest rates, currency exchange rates, inflation rates, recession, and other external economic and political factors over which the Company has no control. VF CORPORATION CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED ---------------------------------------------------------------- JANUARY 3 JANUARY 4 DECEMBER 30 In thousands, except per share amounts 1998 1997 1995 ------------- ----------- ------------ NET SALES $5,222,246 $5,137,178 $5,062,299 COSTS AND OPERATING EXPENSES Cost of products sold 3,440,611 3,458,166 3,577,555 Marketing, administrative and general expenses 1,175,598 1,122,076 1,131,290 Other operating expense (income) 964 (347) 6,064 ------------- ----------- ------------ 4,617,173 4,579,895 4,714,909 ------------- ----------- ------------ OPERATING INCOME 605,073 557,283 347,390 OTHER INCOME (EXPENSE) Interest income 23,818 13,406 11,085 Interest expense (49,695) (62,793) (77,302) Miscellaneous, net 6,684 512 2,962 ------------- ----------- ------------ (19,193) (48,875) (63,255) ------------- ----------- ------------ INCOME BEFORE INCOME TAXES 585,880 508,408 284,135 INCOME TAXES 234,938 208,884 126,844 ------------- ----------- ------------ NET INCOME $ 350,942 $ 299,524 $ 157,291 ========== ========== ========== EARNINGS PER COMMON SHARE Basic $2.76 $2.32 $1.20 Diluted 2.70 2.28 1.19 CASH DIVIDENDS PER COMMON SHARE $ .77 $ .73 $ .69
See notes to consolidated financial statements.
QUARTERLY RESULTS OF OPERATIONS (Unaudited) In thousands, except per share amounts EARNINGS PER COMMON SHARE DIVIDENDS PER NET SALES GROSS PROFIT NET INCOME BASIC DILUTED COMMON SHARE ------------- --------------- ---------- --------- ----------- ---------------- 1997 FIRST QUARTER $1,262,781 $ 417,837 $ 70,186 $ .54 $ .53 $.19 SECOND QUARTER 1,255,549 427,650 78,904 .61 .60 .19 THIRD QUARTER 1,416,906 487,311 108,692 .86 .84 .19 FOURTH QUARTER 1,287,010 448,837 93,160 .75 .74 .20 ------------------------------------------------------------------------------------- $5,222,246 $1,781,635 $350,942 $2.76 $2.70 $.77 ------------------------------------------------------------------------------------- 1996 First quarter $1,158,123 $ 380,517 $ 55,930 $ .43 $ .43 $.18 Second quarter 1,220,997 396,319 69,892 .54 .53 .18 Third quarter 1,380,919 446,358 91,048 .71 .69 .18 Fourth quarter 1,377,139 455,818 82,654 .64 .63 .19 ------------------------------------------------------------------------------------- $5,137,178 $1,679,012 $299,524 $2.32 $2.28 $.73 ------------------------------------------------------------------------------------- 1995 First quarter $1,187,587 $ 388,439 $ 57,953 $ .45 $ .44 $.17 Second quarter 1,271,936 400,924 65,237 .51 .50 .17 Third quarter 1,332,102 412,552 69,718 .54 .53 .17 Fourth quarter 1,270,674 282,829 (35,617) * (.29) * (.29) * .18 ------------------------------------------------------------------------------------- $5,062,299 $1,484,744 $157,291 $1.20 $1.19 $.69 -------------------------------------------------------------------------------------
* Special charges of $155.9 million reduced net income by $102.5 million ($.80 per share). See Note M to consolidated financial statements. VF CORPORATION CONSOLIDATED BALANCE SHEETS
JANUARY 3 JANUARY 4 In thousands 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS Cash and equivalents $ 124,094 $ 270,629 Accounts receivable, less allowances of $39,576 in 1997 and $40,253 in 1996 587,934 592,942 Inventories 774,755 730,823 Deferred income taxes 94,750 90,556 Other current assets 19,933 21,376 ------------ ------------ Total current assets 1,601,466 1,706,326 PROPERTY, PLANT AND EQUIPMENT 705,990 721,524 INTANGIBLE ASSETS 814,332 863,930 OTHER ASSETS 200,994 157,755 ------------ ------------ $3,322,782 $3,449,535 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 24,191 $ 17,528 Current portion of long-term debt 450 1,298 Accounts payable 301,103 320,056 Accrued liabilities 440,164 427,385 ------------ ------------ Total current liabilities 765,908 766,267 LONG-TERM DEBT 516,226 519,058 OTHER LIABILITIES 143,813 164,077 REDEEMABLE PREFERRED STOCK 56,341 58,092 DEFERRED CONTRIBUTIONS TO EMPLOYEE STOCK OWNERSHIP PLAN (26,275) (31,698) ------------ ------------ 30,066 26,394 COMMON SHAREHOLDERS' EQUITY Common Stock, stated value $1; shares authorized 150,000,000; shares outstanding, 121,225,298 in 1997 and 63,907,874 (before two-for-one stock split) in 1996 121,225 63,908 Additional paid-in capital 744,108 668,554 Foreign currency translation (36,110) 6,428 Retained earnings 1,037,546 1,234,849 ------------ ------------ 1,866,769 1,973,739 ------------ ------------ $3,322,782 $3,449,535 ============ ============
