SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended January 1, 2011

 

Commission file number: 1-5256

V. F. CORPORATION

(Exact name of registrant as specified in its charter)

 

 

105 Corporate Center Boulevard
Greensboro, North Carolina 27408
(Address of principal executive offices)

(336) 424-6000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ     NO o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ     NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934).  YES o     NO þ

 

The aggregate market value of Common Stock held by non-affiliates (i.e., persons other than officers, directors and 5% stockholders) of V.F. Corporation on July 3, 2010, the last day of the registrant’s second fiscal quarter, was approximately $5,623,000,000, based on the closing price of the shares on the New York Stock Exchange.

 

As of January 30, 2011, there were 108,205,296 shares of Common Stock of the registrant outstanding.

 

Documents Incorporated By Reference

 

Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 26, 2011 (Item 1 in Part I and Items 10, 11, 12, 13 and 14 in Part III), which definitive Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

 

This document (excluding exhibits) contains 104 pages.

 

The exhibit index begins on page 53.

 

 

PART I

 

 

V.F. Corporation, organized in 1899, is a worldwide leader in branded lifestyle apparel and related products. Unless the context indicates otherwise, the terms “VF,” “we,” “us” and “our” used herein refer to V.F. Corporation and its consolidated subsidiaries. Our stated vision is: VF will grow by building lifestyle brands that excite consumers around the world.

 

For over 100 years, VF has grown by offering consumers high quality, high value branded apparel and related products. Since 2004, we have been implementing a strategy that is transforming VF’s mix of business to include more lifestyle brands. Lifestyle brands are those brands that connect closely with consumers because they are aspirational and inspirational; they reflect consumers’ specific activities and interests. Lifestyle brands generally extend across multiple product categories and have higher than average gross margins. Accordingly, this transformation has included the acquisitions of many lifestyle brands in recent years, including Vans^®, Reef^®, Kipling^®, Napapijri^®, 7 For All Mankind^®, lucy^®, Splendid^® and Ella Moss^®. At the same time, we have continued to support all of our businesses through product line extensions, geographic expansion, retail store openings, product innovation, consumer research and marketing.

 

VF is a highly diversified apparel company — across brands, product categories, channels of distribution and geographies. VF owns a broad portfolio of brands in the jeanswear, outerwear, packs, luggage, footwear, sportswear, occupational and performance apparel categories. These products are marketed to consumers shopping in specialty stores, upscale and traditional department stores, national chains and mass merchants. A growing portion of our revenues, currently 18%, is derived from sales to consumers through VF-operated stores and internet sites. VF derives 30% of its revenues from outside the United States, primarily in Europe, Asia, Canada and Latin America. VF products are also sold in many countries through independent licensees and distributors. To provide our products across multiple channels of distribution in different geographic areas, we balance efficient and flexible internally-owned manufacturing with sourcing finished goods from independent contractors. We utilize state-of-the-art technologies for inventory replenishment that enable us to effectively and efficiently get the right assortment of products which match consumer demand to our customers’ shelves.

 

VF’s businesses are organized primarily into product categories, and by brands within those categories, for both management and internal financial reporting purposes. These groupings of businesses are called “coalitions” and consist of the following: Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. These coalitions are our reportable segments for financial reporting purposes. Coalition management has responsibility to build their brands, with certain financial, administrative and systems support and disciplines provided by central functions within VF.

 

We consider our Outdoor & Action Sports, Sportswear and Contemporary Brands coalitions to be our lifestyle coalitions, which have the potential to achieve higher long-term revenue, profit growth and profit margins than our other businesses. Our Jeanswear and Imagewear coalitions are our heritage businesses which have historically strong levels of profitability and cash flows but lower revenue growth rates.

The following table summarizes VF’s primary owned and licensed brands by coalition:

 

 

Financial information regarding VF’s coalitions is included in Note Q to the Consolidated Financial Statements, which are included at Item 8 of this report.

 

Outdoor & Action Sports Coalition

 

Our Outdoor & Action Sports Coalition, VF’s fastest growing business, is a group of authentic lifestyle brands which are outdoor and activity-based. Product offerings include outerwear, performance wear, sportswear, footwear, equipment, backpacks, luggage and accessories.

 

The North Face^® is the largest brand in our Outdoor & Action Sports Coalition. Its high performance outdoor apparel, equipment and footwear are sold around the world. (In Japan and South Korea, The North Face^® trademarks are owned by a third party.) The North Face^® apparel lines consist of performance wear, outerwear, snow sports gear, functional sportswear and footwear for men, women and children. Its equipment line consists of tents, sleeping bags, backpacks and accessories. Many of The North Face^® products are designed for extreme applications, such as high altitude mountaineering and ice and rock climbing, although many consumers purchase these products because they represent a lifestyle to which they aspire. The North Face^® products are marketed

through specialty outdoor and premium sporting goods stores in the United States, Canada, Europe and Asia and select department stores in the United States. In addition, these products are sold through over 60 VF-operated full price and outlet stores in the United States and Europe and online at www.thenorthface.com. The brand is also sold through agents, distributors, and over 300 The North Face^® stores operated by independent third parties outside the United States.

 

VF manufactures and markets Vans^® performance and casual footwear and apparel for skateboard, bicycle motocross (“BMX”), surf and snow sports participants and enthusiasts. Products are sold on a wholesale basis through national chain stores in the United States and through skate and surf shops and specialty stores in the United States, Canada, Europe and Asia. The brand’s products are also sold through over 270 owned Vans^® full-price and outlet stores in the United States and in key European markets. These retail stores carry a wide variety of Vans^® footwear, along with a growing assortment of apparel and accessory items. In 2010, we completed the acquisition of our former 50% owned joint venture that markets the Vans^® brand in Mexico. VF is the 70% owner of the Vans Warped Tour^® music festival, which presents over 40 punk rock bands in performances in over 40 cities across North America each summer as well as online at www.vans.com.

 

JanSport^® backpacks, duffel bags, luggage and accessories are sold through department, office supply and national chain stores, as well as sports specialty stores and college bookstores in the United States. JanSport^® backpacks have a leading market share in the United States. A technical line of JanSport^® backpacks is sold through outdoor and sporting goods stores. JanSport^® fleece and T-shirts imprinted with college logos are sold through college bookstores and sporting goods stores in the United States. In Europe, Eastpak^® and JanSport^® backpacks, travel bags, luggage, and a line of Eastpak^® clothing are sold primarily through department and specialty stores. Eastpak^® is one of the leading backpack brands in Europe. The JanSport^® and Eastpak^® brands are also marketed throughout Asia by licensees and distributors. Eagle Creek^® adventure travel gear products include luggage, backpacks and accessories sold through specialty luggage stores, outdoor stores and department stores throughout the United States and Europe.

 

Kipling^® handbags, shoulder bags, backpacks, luggage and accessories are stylish, colorful and fun products that are both practical and durable. The brand name comes from the author of The Jungle Book, Rudyard Kipling, and that provides the connection to the Kipling^® monkey mascot, which symbolizes fun and adventure. A colorful monkey key ring is attached to every bag, with a different monkey design for each product collection. Products are sold through specialty and department stores in Europe, Asia and South America, as well as through over 40 VF-operated and over 175 independently-operated stores and at www.kipling.com. The Kipling^® business in North America is managed as part of the Sportswear Coalition.

 

Derived from the Finnish word for Arctic Circle, the Napapijri^® brand offers premium-priced performance skiwear and outdoor-inspired casual outerwear, sportswear and accessories for men, women and children. The Napapijri^® brand enjoys especially strong consumer awareness in Italy, where it was created, and is expanding across Europe. Products are sold on a wholesale basis primarily to European specialty shops, and through VF-operated and independently-operated stores in several countries in Europe. The Napapijri^® brand is marketed through a majority-owned joint venture in Japan.

 

The Reef^® brand of surf-inspired products includes sandals, shoes, swimwear and other casual apparel and accessories for men, women and children. Products are marketed primarily to surf shops, sporting goods and specialty chains, and department stores in the United States, Canada, Europe and Asia. In recent years, we have expanded the Reef^® brand’s presence by acquiring rights previously held by independent distributors to market Reef^® products in Europe, Canada and the Caribbean.

 

The lucy^® brand is an authentic women’s activewear brand designed for style, performance and fit that can be worn by today’s active woman from workout to weekend. lucy^® apparel is sold in 65 lucy^® branded stores across the United States and via the internet at www.lucy.com. The lucy^® stores emphasize the brand’s four core types of activity-based apparel — yoga, gym, running and exploration.

 

We expect continued long-term growth in our Outdoor & Action Sports Coalition as we extend our brands into new product categories, open additional stores, expand geographically, and acquire additional outdoor or activity-based lifestyle brands.

Jeanswear Coalition

 

Our Jeanswear Coalition markets jeanswear and related casual products in the United States and in many international markets. The largest of these brands, the Lee^® and Wrangler^® brands, have long-standing traditions as authentic American jeans brands as they were established in 1889 and 1947, respectively, and have strong market positions. Lee^® and Wrangler^® products are sold in nearly every developed country through a combination of wholesale accounts, owned stores and online through our brands’ websites. Products also include shorts, casual pants, knit and woven tops and outerwear, which are designed to complement the jeanswear products and extend our brands.

