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
-----------------------------------------------------------------------------------------------------------