See notes to consolidated financial statements. VF CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ---------------------------------------------- JANUARY 3 JANUARY 4 DECEMBER 30 In thousands 1998 1997 1995 ------------ ------------ ------------ OPERATIONS Net income $350,942 $299,524 $157,291 Adjustments to reconcile net income to cash provided by operations: Depreciation 128,734 132,440 134,039 Amortization of intangible assets 27,518 28,138 33,682 Other, net (9,396) (18,239) (15,048) Changes in current assets and liabilities: Accounts receivable (9,972) 25,270 (2,045) Inventories (55,677) 110,807 (31,881) Accounts payable (12,587) 43,196 (18,623) Other, net 35,099 90,318 66,241 ------------ ------------ ------------ Cash provided by operations 454,661 711,454 323,656 INVESTMENTS Capital expenditures (154,262) (138,747) (155,206) Business acquisitions (16,003) (24,284) (12,004) Other, net (13,578) 36,887 4,216 ------------ ------------ ------------ Cash invested (183,843) (126,144) (162,994) FINANCING Increase (decrease) in short-term borrowings 8,745 (213,746) (92,655) Proceeds from long-term debt - 15,556 98,718 Payment of long-term debt (1,253) (111,522) (3,123) Purchase of Common Stock (391,651) (61,483) (86,251) Cash dividends paid (100,141) (97,036) (92,038) Proceeds from issuance of stock 64,964 67,819 36,015 Other, net 1,983 1,656 3,005 ------------ ------------ ------------ Cash used by financing (417,353) (398,756) (136,329) ------------ ------------ ------------ NET CHANGE IN CASH AND EQUIVALENTS (146,535) 186,554 24,333 CASH AND EQUIVALENTS - BEGINNING OF YEAR 270,629 84,075 59,742 ------------ ------------ ------------ CASH AND EQUIVALENTS - END OF YEAR $124,094 $270,629 $ 84,075 ============ ============ ============
See notes to consolidated financial statements. VF CORPORATION CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
ADDITIONAL FOREIGN COMMON PAID-IN CURRENCY RETAINED In thousands STOCK CAPITAL TRANSLATION EARNINGS ----------- ------------- ------------ ------------- BALANCE DECEMBER 31, 1994 $64,165 $552,927 $ 4,557 $1,112,360 Net income - - - 157,291 Cash dividends: Common Stock - - - (87,907) Series B Preferred Stock - - - (4,131) Tax benefit from Preferred Stock dividends - - - 955 Redemption of Preferred Stock - - - (507) Restricted Common stock 5 (230) - 248 Purchase of treasury shares (1,720) - - (84,531) Exercise of stock options, net of shares surrendered 989 41,279 - (170) Foreign currency translation, net of $8,576 deferred income taxes - - 15,926 - ----------- ------------- ------------ ------------- BALANCE DECEMBER 30, 1995 63,439 593,976 20,483 1,093,608 Net income - - - 299,524 Cash dividends: Common Stock - - - (93,020) Series B Preferred Stock - - - (4,016) Tax benefit from Preferred Stock dividends - - - 827 Redemption of Preferred Stock - - - (1,218) Restricted Common stock - 23 - - Purchase of treasury shares (1,015) - - (60,468) Exercise of stock options, net of shares surrendered 1,484 74,555 - (388) Foreign currency translation, net of $7,568 deferred income taxes - - (14,055) - ----------- ------------- ------------ ------------- BALANCE JANUARY 4, 1997 63,908 668,554 6,428 1,234,849
(continued) VF CORPORATION CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(continued) ADDITIONAL FOREIGN COMMON PAID-IN CURRENCY RETAINED In thousands STOCK CAPITAL TRANSLATION EARNINGS ------------ ------------ ------------- ------------- BALANCE JANUARY 4, 1997 $ 63,908 $668,554 $ 6,428 $1,234,849 Net income - - - 350,942 Cash dividends: Common Stock - - - (96,337) Series B Preferred Stock - - - (3,804) Tax benefit from Preferred Stock dividends - - - 700 Redemption of Preferred Stock - - - (1,855) Restricted Common stock 9 (520) - 601 Purchase of treasury shares (5,239) - - (386,412) Exercise of stock options, net of shares surrendered 1,457 76,074 - (48) Foreign currency translation, net of $22,905 deferred income taxes - - (42,538) - Two-for-one stock split 61,090 - - (61,090) ------------ ------------ ------------- ------------- BALANCE JANUARY 3, 1998 $121,225 $744,108 $ (36,110) $1,037,546 ============ ============ ============= =============
See notes to consolidated financial statements. VF CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of VF Corporation and all majority owned subsidiaries after elimination of intercompany transactions and profits. INVENTORIES are stated at the lower of cost or market. Inventories stated on the last-in, first-out method represent 53% of total 1997 inventories and 29% in 1996. Remaining inventories are valued using the first-in, first-out method. PROPERTY AND DEPRECIATION: Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, ranging up to 40 years for buildings and 10 years for machinery and equipment. INTANGIBLE ASSETS represent the excess of costs over the fair value of net tangible assets of businesses acquired, less accumulated amortization of $208.3 million and $224.5 million in 1997 and 1996. These assets are amortized on the straight-line method over five to forty years. The Company's