 

In domestic markets, Lee^® products are sold primarily through mid-tier department stores and specialty stores. Wrangler^® westernwear is marketed through western specialty stores. The Wrangler^®, Rustler^® and Riders^® brands are marketed to mass merchant and regional discount stores. Based on available data, we believe our key brands have been gaining market share despite significant competitive activity in all channels where they are distributed. Including all of our jeanswear brands, we believe VF has the largest unit market share of jeans in the United States and is one of the largest marketers of jeans in the world. We also market cotton casual pants under the Lee Casuals^®, Timber Creek by Wrangler^® and Wrangler^® brands.

 

Our vendor-managed inventory and retail floor space management programs with several of our major retailer customers give us a competitive advantage in our domestic jeanswear business. We receive point-of-sale information from these customers on a daily basis, at an individual store and style-size-color stockkeeping unit (“SKU”) level. We then ship products based on that customer data to ensure their selling floors are appropriately stocked with products that match their shoppers’ needs. Our systems capabilities allow us to analyze our retail customer’s sales, demographic and geographic data to develop product assortment recommendations that maximize the productivity of their jeanswear selling space and minimize their investment in inventory.

 

Jeanswear in most international markets is more fashion-oriented and has a higher selling price than similar products in the United States. The international jeans market is also more fragmented than the United States market, with competitors ranging from global brands to a number of smaller brands marketed in a specific country or region.

 

VF’s largest international jeanswear business is located in Western Europe. Lee^® and Wrangler^® jeanswear products are sold through department stores and specialty stores where we employ some of the same retail floor space management programs described above. We also market Lee^® and Wrangler^® products to mass market and specialty stores in Canada and Mexico, as well as to department stores and specialty stores in Asia and South America. In many international markets, we are expanding our reach through VF-operated stores, which are an important vehicle for presenting our brands’ image and marketing message directly to consumers. We are continuing to expand our jeanswear brands in emerging markets, and have experienced significant growth in China and India. In foreign markets where VF does not have owned operations, Lee^® and Wrangler^® products are marketed through distributors, agents or licensees. Lee^® and Wrangler^® products are sold in over 600 independently operated mono or multibrand stores primarily in Eastern Europe and Asia.

 

In the United States, we believe our Jeanswear Coalition is growing its jeans market share in the mass market, westernwear specialty, and national chain channels of distribution through superior consumer insight and marketing strategies and continuous product innovation. Internationally, growth will be driven by expansion of our existing businesses in Asia where we have averaged in excess of 21% revenue growth per year over the last three years, with India showing a revenue growth of 64% in 2010.

 

Imagewear Coalition

 

Our Imagewear Coalition consists of the Image (occupational apparel and uniforms) and Licensed Sports (owned and licensed high profile sports and lifestyle apparel) businesses. Each business represents approximately one-half of coalition revenues.

 

The Image business provides uniforms and career occupational apparel for workers in North America and internationally, under the Red Kap^® brand (a premium workwear brand with more than 75 years of history), the Bulwark^® brand (flame resistant and protective apparel primarily for the petrochemical, utility and mining industries), the Horace Small^® brand (apparel for law enforcement and public safety personnel) and the Chef

Designs^tm brand (apparel for restaurant and food service staff). Products include work pants, slacks, work shirts, overalls, jackets and smocks. Image revenues are significantly affected by the overall level of U.S. industrial and service employment, which improved slightly in 2010 following two years of economic contraction. Approximately two-thirds of our Image revenues are from industrial laundries, resellers and distributors that in turn supply customized workwear to employers for on-the-job wear by production, service and white-collar personnel. Since industrial laundries and uniform distributors maintain minimal inventories of work clothes, VF’s ability to offer rapid delivery of products in a broad range of sizes is an important advantage in this market. Our commitment to customer service, supported by an automated central distribution center with several satellite locations, enables customer orders to be filled within 24 to 48 hours of receipt and has helped the Red Kap^® and Bulwark^® brands obtain a significant share of uniform apparel sold to laundries, resellers and other distributors.

 

Our Image business also develops and manages uniform programs through custom-designed websites for major business customers (e.g., FedEx Corporation, AT&T, Air Canada, Continental Airlines, American Airlines) and governmental organizations (e.g., U.S. Customs and Border Protection, Fire Department of New York City, Transportation Security Administration, National Park Service, New York City Transit Authority). These websites give these customers’ employees the convenience of shopping for their work and career apparel via the internet. We believe this business is the nation’s largest supplier of nonmilitary apparel to the U.S. government.

 

In the Licensed Sports business, we design and market sports apparel and fanwear under licenses granted by the major sports leagues, individual athletes and related organizations, including Major League Baseball, the National Football League, the National Basketball Association, the National Hockey League, MLB Players Association, and selected major colleges and universities. Under license from Major League Baseball, Majestic^® brand uniforms are worn exclusively on-field by all 30 major league teams. Majestic^® brand adult and youth-size authentic, replica jersey and fanwear are sold through sporting goods and athletic specialty stores, department stores and major league stadiums. Adult and youth sports apparel products marketed under other licensed labels are distributed through department, mass market, sporting goods and athletic specialty stores. Our quick response capabilities allow us to deliver products to retailers within hours following major sporting events such as the Super Bowl, the World Series, and conference or division playoff championships. During the year, we extended our license agreement with the National Football League for an additional five year period to 2017 and also added apparel rights for the Canadian, European and Asian markets beginning in 2012. In addition, the Licensed Sports division is a major supplier of licensed Harley-Davidson^® apparel marketed to Harley-Davidson dealerships.

 

The opportunities to grow our Imagewear Coalition revenues include (i) extension of its product and service capabilities to new industrial and service apparel distribution channels, markets, and geographies, (ii) growth of our Major League Baseball and National Football League programs, (iii) market share gains in key licensed categories such as women’s sports apparel, (iv) expansion of our college and university fanware program, and (v) extension of VF’s floor space management and quick response retail replenishment capabilities to more retail doors, placing the right product assortments on the sales floor in each geographic market.

 

Sportswear Coalition

 

The Nautica^® brand is the primary lifestyle brand in the Sportswear Coalition. Nautica^® men’s sportswear, noted for its classic styling, is marketed through department stores, specialty stores and VF-operated outlet stores in premium and better outlet centers. The Nautica Jeans Company^® line features jeanswear and related tops for younger male consumers. We believe the Nautica^® brand is the number two men’s sportswear collection brand in department stores. Other Nautica^® product lines include men’s outerwear, underwear and swimwear and men’s and women’s sleepwear. Nautica^® women’s sportswear is marketed in the United States at most Nautica^® outlet stores and at www.nautica.com.

 

The Sportswear Coalition operates over 90 Nautica^® outlet stores in premium and better outlet centers across the United States. These stores carry Nautica^® merchandise for men, women, boys, girls and infants. The products sold in the outlet stores are different from the Nautica^® styles sold to department and specialty store wholesale customers, although the design inspiration and color palette are consistent across both lines. These outlet stores also carry Nautica^® merchandise from licensees to complete their product assortment. The product assortment offered at www.nautica.com includes products from both the wholesale and retail lines as well as licensed merchandise. In

addition, independent licensees operate over 200 Nautica^® brand stores across the world. About 80% of these are full price stores and 20% are outlet stores with the majority of these stores in southeast Europe, Central America and China.

 

The Nautica^® brand is licensed to independent parties in the United States for apparel categories not produced by VF (e.g., tailored clothing, dress shirts, neckwear, women’s swimwear and outerwear, children’s clothing) and for nonapparel categories (e.g., accessories, fragrances, watches, eyewear, bed and bath products, furniture). Nautica^® products are licensed for sale in over 50 countries outside the United States. Our licensees’ annual wholesale sales of Nautica^® licensed products are approximately $400 million.

 

The Sportswear Coalition also includes the Kipling^® business in North America whose products include Kipling^® brand handbags, luggage, backpacks, totes and accessories. Kipling^® has seen significant growth in 2010 from increased distribution, two new VF-operated stores, increased sales of its products at most existing customers, and a new Kipling^® handbags and accessories program during 2010 that is exclusive with Macy’s Inc. department stores. Kipling^® products are also sold in the United States through specialty luggage and bag stores, VF-operated stores and www.kipling.com and in Canada through specialty and department stores. About two-thirds of brand revenue is generated from products that are the same as those sold in Europe and other parts of the world, with the remainder designed and sold only in the United States.

 

We believe there is potential to improve Nautica^® brand revenue and profit performance through the growth of core Nautica sportswear products, increased pricing, improved product assortments and an enhanced customer experience at our Nautica^® outlet stores, growth in our online business, and expansion of the licensed business internationally. There is also potential for expansion of our Kipling^® brand through our handbag and accessories relationship with Macy’s Inc. as well as the opportunity to open additional VF-operated stores.

 

Contemporary Brands Coalition

 

Our Contemporary Brands Coalition is focused on premium upscale lifestyle brands. The coalition is comprised of the 7 For All Mankind^®, John Varvatos^®, Splendid^® and Ella Moss^® brands.

 

7 For All Mankind^® is a Los Angeles-based brand of premium denim jeans and related products for women and men. While the core business remains focused on denim, the collection also includes sportswear products, such as knit and woven tops, sweaters, jackets and accessories. Products are noted for their fit and for innovation in design, fabric and finish. 7 For All Mankind^® is a leading premium jeans brand in the United States, with the premium segment defined as jeans retailing for $100 or more. Retail price points for the brand’s core jeans range from $150 — $199 for basics, with higher price points for more fashion-forward products. With two-thirds of its sales in the United States, the brand is marketed through premium department stores, such as Bloomingdale’s, Nordstrom, Neiman Marcus, Saks, Macy’s and through specialty stores. In addition, we opened 12 stores in the United States during 2010, bringing the total to 39 stores. International sales are through department stores, such as Harrods in London, specialty stores, as well as VF-operated stores. We are pursuing growth of this brand through new stores, e-commerce, additional sportswear product offerings, licensing and increasing productivity in the wholesale channel. We are also focusing on international growth opportunities, primarily through company-operated and partnership stores and further geographic expansion in Europe and Asia.

 

The John Varvatos^® brand is a luxury apparel and accessories collection for men, including tailored clothing, sportswear, footwear and accessories. The John Varvatos * USA^® line of tailored clothing, sportswear, footwear and accessories is designed to appeal to a younger consumer at more accessible price points. Products are sold primarily in the United States through upscale department and specialty stores, VF-operated John Varvatos^® retail locations and online at www.johnvarvatos.com. This business is 80% owned by VF, with the balance owned by Mr. Varvatos.

 

In March 2009, VF acquired the Splendid^® brand of women’s, men’s and children’s premium tops and casual apparel and Ella Moss^® brand of women’s premium sportswear. The brands, noted for their soft wearable fabrics and vibrant colors, are marketed to upscale department and specialty stores primarily in the United States. We have four Splendid^® stores, along with shop-in-shops in some of our major retail accounts.

 

The recession significantly impacted sales of premium apparel products during 2008 and 2009, as many consumers reduced spending for luxury goods. This led to the closing of a significant number of specialty stores, as

well as a reduction in same store sales comparisons in the upscale department store channel. Although operating results of the upscale department stores have improved during 2010 the premium denim market remains particularly challenging. Further, the specialty store channel has not rebounded to pre-recession levels. However, we still see opportunities for growth through store openings, e-commerce, and wholesale, geographic and product expansion.

 

Direct-To-Consumer Operations

 

VF-operated stores are part of our long-term strategy to drive revenue growth and profitability. Our full price stores allow us to showcase a brand’s full line of current season products, with fixtures and imagery that support the brand’s positioning. These stores provide high visibility for our brands and products and enable us to stay close to the needs and preferences of our consumers. The proper presentation of products in our stores, particularly in our showcase stores, also helps to increase consumer purchases of VF products sold through our wholesale customers. VF-operated full price stores generally provide operating margins that are equal to or above VF averages and a return on investment well above VF averages. In addition, VF operates outlet stores in both premium outlet malls and more traditional value-based locations. These outlet stores serve an important role in our overall inventory management and profitability by allowing VF to sell a significant portion of excess, discontinued and out-of-season products at better prices than are otherwise available from outside parties, while maintaining the integrity of our brands.

 

Our growing global retail operations include 786 stores at the end of 2010. Of that total, there are 711 monobrand stores (i.e., primarily one brand’s products offered in each store) that sell The North Face^®, Vans^®, Nautica^®, 7 For All Mankind^®, lucy^®, Splendid^®, Lee^®, Wrangler^®, Napapijri^®, John Varvatos^®, Kipling^®, and Eastpak^®. Approximately 78% of these stores offer products at full price, with the remainder being outlet locations offering excess, discontinued and out-of-season products at discounted prices. We also operate 75 VF Outlet stores in the United States that sell a broad selection of excess quantities of VF-branded products, as well as women’s intimate apparel, childrenswear, other apparel and accessories. Approximately 75% of the VF-operated stores are located in the United States, with the remaining stores located in Europe, Latin America and Asia.

 

Across the globe, internet sales (i.e., e-commerce) comprise a small but rapidly growing portion of apparel, footwear and accessories sales. At VF, we currently market The North Face^®, Vans^®, Lee^®, Wrangler^®, 7 For All Mankind^®, lucy^®, Nautica^®, Kipling^®, Splendid^®, Ella Moss^®and John Varvatos^® online in the United States, plus The North Face^® and other brands across Europe. We will continue to expand our e-commerce initiatives through continued rollout of brand sites in Europe and Asia, and enhancing each brand’s site to deliver a superior experience with each transaction. E-commerce is our fastest growing direct-to-consumer channel and represents approximately 8% of our direct-to-consumer business.

 

Total retail store and e-commerce revenues accounted for 18% of VF’s consolidated Total Revenues in 2010 and 17% in 2009. We expect our direct-to-consumer business to continue to grow at a faster pace than VF’s overall growth rate as we continue opening stores and expanding our e-commerce presence. During 2010, we opened 85 stores and are planning to open approximately 100 new retail locations in 2011. For 2011, retail capital investments of approximately $85 million will be concentrated where we see higher growth potential — Vans^®, The North Face^®, 7 For All Mankind^® and international.

 

In addition, our licensees, distributors and other independent parties operate over 1,700 partnership stores which are primarily monobrand stores that have the appearance of VF-operated stores. These stores — most of which are in Eastern Europe and Asia — are focused on The North Face^®, Kipling^®, Nautica^®, Lee^® and Wrangler^® brands.

 

Licensing Arrangements

 

As part of our business strategy of expanding market penetration of VF-owned brands, we may enter into licensing agreements for specific apparel and complementary product categories if such arrangements with independent parties can provide more effective manufacturing, distribution and marketing of such products than could be achieved internally. We provide support to these business partners and ensure the integrity of our brand

names by taking an active role in the design, quality control, advertising, marketing and distribution of licensed products.

 

Licensing arrangements relate to a broad range of VF brands. License agreements are for fixed terms of generally three to five years, with conditional renewal options. Each licensee pays royalties to VF based on its sales of licensed products, with most agreements providing for a minimum royalty requirement. Royalties generally range from 5% to 7% of the licensing partners’ net licensed products sales. Gross Royalty Income was $78.0 million in 2010, with the largest contributions from the Nautica^®, Vans^®, The North Face^®, John Varvatos^®, Lee^® and Wrangler^® brands. In addition, licensees of our brands are generally required to spend from 1% to 5% of their net licensed product sales to advertise VF’s products. In some cases, these advertising amounts are remitted to VF for advertising on behalf of the licensees.

 

VF has also entered into license agreements to use trademarks owned by third parties. We market apparel under licenses granted by Major League Baseball, the National Football League, the National Basketball Association, the National Hockey League, Harley-Davidson Motor Company, Inc., major colleges and universities, and individual athletes and related organizations, most of which contain minimum annual licensing and advertising requirements.

 

Manufacturing, Sourcing and Distribution

 

Product design, fit, fabric, finish and quality are important in all of our businesses. These functions are performed by employees located in either our global supply chain organization or our branded business units across the globe.

 

VF’s centralized global supply chain organization sources product and is responsible for delivering products to our customers. VF is highly skilled in managing the complexities associated with the supply chain. VF’s revenues are comprised of over 400 million units spread across 30 brands. VF operates 25 manufacturing facilities and utilizes at least 1,500 contractor manufacturing facilities in over 60 countries. We operate approximately 30 distribution centers and 786 retail stores. Managing this complexity is made possible by our use of information systems technologies — with sophisticated systems for product development, forecasting, order management and warehouse management, attached to our core enterprise resource management platform.

 

In 2010, 34% of our units were manufactured in VF-owned facilities and 66% were obtained from independent contractors, primarily in Asia. Products manufactured in VF facilities generally have a lower cost and shorter lead times than contracted production. Products obtained from contractors in the Western Hemisphere generally have a higher cost than products obtained from contractors in the Far East. But contracting in the Western Hemisphere gives us greater flexibility, shorter lead times and allows for lower inventory levels. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced approach to product sourcing. We will continue to manage our supply chain from a global perspective and adjust as needed to changes in the global production environment.

 

We operate manufacturing facilities (primarily cutting, sewing and finishing) located in Mexico, Central America and the Middle East. A significant percentage of our denim bottoms and occupational apparel are manufactured in these plants. For these owned production facilities, we purchase raw materials from numerous domestic and international suppliers to meet our production needs. Raw materials include fabrics made from cotton, synthetics and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers and snaps). In some instances, we contract the sewing of VF-owned raw materials into finished product with independent contractors in the United States, Mexico and Central America. Owned manufacturing in the United States is primarily limited to screen printing and embroidery of jerseys, T-shirts and fleece products, including Major League Baseball uniforms and other products. While we obtain fixed price commitments for fabric and certain supplies for up to one year in advance, specific purchase obligations with suppliers are typically limited to the succeeding two to six months. Our only long-term contract is a commitment in connection with the sale of our childrenswear business in 2004 to purchase childrenswear for sale through our VF Outlet stores, with a minimum of $15.0 million per year through 2015. No single supplier represents more than 5% of our total cost of sales.