policy is to evaluate intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This evaluation is based on a number of factors, including a business unit's expectations for operating income and undiscounted cash flows that will result from the use of such assets. ADVERTISING COSTS are expensed as incurred and were $309.3 million in 1997, $271.4 million in 1996 and $230.6 million in 1995. STOCK SPLIT: The Company declared a two-for-one stock split effective November 4, 1997. Common Stock increased and Retained Earnings decreased by $61.1 million, representing the stated value of additional shares issued. References in this report to number of shares, per share amounts and stock option data have been restated. Amounts presented in the Consolidated Balance Sheets and Statements of Common Shareholders' Equity are based on actual share amounts outstanding for each period presented. 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 the years 1995 through 1997, the Company acquired a total of five businesses, primarily related to jeanswear products, for an aggregate cost of $52.3 million, of which $28.6 million represents intangible assets. All acquisitions have been accounted for as purchases, and accordingly the purchase prices have been allocated to the net assets acquired based on fair values at the dates of acquisition. The excess of cost over fair value of the purchased businesses has been allocated to intangible assets and is being amortized primarily over 40 years. Operating results of these businesses have been included in the consolidated financial statements since the dates of acquisition. On January 8, 1998, the Company acquired the stock of Bestform Group, Inc. for $184.3 million in cash, plus repayment of $44.4 million of debt. Bestform is a manufacturer and marketer of intimate apparel in the United States, with 1997 sales of $307 million (unaudited). NOTE C - INVENTORIES
1997 1996 ------- ------- In thousands Finished products $434,000 $394,962 Work in process 166,947 168,774 Materials and supplies 173,808 167,087 ------- ------- $774,755 $730,823 ======== ========
The current cost of inventories stated on the last-in, first-out method (see Note A) is not significantly different from their value determined under the first-in, first-out method. NOTE D - PROPERTY, PLANT AND EQUIPMENT
1997 1996 --------- --------- In thousands Land $ 44,786 $ 44,244 Buildings 437,903 402,635 Machinery and equipment 1,086,263 1,096,472 ---------- ---------- 1,568,952 1,543,351 Less accumulated depreciation 862,962 821,827 ---------- ---------- $ 705,990 $ 721,524 ========== ==========
NOTE E - SHORT-TERM BORROWINGS The weighted average interest rate for short-term borrowings, all of which relate to foreign operations, was 10.5% at the end of 1997 and 12.6% at the end of 1996. The Company maintains an unsecured revolving credit agreement with a group of banks for $750.0 million that supports commercial paper borrowings and is otherwise available for general corporate purposes. The agreement, which extends to 1999, requires a .12% facility fee per year and contains various financial covenants, including minimum net worth and debt ratio requirements. At January 3, 1998, there were no borrowings under the agreement. NOTE F - ACCRUED LIABILITIES
1997 1996 -------- -------- In thousands Income taxes $ 86,244 $ 81,419 Compensation 84,425 87,027 Insurance 62,153 64,247 Special charges (Note M) - 16,218 Other 207,342 178,474 ------- ------- $440,164 $427,385 ======== ========
NOTE G - LONG-TERM DEBT
1997 1996 -------- -------- In thousands 9.50% notes, due 2001 $100,000 $100,000 6.63% notes, due 2003 100,000 100,000 7.60% notes, due 2004 100,000 100,000 6.75% notes, due 2005 100,000 100,000 9.25% debentures, due 2022 100,000 100,000 Other 16,676 20,356 -------- -------- 516,676 520,356 Less current portion 450 1,298 -------- -------- $516,226 $519,058 ======== ========
The scheduled payments of long-term debt are $.6 million in each of the years 1999 and 2000, $114.0 million in 2001 and $.8 million in 2002. The Company paid interest of $48.0 million in 1997, $62.6 million in 1996 and $74.4 million in 1995. NOTE H - OTHER LIABILITIES
1997 1996 -------- -------- In thousands Deferred compensation $113,727 $ 84,617 Deferred income taxes - 43,131 Other 30,086 36,329 -------- -------- $143,813 $164,077 ======== ========
NOTE I - BENEFIT PLANS The Company sponsors a noncontributory defined benefit pension plan covering substantially all full-time domestic employees. Benefits are based on employees' compensation and years of service. The Company annually contributes amounts, as determined by an actuary, that provide the plan with sufficient assets to meet future benefit payments. Plan assets consist principally of common stocks, U.S. government obligations and corporate obligations. The effect of the defined benefit plan on income is as follows:
1997 1996 1995 -------- -------- -------- In thousands Service cost - benefits earned during the year $ 16,726 $ 17,160 $ 14,660 Interest cost on projected benefit obligation 33,577 31,060 26,409 Actual return on plan assets (115,805) (38,049) (68,659) Net amortization and deferral 81,643 7,711 44,606 -------- -------- -------- Pension expense $ 16,141 $ 17,882 $ 17,016 ======== ======== ========
The funded status of the defined benefit plan, based on a September 30 valuation date, is as follows:
1997 1996 -------- -------- In thousands Present value of vested benefits $380,256 $326,185 -------- -------- Present value of accumulated benefits $428,444 $372,183 -------- -------- Plan assets at fair value $526,087 $405,000 Present value of projected benefits 473,940 411,295 -------- -------- Funded status 52,147 (6,295) Unrecognized net (gain) loss (37,483) 12,387 Unrecognized net asset (3,068) (7,446) Unrecognized prior service cost 16,117 18,208 -------- -------- Pension asset recorded in Other Assets $ 27,713 $ 16,854 ======== ========
The projected benefit obligation was determined using an assumed discount rate of 7.5% in 1997, 8.0% in 1996 and 7.8% in 1995. The assumption for compensation increases was 4.5% in 1997 and 1996 and 5.0% in 1995, and the assumption for return on plan assets was 8.8% in each year. The Company sponsors an Employee Stock Ownership Plan (ESOP) as part of a 401(k) savings plan covering most domestic salaried employees. Contributions made by the Company to the 401(k) plan are based on a specified percentage of employee contributions. Cash contributions by the Company were $5.7 million in 1997, $5.5 million in 1996 and $5.8 million in 1995. Plan expense was $5.5 million in 1997, $5.7 million in 1996 and $6.2 million in 1995, after giving effect to tax-deductible dividends on the Series B Preferred Stock of $3.8 million in 1997, $4.0 million in 1996 and $4.1 million in 1995. The Company sponsors other savings and retirement plans for certain domestic and foreign employees. Expense for these plans totaled $9.1 million in 1997, $9.6 million in 1996 and $13.3 million in 1995. NOTE J - CAPITAL Common shares outstanding are net of shares held in treasury of 13,910,519 in 1997, 4,798,646 in 1996 and 2,753,952 in 1995. During 1995, 2,700,000 treasury shares were retired. There are 25,000,000 authorized shares of Preferred Stock, $1 par value. As of January 3, 1998, 2,000,000 shares are designated as Series A Preferred Stock, of which none have been issued. In addition, 2,105,263 shares are designated as 6.75% Series B Preferred Stock, which were purchased by the ESOP. There were 1,824,820 shares of Series B Preferred Stock outstanding at January 3, 1998, 1,881,515 outstanding at January 4, 1997 and 1,964,942 shares outstanding at December 30, 1995, after share redemptions. Each outstanding share of Common Stock has one preferred stock purchase right attached. The rights become exercisable ten days after an outside party acquires, or makes an offer for, 15% or more of the Common Stock. Once exercisable, each right will entitle its holder to buy 1/100 share of Series A Preferred Stock for $175. If the Company is involved in a merger or other business combination or an outside party acquires 15% or more of the Common Stock, each right will be modified to entitle its holder (other than the acquiror) 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 acquiror may be exchanged for one share of VF Common Stock. The rights, which expire in January 2008, may be redeemed at $.01 per right prior to their becoming exercisable. NOTE K - REDEEMABLE PREFERRED STOCK Each share of Series B Preferred Stock has a redemption value of $30.88 plus cumulative accrued dividends, is convertible into 1.6 shares of Common Stock and is entitled to two votes per share along with the Common Stock. The trustee for the ESOP may convert the preferred shares to Common Stock at any time or may cause the Company to redeem the preferred shares under certain circumstances. The Series B Preferred Stock also has preference in liquidation over all other stock issues. The ESOP's purchase of the preferred shares was funded by a loan of $65.0 million from the Company that bears interest at 9.80% and is payable in increasing installments through 2002. Interest related to this loan was $3.9 million in 1997, $4.4 million in 1996 and $4.9 million in 1995. Principal and interest obligations on the loan are satisfied as the Company makes contributions to the savings plan and dividends are paid on the Preferred Stock. As principal payments are made on the loan, shares of Preferred Stock are allocated to participating employees' accounts within the ESOP. NOTE L - STOCK OPTIONS The Company has granted nonqualified stock options to officers, directors and key employees under a stock compensation plan at prices not less than fair market value on the date of grant. Options become exercisable one year after the date of grant and expire ten years after the date of grant. Activity in the stock compensation plan is summarized as follows:
SHARES WEIGHTED UNDER AVERAGE OPTIONS EXERCISE PRICE ----------- --------------- Balance December 31, 1994 9,478,976 $22.84 Options granted 2,177,550 26.00 Options exercised (1,985,420) 18.21 Options canceled (147,008) 25.41 --------- ------ Balance December 30, 1995 9,524,098 24.49 Options granted 1,965,400 34.49 Options exercised (2,982,576) 22.87 Options canceled (342,450) 24.86 --------- ------ Balance January 4, 1997 8,164,472 26.21 Options exercised (2,521,346) 25.78 Options canceled (131,510) 29.88 --------- ------ Balance January 3, 1998 5,511,616 $28.21 =========
Stock options outstanding at January 3, 1998, all of which are exercisable, are summarized as follows:
RANGE OF WEIGHTED AVERAGE WEIGHTED EXERCISE NUMBER REMAINING AVERAGE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE - ------------- ----------------- -------------------- ------------------- $ 6-10 28,800 2.9 years $ 8.09 11-15 41,400 .9 years 14.06 16-20 223,430 3.4 years 17.62 21-25 1,070,976 6.5 years 23.40 26-30 2,423,910 6.4 years 27.32 31-35 1,723,100 8.9 years 34.49 ------ --------- --------- ------ $ 6-35 5,511,616 7.0 years $28.21 =========
The Company does not recognize compensation expense for stock options granted at fair market value, as permitted by the accounting standards. However, had compensation expense been determined based on the fair value of the options on the grant dates, the Company's net income would have been reduced by $9.0 million ($.07 per share) in 1997 and by $6.9 million ($.06 per share) in 1996. Because options were granted late in the year, the pro forma expense for 1995 would not be meaningful and is therefore not presented. The fair value of options granted during 1996 was $7.97 per share and of options granted during 1995 was $5.49 per share. Fair value is estimated based on the Black-Scholes option-pricing model with the following assumptions for grants in 1996 and 1995: dividend yield of 2.5%; expected volatility of 20%; risk-free interest rates of 6.5% in 1996 and 5.4% in 1995; and expected lives of 5 years. The Company has granted to key employees 29,030 shares of restricted stock that vest in the year 2005. Compensation equal to the market value of shares at the date of grant is amortized to expense over the vesting period. There are 5,526,086 shares available for future grants of stock options and restricted stock, of which no more than 1,181,476 may be grants of restricted stock. NOTE M - SPECIAL CHARGES During the fourth quarter of 1995, the Company recorded special charges totaling $155.9 million ($.80 per share) to address changes in consumer buying habits and the increasingly competitive retail environment that have occurred in the apparel industry. These charges were aimed at reducing the Company's overall cost structure, including both manufacturing and administrative costs, through the closure of higher cost manufacturing facilities and personnel reductions in administrative positions. In addition, included in the charges were provisions related to better align inventories to existing retailer and consumer requirements. These actions affected approximately 7,700 of the Company's employees in manufacturing and headquarters locations throughout North America and Europe. Charges related to personnel reductions, including severance and related benefits, totaled $46.9 million. The remaining $109.0 million included noncash charges of $59.9 million for asset write-offs for closed manufacturing facilities and business and inventory realignments and $49.1 million for expected cash charges for lease and other contract terminations. The special charges were recorded in the 1995 consolidated statement of income as follows: Cost of Products Sold - $109.8 million; Marketing, Administrative and General Expenses - $41.7 million; Miscellaneous and Other Operating Expenses - $4.4 million. Substantially all of the actions have been completed, and costs incurred, by the end of 1997. NOTE N - INCOME TAXES The provision for income taxes is computed based on the following amounts of income before income taxes:
1997 1996 1995 -------- -------- -------- In thousands Domestic $514,028 $433,959 $261,437 Foreign 71,852 74,449 22,698 -------- -------- -------- $585,880 $508,408 $284,135 ======== ======== ========
The provision for income taxes consists of:
1997 1996 1995 -------- -------- -------- In thousands Current: Federal $201,924 $179,217 $136,863 Foreign 46,466 43,493 32,535 State 19,553 15,894 11,299 -------- -------- -------- 267,943 238,604 180,697 Deferred, primarily federal (33,005) (29,720) (53,853) -------- -------- -------- $234,938 $208,884 $126,844 ======== ======== ========