 

Our independent contractors generally own the raw materials and ship finished ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with satellite offices across Asia) and

Panama. These hubs are responsible for product procurement, product quality assurance, supplier management, transportation and shipping functions in the Eastern and Western Hemispheres, respectively. Substantially all products in the Outdoor & Action Sports and Sportswear Coalitions, as well as a portion of product requirements for our Jeanswear and Imagewear Coalitions, are obtained through these sourcing hubs. For most products in our Contemporary Brands Coalition, we contract the sewing and finishing of VF-owned raw materials through a network of independent domestic contractors.

 

Management continually monitors political risks and developments related to duties, tariffs and quotas. We limit VF’s sourcing exposure through, among other measures, (i) extensive geographic diversification with a mix of VF-operated and contracted production, (ii) shifts of production among countries and contractors, (iii) allocation of production to merchandise categories where the free flow of product is available and (iv) sourcing from countries with tariff preference and free trade agreements. VF does not directly or indirectly source products from suppliers in countries identified by the State Department as state sponsors of terrorism and subject to U.S. economic sanctions and export controls.

 

All VF-owned production facilities throughout the world, as well as all independent contractor facilities that manufacture VF-branded products, must comply with VF’s Global Compliance Principles. These principles, established in 1997 and consistent with international labor standards, are a set of strict standards covering legal and ethical business practices, workers’ ages, work hours, health and safety conditions, environmental standards, and compliance with local laws and regulations. In addition, our owned factories must also undergo certification by the independent, nonprofit organization, Worldwide Responsible Accredited Production (“WRAP”), which promotes global ethics in manufacturing. VF, through its contractor monitoring program, audits the activities of the independent businesses and contractors that produce VF-branded goods at locations across the globe. Each of the over 1,500 independent contractor facilities, including those serving our independent licensees, must be precertified prior to performance of any production on behalf of VF. This precertification includes passing a factory inspection and signing a VF Terms of Engagement agreement. We maintain an ongoing audit program to ensure compliance with these requirements by using dedicated internal and outsourced staff. Additional information about VF’s Code of Business Conduct, Global Compliance Principles, Terms of Engagement, Factory Compliance Guidelines, Factory Audit Procedure and Environmental Compliance Guidelines, along with a Global Compliance Report, is available on the VF website at www.vfc.com.

 

VF did not experience difficulty in filling its raw material and contracting production needs during 2010. It is possible that we could experience some challenges in our supply chain during 2011 due to increases in demand and pricing for raw materials, primarily related to the cost of cotton. Although VF is not immune to these pressures, we believe that we will be able to retain our competitive advantage due to our scale and significance to our suppliers. The loss of any one supplier or contractor would not have a significant adverse effect on our business.

 

Product is shipped from our independent suppliers and VF-operated manufacturing plants to distribution centers in the United States and international markets. In limited instances, product is shipped directly to our customers. Product is inspected, sorted and stored in our distribution centers until needed for packing and shipping to our wholesale customers or our stores. Most distribution centers are operated by VF, and some support more than one brand. Our distribution centers use computer-controlled inventory management technology for efficient tracking, moving and shipping of products. A small portion of our distribution needs are met by contract distribution centers.

 

Seasonality

 

VF’s operating results vary from quarter-to-quarter throughout the year due to the differing sales patterns of our individual businesses. On a quarterly basis and excluding the effect of acquisitions, consolidated Total Revenues for 2010 ranged from a low of 21% of full year revenues in the second quarter to a high of 29% in the third quarter, while consolidated Operating Income ranged from a low of 17% in the second quarter to a high of 35% in the third quarter. This variation results primarily from the seasonal influences on revenues of our Outdoor & Action Sports Coalition, where 18% of the Coalition’s revenues occurred in the second quarter and 33% in the third quarter of 2010. With changes in our mix of business and growth of our retail operations, historical quarterly revenue and

profit trends may not be indicative of future trends. We expect the portion of annual revenues and profits occurring in the second half of the year to continue to increase.

 

Working capital requirements vary throughout the year. Working capital generally increases during the first half of the year as inventory builds to support peak shipping periods and then decreases during the second half of the year as those inventories are sold and accounts receivable are collected. Cash provided by operating activities is substantially higher in the second half of the year due to higher net income during that period and reduced working capital requirements, particularly during the fourth quarter.

 

Advertising and Customer Support

 

During 2010, our advertising and promotion spending was $426.8 million, representing 5.5% of Net Sales. We advertise in consumer and trade publications, on national and local radio and television and on the internet. We also participate in cooperative advertising on a shared cost basis with major retailers in print media, radio and television. We sponsor sporting, musical and special events and sponsor a number of athletes and personalities. We employ marketing sciences to optimize the impact of advertising and promotional spending and to identify the types of spending that provide the greatest return on our marketing investments.

 

We provide point-of-sale fixtures and signage to our wholesale customers to enhance the presentation and brand image of our products. We utilize shop-in-shops, which are separate sales areas dedicated to a specific VF brand within our customers’ stores, to help differentiate and enhance the presentation of our products. We participate in concession arrangements with department store customers in China and other international markets. In a typical concession arrangement, the department store provides a dedicated sales area, along with check-out, credit and other retail services, while VF owns and bears the risk of inventory ownership. Concession sales associates may be employees of VF or the department store.

 

We participate in incentive programs with our retailer customers, including discounts, allowances and cooperative advertising funds. We also offer sales incentive programs directly to consumers in the form of rebate and coupon offers.

 

We maintain internet sites for most of our brands. Many of them are e-commerce sites where consumers can order products from VF. Other websites provide information about our brands and products and may direct consumers to our wholesale customers where they can purchase our products. We also operate several business-to-business sites where our retail customers can order VF products.

 

Many of our coalitions employ a staff of in-store marketing and merchandising coordinators located in major cities across the United States. These individuals visit our customers’ retail locations to ensure that our products, and those of our licensees, are properly presented on the merchandise sales floor and to inform the customers’ sales associates about our products and related promotions.

 

In addition to sponsorships and activities that directly benefit our products and brands, VF and its associates actively support our communities and various charities. For example, The North Face^® has committed to programs that encourage and enable outdoor participation, such as Planet Explore (www.planetexplore.com), the Never Stop Exploring Award, and the Explore Your Parks program. Nautica^® has partnered with Oceana, a not-for-profit organization focused on ocean conservation. And 2010 marked the fifteenth year of support for Lee National Denim Day^®, one of the country’s largest single-day fund-raisers for breast cancer which has raised over $80 million to fight breast cancer since inception. VF also supports companywide sustainability efforts, and recognizes the “VF 100” as a means of honoring the 100 VF associates world-wide having the highest number of volunteer service hours during the year.

Other Matters

 

Competitive Factors

 

Our business depends on our ability to stimulate consumer demand for VF’s brands and products. VF is well-positioned to compete in the apparel industry by developing high quality innovative products at competitive prices which meet consumer needs, providing high service levels, ensuring the right products are on the retail sales floor to meet consumer demand, and investing significant amounts behind existing brands. We continually strive to improve each of these areas. Many of VF’s brands have long histories and enjoy high recognition within their respective consumer segments.

 

Trademarks

 

Trademarks, patents and domain names, as well as related logos, designs and graphics, provide substantial value in the marketing of VF’s products and are important to our continued success. We have registered this intellectual property in the United States and in other countries where our products are manufactured and/or sold. We vigorously monitor and enforce VF’s intellectual property against counterfeiting, infringement and violations of other rights where and to the extent legal, feasible and appropriate. In addition, we grant licenses to other parties to manufacture and sell products utilizing our intellectual property in product categories and geographic areas in which VF does not operate.

 

Customers

 

VF products are primarily sold through our sales force and independent sales agents and distributors. VF’s customers are specialty stores, department stores, national chains and mass merchants in the United States and in international markets. Of our Total Revenues, 30% are in international markets, the majority of which are in Europe, and 18% are direct-to-consumer through VF-operated stores and e-commerce sites (including stores and internet sites in international markets).

 

Sales to VF’s ten largest customers, all of which are retailers based in the United States, amounted to 26% of Total Revenues in 2010, 27% in 2009 and 26% in 2008. These larger customers included (in alphabetical order) Kohl’s Corporation, Macy’s, Inc., J.C. Penney Company, Inc., Sears Holdings Corporation, Target Corporation and Wal-Mart Stores, Inc. Sales to the five largest customers amounted to approximately 21% of Total Revenues in 2010, 2009 and 2008. Sales to VF’s largest customer, Wal-Mart Stores, Inc., totaled 10% of Total Revenues in 2010 and 11% in 2009 and 2008, the majority of which were in the Jeanswear Coalition.

 

Employees

 

VF employed approximately 47,000 men and women at the end of 2010, of which approximately 20,300 were located in the United States. Approximately 680 employees in the United States are covered by collective bargaining agreements. In international markets, a significant percentage of employees are covered by trade-sponsored or governmental bargaining arrangements. Employee relations are considered to be good.

 

Backlog

 

The dollar amount of VF’s order backlog as of any date is not meaningful, may not be indicative of actual future shipments and, accordingly, is not material for an understanding of the business of VF taken as a whole.

Executive Officers of VF

 

The following are the executive officers of VF Corporation as of February 19, 2011. The executive officers are generally elected annually and serve at the pleasure of the Board of Directors. There is no family relationship among any of the VF Corporation executive officers.

 

 

Mr. Wiseman was named President and Chief Operating Officer of VF in March 2006, Director of VF in October 2006, Chief Executive Officer in January 2008 and Chairman of the Board in August 2008. He has held a progression of leadership roles within and across VF’s Coalitions since 1995.

 

Mr. Shearer joined VF in 1986 as Assistant Controller and was elected Controller in 1989 and Vice President — Controller in 1994. He was elected Vice President — Finance and Chief Financial Officer in 1998 and Senior Vice President and Chief Financial Officer in June 2005.

 

Mr. Batten rejoined VF in September 2004 and was named as Vice President — Controller in October 2004. Mr. Batten had previously served as Vice President & Chief Financial Officer of VF’s former intimate apparel business from 1998 to July 2000.

 

Mrs. Cummings joined VF as Vice President — General Counsel in 1995 and became Vice President — Administration and General Counsel in 1996 and Secretary in 1997.

 

Mr. Gannaway joined VF in July 2004 as Vice President — Customer Management. In January 2008, his responsibilities were broadened to Vice President — VF Direct/Customer Teams.

 

Mr. Pickard joined VF in 1976 and was elected Assistant Controller in 1982, Assistant Treasurer in 1985, Treasurer in 1987 and Vice President — Treasurer in 1994.

 

Mr. Rogers joined VF in 1971 and served in a number of positions until his appointment as Vice President — Operations in 1994. He was appointed Vice President — Process Development Supply Chain in 2000 and Vice

President — Process and Technology in 2002. In March 2004, he served as Vice President — Global Supply Chain and Technology until his appointment in June 2005 as Vice President of VF and President — Supply Chain.

 

Mr. Salzburger joined The North Face in 1997 as Chief Executive Officer of European operations and was appointed President of The North Face in 1999. Following the VF acquisition of The North Face in 2000, Mr. Salzburger served as President of VF’s International Outdoor Coalition from 2001 until his appointment as President of VF’s European, Middle East, Africa and Asian operations in September 2006. In January 2009, Mr. Salzburger was appointed Vice President of VF and President — VF International.

 

Mr. Rendle joined The North Face in 1999 and shortly afterward was promoted to Vice President of Sales. From 2004 to 2009, he served as President of The North Face. Prior to being appointed to his current role in January 2011, he served as President of VF’s Outdoor Americas coalition.

 

Mr. Baxter joined VF Corporation in 2007 as President of the Licensed Sports Group. In 2008, he was named Coalition President for the Imagewear Coalition, comprised of both the Image and the licensed Sports Group businesses.

 

Additional information is included under the caption “Election of Directors” in VF’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 26, 2011 (“2011 Proxy Statement”) that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 1, 2011, which information is incorporated herein by reference.

 

Available Information

 

All periodic and current reports, registration statements and other filings that VF has filed or furnished to the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available free of charge from the SEC’s website (www.sec.gov) and public reference room at 100 F Street, NE, Washington, DC 20549 and on VF’s website at www.vfc.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) may also be obtained free of charge upon written request to the Secretary of VF Corporation, P.O. Box 21488, Greensboro, NC 27420. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330.

 

The following corporate governance documents can be accessed on VF’s website: VF’s Corporate Governance Principles, Code of Business Conduct, and the charters of our Audit Committee, Compensation Committee, Finance Committee and Nominating and Governance Committee. Copies of these documents also may be obtained by any shareholder free of charge upon written request to: Secretary of VF Corporation, P.O. Box 21488, Greensboro, NC 27420.

 

After VF’s 2011 Annual Meeting of Shareholders, VF intends to file with the New York Stock Exchange (“NYSE”) the certification regarding VF’s compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, VF filed this certification with the NYSE on April 30, 2010.

 

 

The following risk factors should be read carefully in connection with evaluating VF’s business and the forward-looking statements contained in this Form 10-K. Any of the following risks could materially adversely affect VF’s business, its operating results and its financial condition.

 

VF’s revenues and profits depend on the level of consumer spending for apparel, which is sensitive to general economic conditions. A decline in consumer spending could have a material adverse effect on VF.

 

The apparel industry has historically been subject to cyclical variations and is particularly affected by adverse trends in the general economy. The success of VF’s business depends on consumer spending, and there are a number of factors that influence consumer spending, including actual and perceived economic conditions, disposable consumer income, interest rates, availability of credit, housing costs, stock market performance, energy prices and tax rates in the

international, national, regional and local markets where VF’s products are sold. Consumer spending advanced at a relatively slow pace during 2010 following the recessionary conditions of 2008 and early 2009. A decline in actual or perceived economic conditions or other factors could negatively impact the level of consumer spending.

 

The effects of a return to recessionary conditions could have a material adverse effect on VF.

 

The global recession — with rising unemployment, reduced availability of credit, increased savings rates and declines in real estate and securities values — had and is continuing to have a negative impact on retail sales of apparel and other consumer products. Reduced sales at our wholesale customers may lead to lower retail inventory levels, reduced orders to VF, or order cancellations. These lower sales volumes, along with the possibility of restrictions on access to the credit markets, may result in our customers experiencing financial difficulties including store closures, bankruptcies or liquidations. This may result in higher credit risk relating to receivables from our customers who are experiencing these financial difficulties. If these developments occur, our inability to shift sales to other customers or to collect on VF’s trade accounts receivable could have a material adverse effect on VF’s financial condition and results of operations.

 

A growing portion of our revenues are direct-to-consumer through VF-operated stores and e-commerce websites. It is possible that reduced consumer confidence, along with a reduction in availability of consumer credit and increasing unemployment, could lead to a reduction in our direct-to-consumer sales channel. This could have a material adverse effect on VF’s financial condition and results of operations.

 

Fluctuations in the price, availability and quality of raw materials and finished goods could increase costs.

 

Fluctuations in the price, availability and quality of fabrics or other raw materials used by VF in its manufactured apparel, or of purchased finished goods, could have a material adverse effect on VF’s cost of sales or its ability to meet its customers’ demands. The prices for fabrics depend on demand and market prices for the raw materials used to produce them, with the price of cotton currently having a significant negative impact. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields, weather patterns and speculation in the commodities markets. Prices of purchased finished products also depend on wage rates in Asia and other geographic areas where our independent contractors are located, as well as freight costs from those regions. In the future, VF may not be able to offset cost increases with other cost reductions or efficiencies or to pass higher costs on to its customers. In addition, increased costs could lead to reduced customer demand. These developments could have a material adverse effect on VF’s results of operations, liquidity and financial condition.

 

The apparel industry is highly competitive, and VF’s success depends on its ability to respond to constantly changing fashion trends and consumer demand. Reduced sales or prices resulting from competition could have a material adverse effect on VF.

 

VF competes with numerous apparel brands and manufacturers. Some of our competitors are larger and have more resources than VF in some product categories and geographies. In addition, VF competes directly with the private label brands of most of its wholesale customers. VF’s ability to compete within the apparel and footwear industries depends on our ability to:

 

 

If we misjudge fashion trends and market conditions, we could have insufficient levels of inventory that cause us to miss opportunities to make sales, or we could have significant excess inventories of products that we may have to sell at a loss. Failure to compete effectively or to keep pace with rapidly changing markets and trends could have a material adverse effect on VF’s business, financial condition and results of operations.

 

VF’s results of operations could be materially harmed if we are unable to accurately forecast demand for our products.

 

We often schedule internal production and place orders for products with independent manufacturers before our customers’ orders are firm. Factors that could affect our ability to accurately forecast demand for our products include:

 

 

If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of product required to meet the demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on VF’s results of operations and financial condition. On the other hand, if we underestimate demand for our products, our manufacturing facilities or third party manufacturers may not be able to produce products to meet consumer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to VF’s reputation and relationships. There can be no assurance that we will be able to successfully manage inventory levels to meet our future order requirements.

 

A substantial portion of VF’s revenues and gross profit is derived from a small number of large customers. The loss of any of these customers could substantially reduce VF’s revenues and profits.

 

A few of VF’s customers account for a significant portion of revenues. Sales to VF’s ten largest customers were 26% of Total Revenues in fiscal 2010, with Wal-Mart Stores, Inc. accounting for 10% of revenues. Sales are generally on a purchase order basis, and we do not have long-term agreements with any of our customers. A decision by any of VF’s major customers to significantly decrease the volume of products purchased from VF could substantially reduce revenues and have a material adverse effect on VF’s financial condition and results of operations. Moreover, in recent years, the retail industry has experienced consolidation and other ownership changes. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target markets. These developments could result in a reduction in the number of stores that carry VF’s products, increase ownership concentration within the retail industry, increase credit exposure or increase leverage over their suppliers. These changes could impact VF’s opportunities in the market and increase VF’s reliance on a smaller number of large customers.