The reasons for the difference between income taxes computed by applying the statutory federal income tax rate and income tax expense in the financial statements are as follows:
1997 1996 1995 -------- -------- -------- In thousands Tax at federal statutory rate $205,058 $177,943 $ 99,448 State income taxes, net of federal tax benefit 12,709 10,331 7,344 Amortization of intangible assets 7,084 7,091 7,319 Foreign operating losses with no current benefit 4,033 7,109 11,169 Other, net 6,054 6,410 1,564 -------- -------- -------- $234,938 $208,884 $126,844 ======== ======== ========
Deferred income tax assets and liabilities consist of the following:
1997 1996 -------- -------- In thousands Deferred income tax assets: Employee benefits $ 50,917 $ 42,582 Inventories 10,450 338 Other accrued expenses 95,841 93,922 Operating loss carryforwards 36,323 32,760 Foreign currency translation 19,444 - -------- -------- 212,975 169,602 Valuation allowance (32,506) (29,296) -------- -------- $180,469 $140,306 -------- -------- Deferred income tax liabilities: Depreciation $ 47,311 $ 58,848 Foreign currency translation - 3,461 Unremitted foreign earnings 4,142 6,735 Other 22,515 16,461 -------- -------- $ 73,968 $ 85,505 ======== ========
The Company has $84.6 million of foreign operating loss carryforwards expiring at various dates; a valuation allowance has been provided where it is more likely than not that the deferred tax assets relating to certain of those loss carryforwards will not be realized. Income taxes paid were $230.1 million in 1997, $177.4 million in 1996 and $172.0 million in 1995. Interest Income includes $10.5 million in 1997 and $2.6 million in 1996 relating to settlements of tax examinations of acquired companies. NOTE O - OPERATIONS The Company's principal business is designing, manufacturing and marketing high quality branded jeanswear, intimate apparel, knitwear, children's playwear and other apparel. The Company's customers are primarily department, discount and specialty stores throughout the world. One domestic discount store group comprises 11.1% of consolidated sales in 1997, 10.3% in 1996 and 10.5% in 1995. Sales and profit by geographic area are as follows:
1997 1996 1995 ---------- ---------- ---------- In thousands Net sales: United States $4,368,474 $4,203,675 $4,192,435 Foreign 853,772 933,503 869,864 ---------- ---------- ---------- $5,222,246 $5,137,178 $5,062,299 ---------- ---------- ---------- Operating income: United States $ 531,583 $ 481,684 $ 328,878 Foreign 117,493 111,064 59,173 ---------- ---------- ---------- 649,076 592,748 388,051 Corporate expenses (44,003) (35,465) (40,661) Interest, net (25,877) (49,387) (66,217) Miscellaneous, net 6,684 512 2,962 ---------- ---------- ---------- Income before income taxes $ 585,880 $ 508,408 $ 284,135 ========== ========== ========== Identifiable assets: United States $2,556,809 $2,546,162 $2,672,864 Foreign 606,321 646,410 684,426 Corporate 159,652 256,963 89,781 ---------- ---------- ---------- $3,322,782 $3,449,535 $3,447,071 ========== ========== ==========
Foreign operations are conducted primarily in Europe. Foreign operations located elsewhere are not significant. Corporate assets consist primarily of cash and cash equivalents. The 1995 special charges (Note M) were incurred as follows: United States - $127.1 million; Foreign - $22.9 million; Corporate - $2.9 million; Miscellaneous - $3.0 million. Worldwide sales by product category are as follows:
1997 1996 1995 ---------- ---------- ---------- In thousands Jeanswear $2,888,967 $2,885,232 $2,792,532 Intimate apparel 648,937 650,197 729,149 Knitwear 614,798 601,303 582,398 Other 1,069,544 1,000,446 958,220 ---------- ---------- ---------- $5,222,246 $5,137,178 $5,062,299 ========== ========== ==========
NOTE P - LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Rental expense was $66.2 million in 1997, $67.0 million in 1996 and $70.4 million in 1995. Future minimum lease payments are $48.1 million, $38.9 million, $31.1 million, $25.0 million and $17.5 million for the years 1998 through 2002 and $40.5 million thereafter. NOTE Q - EARNINGS PER SHARE Earnings per share amounts have been restated in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. This restatement resulted in no material change from amounts previously reported. Earnings per share are computed as follow:
1997 1996 1995 -------- -------- -------- In thousands, except per share amounts Basic earnings per share: Net income $350,942 $299,524 $157,291 Less Preferred Stock dividends and redemption premium 5,003 4,363 3,683 -------- -------- -------- Net income available for Common Stock $345,939 $295,161 $153,608 ======== ======== ======== Weighted average Common Stock outstanding 125,504 127,292 127,486 Basic earnings per share $ 2.76 $ 2.32 $ 1.20 ======== ======== ======== Diluted earnings per share: Net income $350,942 $299,524 $157,291 Increased ESOP expense if Preferred Stock were converted to Common Stock 1,227 1,318 1,430 -------- -------- -------- Net income available for Common Stock and dilutive securities $349,715 $298,206 $155,861 ======== ======== ======== Weighted average Common Stock outstanding 125,504 127,292 127,486 Additional common shares resulting from dilutive securities: Preferred Stock 2,955 3,056 3,172 Stock options 1,261 730 558 -------- -------- -------- Weighted average Common Stock and dilutive securities outstanding 129,720 131,078 131,216 ======== ======== ======== Diluted earnings per share $ 2.70 $ 2.28 $ 1.19 ======== ======== ========
NOTE R - FINANCIAL INSTRUMENTS The carrying amount and fair value of financial instruments included in the balance sheets are as follows:
1997 1996 ----------------------------------- -------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------------- -------------- ------------------- -------------- In thousands Financial liabilities: Short-term borrowings $ 24,191 $ 24,191 $ 17,528 $ 17,528 Long-term debt 516,226 543,976 519,058 537,698 Series B Preferred Stock 56,341 137,915 58,092 101,602
The fair value of the Company's short-term and long-term debt is estimated based on quoted market prices or values of comparable borrowings. The fair value of the Series B Preferred Stock is based on a valuation by an independent financial consulting firm. The Company enters into short-term foreign currency forward exchange contracts to manage exposures related to specific foreign currency transactions or anticipated cash flows. Changes in the fair values of these contracts are recognized currently in operating income. The amounts of the contracts, and related gains and losses, are not material. In addition, the Company has entered into an interest rate swap contract expiring in 1999 related to $100 million of the Company's long-term debt. Net cash flows of the swap contract are included in Interest Expense. The fair value of these foreign currency and swap financial instruments approximates their carrying value.
In thousands, except per share amounts 1997 1996 1995 -------------------------------------------------------- SUMMARY OF OPERATIONS Net sales $5,222,246 $5,137,178 $5,062,299 Cost of products sold 3,440,611 3,458,166 3,577,555 ------------------------------------------------------------------------------------------------------------------- Gross profit 1,781,635 1,679,012 1,484,744 Marketing, administrative and other 1,176,562 1,121,729 1,137,354 ------------------------------------------------------------------------------------------------------------------- Operating income 605,073 557,283 347,390 Interest, net (25,877) (49,387) (66,217) Miscellaneous, net 6,684 512 2,962 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 585,880 508,408 284,135 Income taxes 234,938 208,884 126,844 ------------------------------------------------------------------------------------------------------------------- Net income $ 350,942 $ 299,524 $ 157,291 ------------------------------------------------------------------------------------------------------------------- Per share of Common Stock 1 Earnings - basic $ 2.76 $ 2.32 $ 1.20 Earnings - diluted 2.7 2.28 1.19 Dividends .77 .73 .69 Average number of common shares outstanding 125,504 127,292 127,486 Net income as % of average common shareholders' equity 18.2% 16.2% 8.8% Net income as % of average total assets 10.1% 8.6% 4.4% ------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Accounts receivable, net $ 587,934 $ 592,942 $ 629,506 Inventories 774,755 730,823 841,907 Total current assets 1,601,466 1,706,326 1,667,637 Property, plant and equipment, net 705,990 721,524 749,880 Total assets 3,322,782 3,449,535 3,447,071 Total current liabilities 765,908 766,267 868,320 Long-term debt 516,226 519,058 614,217 Common shareholders' equity 1,866,769 1,973,739 1,771,506 ------------------------------------------------------------------------------------------------------------------- OTHER STATISTICS Working capital $ 835,558 $ 940,059 $ 799,317 Current ratio 2.1 2.2 1.9 Debt to capital ratio 2 22.5% 21.4% 32.3% Dividends $ 100,141 $ 97,036 $ 92,038 Purchase of Common Stock 391,651 61,483 86,251 Cash provided by operations 454,661 711,454 323,656 Capital expenditures (excluding acquisitions) 154,262 138,747 155,206 Depreciation and amortization 156,252 160,578 167,721 ------------------------------------------------------------------------------------------------------------------- MARKET DATA Market price range 1 $48 1/4-32 1/4 $34 15/16-23 13/16 $28 9/16-23 3/8 Book value per common share 1 15.4 15.44 13.96 Price earnings ratio -- high-low 17.5 - 11.7 15.1 - 10.3 23.8 - 19.5 Rate of payout 3 27.9% 31.5% 