 

VF’s profitability may decline as a result of increasing pressure on margins.

 

The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. If these factors cause us to reduce our sales prices to retailers and consumers, and we fail to sufficiently reduce our product costs or operating expenses, VF’s profitability will decline. This could have a material adverse effect on VF’s results of operations, liquidity and financial condition.

VF may not succeed in implementing its growth strategy.

 

One of our key strategic objectives is growth. We seek to grow through both organic growth and acquisitions by building new growing lifestyle brands, expanding our share with winning customers, stretching VF’s brands to new geographies, managing costs, leveraging our supply chain and information technology capabilities across VF, expanding our direct-to-consumer business and identifying and developing high potential employees. We may not be able to grow our existing businesses. We may have difficulty completing acquisitions, and we may not be able to successfully integrate a newly acquired business or achieve the expected growth, cost savings or synergies from such integration. We may not be able to expand our market share with winning customers, expand our brands geographically or achieve the expected results from our supply chain initiatives. We may also have difficulty recruiting or developing qualified employees. Failure to implement our growth strategy may have a material adverse effect on VF’s business.

 

VF’s operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political and economic risks.

 

Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth in existing and new international markets is subject to risks associated with international operations. These include the burdens of complying with foreign laws and regulations, unexpected changes in regulatory requirements, new tariffs or other barriers in some international markets.

 

We cannot predict whether quotas, duties, taxes, exchange controls or other restrictions will be imposed by the United States, the European Union or other countries on the import or export of our products, or what effect any of these actions would have on VF’s business, financial condition or results of operations. We cannot predict whether there might be changes in our ability to repatriate earnings or capital from international jurisdictions. Changes in regulatory, geopolitical policies and other factors may adversely affect VF’s business or may require us to modify our current business practices.

 

Approximately 40% of VF’s net income is earned in international jurisdictions. VF is exposed to risks of changes in U.S. policy for companies having business operations outside the United States. The President and others in his Administration have proposed changes in U.S. income tax laws that could, among other things, accelerate the U.S. taxability of non-U.S. earnings or limit foreign tax credits. Although such proposals have been deferred, if new legislation were enacted, it is possible our U.S. income tax expense could increase, which would reduce our earnings.

 

VF uses foreign suppliers and manufacturing facilities for a substantial portion of its raw materials and finished products, which poses risks to VF’s business operations.

 

During fiscal 2010, approximately 66% of VF’s units were purchased from independent manufacturers primarily located in Asia, with substantially all of the remainder produced by VF-owned and operated manufacturing facilities located in Mexico, Central America and the Middle East. Although no single supplier and no one country is critical to VF’s production needs, any of the following could impact our ability to produce or deliver VF products and, as a result, have a material adverse effect on VF’s business, financial condition and results of operations:

 

 

 

Our business is subject to national, state and local laws and regulations for environmental, employment, safety and other matters. The costs of compliance with, or the violation of, such laws and regulations by VF or by independent suppliers who manufacture products for VF could have an adverse effect on our operations and cash flows.

 

Numerous governmental agencies enforce comprehensive federal, state and local laws and regulations on a wide range of environmental, employment, safety and other matters. VF could be adversely affected by costs of compliance with or violations of those laws and regulations. In addition, the costs of products purchased by VF from independent contractors could increase due to the costs of compliance by those contractors. Further, violations of such laws and regulations could affect the availability of inventory, affecting our net sales.

 

If VF’s suppliers fail to use acceptable ethical business practices, VF’s business could suffer.

 

We require third party suppliers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. However, we do not control the practices of our independent manufacturers. If one of our independent contractors violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, it could impact VF’s reputation and relationships. Although the loss of a single supplier would not have a significant impact on our operations, it could result in interruption of finished goods shipments to VF, cancellation of orders by customers, and termination of relationships. This, along with the damage to our reputation, could have a material adverse effect on VF’s revenues and, consequently, its results of operations.

 

VF’s business is exposed to the risks of foreign currency exchange rate fluctuations. VF’s hedging strategies may not be effective in mitigating those risks.

 

Approximately 30% of VF’s Total Revenues is derived from international markets. VF’s foreign businesses operate in functional currencies other than the U.S. dollar. Changes in currency exchange rates may affect the U.S. dollar value of the foreign currency-denominated amounts at which VF’s international businesses purchase products, incur costs or sell products. In addition, for VF’s U.S.-based businesses, the majority of products are sourced from independent contractors or VF plants located in foreign countries. As a result, the cost of these products may be affected by changes in the value of the relevant currencies. Furthermore, much of VF’s licensing revenue is derived from sales in foreign currencies. Changes in foreign currency exchange rates could have an adverse impact on VF’s financial condition, results of operations and cash flows.

 

In accordance with our operating practices, we hedge a significant portion of our foreign currency transaction exposures arising in the ordinary course of business to reduce risks in our cash flows and earnings. Our hedging strategies may not be effective in reducing these risks, and no hedging strategy can completely insulate VF from foreign exchange risk. We do not hedge foreign currency translation rate changes.

 

Further, our use of derivative financial instruments may expose VF to counterparty risks. Although VF only enters into hedging contracts with counterparties having investment grade credit ratings, it is possible that the credit quality of a counterparty could be downgraded or a counterparty could default on its obligations, which could have a material adverse impact on VF’s financial condition, results of operations and cash flows.

VF borrows funds on a short-term basis, primarily to support seasonal working capital requirements. Long-term debt is part of VF’s total capital structure. Because of conditions in global credit markets, VF may have difficulty accessing capital markets for short or long-term financing.

 

Particularly in 2008 and continuing to a lesser extent during the last two years, global capital and credit markets have experienced extreme volatility and disruption, with government intervention, mergers or bankruptcies of several major financial institutions, and a general decline in global liquidity. Many corporate issuers have been unable to access credit markets.

 

We typically use short-term commercial paper borrowings to support seasonal working capital requirements, with amounts generally repaid by the end of each year from strong cash flows from operations. VF was able to continue to borrow in the commercial paper markets during the last three years, and our commercial paper borrowings in 2010 were minimal. In the future, VF may seek to access the long-term capital markets to replace maturing debt obligations or to fund acquisition or other growth opportunities. There is no assurance that the commercial paper markets or the long-term capital markets will continue to be reliable sources of financing for VF.

 

VF has domestic and international bank credit facilities. One or more of the participating banks may not be able to honor their commitments, which could have an adverse effect on VF’s business.

 

VF has $1.3 billion of domestic and international bank credit facilities that expire in October 2012. If the financial markets return to recessionary conditions, this could impair the ability of one or more of the banks participating in our credit agreements from honoring their commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.

 

The loss of members of VF’s executive management and other key employees could have a material adverse effect on its business.

 

VF depends on the services and management experience of its executive officers and business leaders who have substantial experience and expertise in VF’s business. VF also depends on other key employees involved in the operation of its business. Competition for experienced and well-qualified personnel in the apparel industry is intense. The unexpected loss of services of one or more of these individuals could have a material adverse effect on VF.

 

VF may be unable to protect its trademarks and other intellectual property rights.

 

VF’s trademarks and other intellectual property rights are important to its success and its competitive position. VF is susceptible to others imitating its products and infringing its intellectual property rights especially with the shift in product mix to higher priced brands and innovative new products in recent years. Some of VF’s brands, such as The North Face^®, Vans^®, JanSport^®, Nautica^®, Wrangler^® and Lee^® brands, enjoy significant worldwide consumer recognition, and the higher pricing of those products creates additional risk of counterfeiting and infringement.

 

Counterfeiting of VF’s products or infringement on its intellectual property rights could diminish the value of our brands and adversely affect VF’s revenues. Actions we have taken to establish and protect VF’s intellectual property rights may not be adequate to prevent imitation of its products by others or to prevent others from seeking to invalidate its trademarks or block sales of VF’s products as a violation of the trademarks and intellectual property rights of others. In addition, unilateral actions in the United States or other countries, including changes to or the repeal of laws recognizing trademark or other intellectual property rights, could have an impact on VF’s ability to enforce those rights.

 

The value of VF’s intellectual property could diminish if others assert rights in or ownership of trademarks and other intellectual property rights of VF, or trademarks that are similar to VF’s trademarks, or trademarks that VF licenses from others. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have prior rights to VF’s trademarks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States. In other

cases, there may be holders who have prior rights to similar trademarks. VF is from time to time involved in opposition and cancellation proceedings with respect to some of its intellectual property rights.

 

VF is subject to the risk that its licensees may not generate expected sales or maintain the value of VF’s brands.

 

During 2010, $78.0 million of VF’s revenues were derived from licensing royalties. Although VF generally has significant control over its licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial controls over their businesses. Failure of our licensees to successfully market licensed products or our inability to replace existing licensees, if necessary, could adversely affect VF’s revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. Risks are also associated with a licensee’s ability to:

 

 

In addition, VF relies on its licensees to help preserve the value of its brands. Although we make every attempt to protect VF’s brands through approval rights over design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of licensed VF brands by our licensees. The misuse of a brand by a licensee could have a material adverse effect on that brand and on VF.

 

VF has entered into license agreements to use the trademarks of others. Loss of a license could have an adverse effect on VF’s operating results.

 

VF has entered into agreements to market products under licenses granted by third parties, including Major League Baseball, the National Football League and Harley-Davidson Motor Company, Inc. Some of these licenses are for a short term and do not contain renewal options. Loss of a license, which in certain cases could result in an impairment charge for related operating and intangible assets, could have an adverse effect on VF’s operating results.

 

VF relies significantly on information technology. Any inadequacy, interruption, integration failure or security failure of that technology could harm VF’s ability to effectively operate its business.

 

Our ability to effectively manage and operate our business depends significantly on information technology systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, difficulty in integrating new systems or systems of acquired businesses, or a breach in security of these systems could adversely impact the operations of VF’s business. Moreover, VF and its customers could suffer harm if customer information were accessed by third parties due to a security failure in VF’s systems. It could also require significant expenditures to remediate any such failure, problem or breach.

 

If VF encounters problems with its distribution system, VF’s ability to deliver its products to the market could be adversely affected.

 

VF relies on owned or independently-operated distribution facilities to warehouse and ship product to its customers. VF’s distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. Because substantially all of VF’s products are distributed from a relatively small number of locations, VF’s operations could also be interrupted by earthquakes, floods, fires or other natural disasters near its distribution centers. We maintain business interruption insurance, but it may not adequately protect VF from the adverse effects that could be caused by significant disruptions in VF’s distribution facilities, such as the

long-term loss of customers or an erosion of brand image. In addition, VF’s distribution capacity is dependent on the timely performance of services by third parties, including the transportation of product to and from its distribution facilities. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve operating efficiencies could be materially adversely affected.

 

VF’s balance sheet includes a significant amount of intangible assets and goodwill. A decline in the fair value of an intangible asset or of a business unit could result in an asset impairment charge, which would be recorded as an operating expense in VF’s Consolidated Statement of Income and could be material.

 

We evaluate goodwill and trademark intangible assets that are not amortized for possible impairment at least annually. In addition, intangible assets that are being amortized are tested for impairment whenever events or circumstances indicate that their carrying value might not be recoverable. For these impairment tests, we use various valuation methods to estimate the fair value of our business units and intangible assets. If the fair value of an asset is less than its carrying value, we would recognize an impairment charge for the difference. During 2010 and 2009, we recognized goodwill and intangible asset impairment charges totaling $201.7 million and $122.0 million, respectively.

 

At December 2010, VF had indefinite-lived intangible assets of approximately $1.0 billion related to trademarks and $1.2 billion of goodwill on its balance sheet. In addition, VF had approximately $0.5 billion of intangible assets that are being amortized. Goodwill and intangible assets combined represent 41% of VF’s Total Assets and 69% of Stockholders’ Equity.

 

It is possible that we could have an impairment charge for goodwill or trademark intangible assets in future periods if (i) overall economic conditions in 2011 or future years vary from our current assumptions, (ii) business conditions or our strategies for a specific business unit change from our current assumptions, (iii) investors require higher rates of return on equity investments in the marketplace or (iv) enterprise values of comparable publicly traded companies, or of actual sales transactions of comparable companies, were to decline, resulting in lower comparable multiples of revenues and EBITDA and, accordingly, lower implied values of goodwill and intangible assets. A future impairment charge for goodwill or intangible assets could have a material effect on our consolidated financial position or results of operations.

 

VF’s defined benefit pension plans were underfunded at the end of 2010.

 

VF’s defined benefit pension plans were underfunded by $207.4 million at the end of 2010. This underfunding resulted from the decline in market value of the qualified plans’ investment portfolios resulting from the global financial and credit crisis that began near the end of 2007 and a reduction in the discount rate used to determine the present value of the plans’ projected benefit obligations. Differences between actual results and amounts estimated using actuarial assumptions (e.g., investment returns, discount rate, mortality) are deferred and amortized as part of future years’ pension cost. Deferred actuarial losses included in Accumulated Other Comprehensive Income in Stockholders’ Equity totaled $415.2 million at December 2010. Primarily because of the amortization of these deferred actuarial losses, our pension cost was $67.6 million in 2010 and $98.0 million in 2009, a sharp increase from $10.8 million in 2008. We made $100 million of discretionary contributions to our pension plans during 2010 and $200 million in 2009, which increased the funded status of our pension plans to 85% at the end of 2010.

 

A further decrease in the value of our pension plans’ assets or a decrease in the discount rate used to value the plans’ liabilities to participants could result in a further decrease in the plans’ funded status. In that case, VF would recognize additional pension liabilities and additional charges to Stockholders’ Equity in our Consolidated Balance Sheet and higher pension expense in future years. Further, VF could be required to make additional cash funding contributions to return the funded status of the pension plans to a higher level over the next few years.

 

 

None

 

VF owns certain facilities used in manufacturing and distribution activities and leases a distribution center under a capital lease. Other facilities are leased under operating leases that generally contain renewal options. We believe all facilities and machinery and equipment are in good condition and are suitable for VF’s needs. Manufacturing, distribution and administrative facilities being utilized at the end of 2010 are summarized below by reportable segment:

 

 

 

 

Approximately 70% of the owned and leased space represents manufacturing (cutting, sewing and finishing) and distribution facilities. The remainder represents administrative and showroom facilities.

 

In addition to the above, VF owns or leases retail locations totaling 6,200,000 square feet. VF also leases 500,000 square feet of space that was formerly used in its operations but is now subleased to a third party through the end of the lease term.

 

 

There are no pending material legal proceedings, other than ordinary, routine litigation incidental to the business, to which VF or any of its subsidiaries is a party or to which any of their property is the subject.

 

 

Not applicable.

PART II

 

 

VF’s Common Stock is listed on the New York Stock Exchange under the symbol “VFC”. The high and low sale prices of VF Common Stock, as reported on the NYSE Composite Tape in each calendar quarter of 2010, 2009 and 2008, along with dividends declared, are as follows:

 

 

As of January 30, 2011, there were 4,319 shareholders of record. Quarterly dividends on VF Common Stock, when declared, are paid on or about the 20th day of March, June, September and December.

Performance graph:

 

The following graph compares the cumulative total shareholder return on VF Common Stock with that of the Standard & Poor’s (“S&P”) 500 Index and the S&P 1500 Apparel, Accessories & Luxury Goods Subindustry Index (“S&P 1500 Apparel Index”) for the five calendar years ended December 31, 2010. The S&P 1500 Apparel Index at the end of 2010 consisted of Carter’s, Inc., Coach, Inc., Perry Ellis International, Inc., Fossil, Inc., Hanesbrands Inc., Liz Claiborne, Inc., Maidenform Brands, Inc., Movado Group, Inc., Oxford Industries, Inc., Phillips-Van Heusen Corporation, Polo Ralph Lauren Corporation, Quiksilver, Inc., True Religion Apparel, Inc., Under Armour, Inc., VF Corporation, Volcom, Inc. and The Warnaco Group, Inc. The graph assumes that $100 was invested on December 31, 2005, in each of VF Common Stock, the S&P 500 Index and the S&P 1500 Apparel Index, and that all dividends were reinvested. The graph plots the respective values on the last trading day of calendar years 2005 through 2010. Past performance is not necessarily indicative of future performance.

 

Comparison of Five Year Total Return of
VF Common Stock, S&P 500 Index and S&P 1500 Apparel Index
VF Common Stock closing price on December 31, 2010 was $86.18

TOTAL SHAREHOLDER RETURNS

 

 

Issuer Purchases of Equity Securities:

 

The following table sets forth the repurchases of our shares of Common Stock during the fiscal quarter ended January 1, 2011:

 

 

 

 

 

The following table sets forth selected consolidated financial data for the five years ended January 1, 2011. This selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Notes” included in this report. Historical results presented herein may not be indicative of future results.

 

 

 

 

 

 

Overview

 

VF Corporation is a worldwide leader in branded lifestyle apparel and related products. Management’s vision is to grow VF by building leading lifestyle brands that excite consumers around the world. Lifestyle brands, representative of the activities that consumers aspire to, generally extend across multiple geographic markets and product categories and therefore have greater opportunities for growth.

 

VF owns a diverse portfolio of brands with strong market positions in many consumer product categories. In addition, we market occupational apparel to resellers and major corporate and governmental customers. VF has a broad customer base, with products distributed through leading specialty stores, upscale and traditional department stores, national chains and mass merchants, plus direct-to-consumer channels.