57.5% ------------------------------------------------------------------------------------------------------------------- In thousands, except per share amounts 1994 1993 --------------------------------- SUMMARY OF OPERATIONS Net sales $4,971,713 $4,320,404 Cost of products sold 3,387,295 2,974,861 --------------------------------------------------------------------------------------------- Gross profit 1,584,418 1,345,543 Marketing, administrative and other 1,053,912 911,063 --------------------------------------------------------------------------------------------- Operating income 530,506 434,480 Interest, net (70,984) (37,387) Miscellaneous, net (3,861) 2,894 --------------------------------------------------------------------------------------------- Income before income taxes 455,661 399,987 Income taxes 181,125 153,572 --------------------------------------------------------------------------------------------- Net income $ 274,536 $ 246,415 --------------------------------------------------------------------------------------------- Per share of Common Stock 1 Earnings - basic $ 2.10 $ 1.90 Earnings - diluted 2.05 1.85 Dividends .65 .61 Average number of common shares outstanding 129,240 128,022 Net income as % of average common shareholders' equity 16.8% 16.9% Net income as % of average total assets 7.9% 8.5% --------------------------------------------------------------------------------------------- FINANCIAL POSITION Accounts receivable, net $ 613,337 $ 511,887 Inventories 801,338 778,767 Total current assets 1,551,166 1,500,180 Property, plant and equipment, net 767,011 712,759 Total assets 3,335,608 2,877,348 Total current liabilities 912,332 659,848 Long-term debt 516,700 527,573 Common shareholders' equity 1,734,009 1,547,400 --------------------------------------------------------------------------------------------- OTHER STATISTICS Working capital $ 638,834 $ 840,332 Current ratio 1.7 2.3 Debt to capital ratio 2 32.7% 30.3% Dividends $ 88,223 $ 82,831 Purchase of Common Stock 27,878 - Cash provided by operations 479,401 293,751 Capital expenditures (excluding acquisitions) 132,908 209,494 Depreciation and amortization 158,511 125,765 --------------------------------------------------------------------------------------------- MARKET DATA Market price range 1 $26 7/8-22 1/8 $28 1/4-19 3/4 Book value per common share 1 13.51 12 Price earnings ratio -- high-low 12.8 - 10.5 14.9 - 10.4 Rate of payout 3 31.0% 32.1% ----------------------------------------------------------------------------------------------
(1) Per share computations and market price ranges have been adjusted to reflect a two-for-one stock split in November 1997. (2) Capital is defined as common shareholders' equity plus short-term and long-term debt. (3) Dividends per share divided by earnings per share. QUARTERLY COMMON STOCK PRICE INFORMATION The high and low sales prices for the periods indicated were as follows:
1997 1996 1995 __________________________________________________________________________ High Low High Low High Low __________________________________________________________________________ First quarter $3511/16 $ 321/2 $ 283/8 $2313/16 $ 269/16 $239/16 Second quarter 435/8 321/4 3111/16 267/8 267/8 251/4 Third quarter 481/4 429/16 313/16 261/4 289/16 24 Fourth quarter 473/16 4111/16 3415/16 291/2 2613/16 233/8 __________________________________________________________________________
REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders VF Corporation We have audited the accompanying consolidated balance sheets of VF Corporation as of January 3, 1998 and January 4, 1997, and the related consolidated statements of income, cash flows, and common shareholders' equity for each of the three fiscal years in the period ended January 3, 1998. 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 in accordance with generally accepted auditing standards. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VF Corporation as of January 3, 1998 and January 4, 1997, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 1998 in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania February 5, 1998 QUARTERLY COMMON STOCK PRICE INFORMATION The high and low sales prices for the periods indicated were as follows:
1997 1996 1995 ----------------------------------------------------------------------------------------------------------- High Low High Low High Low ----------------------------------------------------------------------------------------------------------- First quarter $35 11/16 $32 1/2 $28 3/8 $23 13/16 $26 9/16 $23 9/16 Second quarter 43 5/8 32 1/4 31 11/16 26 7/8 26 7/8 25 1/4 Third quarter 48 1/4 42 9/16 31 3/16 26 1/4 28 9/16 24 Fourth quarter 47 3/16 41 11/16 34 15/16 29 1/2 26 13/16 23 3/8 -----------------------------------------------------------------------------------------------------------