 

VF’s businesses are grouped by product categories, and by brands within those product categories, for internal financial reporting used by management. These groupings of businesses within VF are referred to as “coalitions” and are the basis for VF’s reportable business segments, as described below:

 

 

Impact of the Current Global Economic Environment

 

The global recession from late 2007 through mid-2009 was the longest and most severe recession in the last several decades. This recession, with its flat-to-falling consumer income levels, sharp declines in real estate and securities markets, volatility in commodity and currency markets, significant increases in unemployment, numerous retailer and other bankruptcies and unprecedented government stimulus programs, led to a decline in consumer spending that impacted VF as well as most other companies.

 

The economic recovery in most developed countries over the last 18 months has been slow. Consumer spending, representing about 70% of the U.S. economy, has advanced slowly during this period and has only recently returned to pre-recession levels. Some of these headwinds will continue to impact VF and our competitors.

 

In response to the challenging market conditions of the last three years, we have been aggressive in controlling our costs and operating with lean inventory levels. Our balance sheet, cash flows from operations and liquidity have remained strong. And we have continued to invest in our brands. During 2010, we increased our investments in advertising and product development by over $100 million compared with the prior year. These investments were

very targeted and were concentrated in our brands having the greatest opportunities for growth, including The North Face^®, Vans^® and our businesses in Asia. We will continue this higher level of investment spending during 2011, as we believe the strength of our brands is fundamental to our success in this economic climate.

 

Highlights of 2010

 

Following are the notable actions and achievements in 2010:

 

 

Analysis of Results of Operations

 

Consolidated Statements of Income

 

The following table presents a summary of the changes in our Total Revenues during the last two years:

 

Total Revenues consist of Net Sales of products and Royalty Income from licensees. Revenues increased 7% in 2010, led by 14% growth in our Outdoor & Action Sports businesses. In addition, while not to the same extent, revenues increased in most of our other businesses. Revenues declined 6% in 2009, with 2% of the decline due to foreign currency translation. Additional details on revenues are provided in the section titled “Information by Business Segment.”

 

In translating foreign currencies into the U.S. dollar, the stronger U.S. dollar in relation to the functional currencies of those countries where VF conducts the majority of its international business (primarily Europe/euro-based countries) negatively impacted revenue by $21 million in 2010 relative to 2009 and $156 million in 2009 relative to 2008. The weighted average translation rates for the euro were $1.33, $1.39 and $1.47 per euro for 2010, 2009 and 2008, respectively.

 

The following table presents the percentage relationship to Total Revenues for components of our Consolidated Statements of Income:

 

 

Approximately 1.3% of the improvement in gross margin percentage in 2010 over 2009 was due to (i) a greater percentage of our revenues coming from higher gross margin businesses, including our direct-to-consumer operations, and (ii) other areas of operational improvements, including retail and inventory efficiencies. The remaining 1.1% improvement resulted from product cost reductions.

 

The gross margin percentage increased 1.4% in 2009 over 2008 from the impact of our growing direct-to-consumer operations, which have gross margin percentages higher than VF averages. In addition, gross margins improved in 2009 due to lower levels and improved profitability on disposal of distressed inventories. These increases were partially offset by lower gross margins in our European jeanswear and imagewear businesses. See the “Information by Business Segment” section below.

 

Marketing, Administrative and General Expenses as a percent of revenues increased 1.0% in 2010 over 2009 due to increased marketing spending in 2010, as discussed above, and 0.4% due to higher growth than average in our direct-to-consumer business, which has a higher expense ratio than our wholesale business. These increases were partially offset by lower domestic pension expense, which reduced the ratio by 0.6% in 2010 compared with 2009.

 

Marketing, Administrative and General Expenses as a percent of revenues increased 1.2% in 2009 over 2008 due to higher domestic pension expense and 1.1% due to higher growth than average in our direct-to-consumer business. The 2009 comparison benefited from (i) the absence of charges from cost reduction actions, which increased Marketing, Administrative and General Expenses by 0.7% as a percent of revenues in 2008, and (ii) the benefit of these actions and other spending reductions in 2009.

 

We completed our annual impairment testing for goodwill and indefinite-lived trademark intangible assets in the fourth quarter of 2010 in conjunction with finalizing our strategic plan. Based on our assessment of current and expected economic conditions, trends and forecasted cash flows at each business unit, and assumptions representative of those that market participants would make in valuing our business units, VF management determined that the carrying values of its goodwill and trademark intangible asset at its 7 For All Mankind^® business unit exceeded the respective fair values. Accordingly, VF recorded a noncash impairment charge totaling $201.7 million ($141.8 million net of related income tax benefits) to reduce the carrying values of goodwill and the trademark intangible asset of this business unit to their fair values. This charge represents all of the recorded goodwill for the 7 For All Mankind^® business unit and 40% of the consolidated goodwill and nonamortized trademark balances for this business unit. Similarly, as a result of our annual impairment testing in the fourth quarter of 2009, VF management determined that the carrying values of goodwill at its Reef^®, Nautica^®, and lucy^® business units and trademark intangible assets at its Reef^® and lucy^® business units exceeded their respective fair values. Accordingly, VF recorded noncash impairment charges totaling $122.0 million ($114.4 million net of related income tax benefits) to

reduce these carrying values to their fair values. Of this total, Reef^® represented $36.7 million, Nautica^® represented $58.5 million and lucy^® represented $26.8 million (23%, 14% and 26%, respectively, of each businesses’ combined goodwill and nonamortized trademark intangible asset balances). For additional information, see Notes F, G and T to the Consolidated Financial Statements and the “Critical Accounting Policies and Estimates” section below.

 

Interest income was flat in 2010 compared with 2009, but decreased $3.9 million in 2009 from 2008 primarily due to lower interest rates. Interest expense decreased $8.2 million in 2010 from 2009 due to reduced short-term borrowing levels and the payment of $200 million of notes that matured in 2010. The $8.1 million decline in interest expense in 2009 from 2008 was due primarily to lower short-term borrowing levels. Average interest-bearing debt outstanding totaled $1,136 million for 2010, $1,364 million for 2009 and $1,454 million for 2008, with Short-term Borrowings representing 4.0%, 16.2% and 21.2% of average debt outstanding for the respective years. The weighted average interest rate on outstanding debt was 6.6% for 2010, 6.1% for 2009 and 6.3% for 2008. The increase in the weighted average interest rate in 2010 resulted from a reduction in commercial paper borrowings, which bear lower interest rates.

 

In connection with the Vans Mexico acquisition, we recognized a $5.7 million gain in Miscellaneous Income during 2010 from remeasuring our previous 50% investment in the joint venture to fair value.

 

Excluding the impairment charges discussed above, the tax rates for 2010 and 2009 were 24.9% and 26.2%, respectively, compared with 28.9% in 2008. During 2010, we recorded tax benefits of $20.5 million related to prior years’ refund claims and tax credits and $5.6 million of tax benefits related to expirations of statutes of limitations in international jurisdictions where accruals for uncertain tax positions had been recorded. These items lowered our 2010 annual tax rate by 2.7%. During 2009, we recorded tax benefits of $17.5 million related to favorable outcomes of U.S. state tax audits and from expirations of statutes of limitations in several U.S. state and international jurisdictions where accruals for uncertain tax positions had been recorded. These items lowered our 2009 annual tax rate by 2.3%. During 2008, we recorded tax benefits of (i) $24.6 million related primarily to favorable outcomes of foreign tax audits, expirations of statutes of limitations in foreign jurisdictions and other state tax benefits and (ii) $11.5 million to reflect updated assessments of previously accrued amounts. These items lowered our 2008 annual tax rate by 4.3%. After considering the impact of the unusual items discussed above, the remaining declines in the effective income tax rates in 2010 from 2009 and in 2009 from 2008 were primarily attributed to growth in our international businesses in jurisdictions having effective tax rates that are substantially lower than rates in the United States.

 

Net Income Attributable to VF Corporation increased to $571.4 million in 2010 from $461.3 million in 2009, while earnings per share increased to $5.18 in 2010 from $4.13 in 2009. Excluding the impairment charges noted above, earnings per share were $6.46 in 2010 and $5.16 in 2009. The increase in earnings per share in 2010 over 2009 resulted primarily from improved operating performance, as discussed in the “Information by Business Segment” section below, and lower domestic pension expense, which benefited earnings per share in 2010 by $0.20. These benefits were partially offset by cost reduction actions that negatively impacted earnings per share in 2010 by $0.09. There were no similar actions taken in 2009.

 

Net Income Attributable to VF Corporation decreased to $461.3 million in 2009 from $602.7 million in 2008, while earnings per share decreased to $4.13 in 2009 from $5.42 in 2008. Earnings per share in 2009 were $5.16 excluding impairment charges for goodwill and intangible assets. Earnings per share in 2009 compared with 2008 were negatively impacted by (i) higher domestic pension expense of $0.48 and (ii) an unfavorable impact of $0.18 from translating foreign currencies into a stronger U.S. dollar. The earnings per share comparison in 2009 benefited from the absence of charges of $0.30 per share for cost reduction actions taken in 2008.

 

Information by Business Segment

 

Management at each of the coalitions has direct control over and responsibility for its revenues, operating income and assets, hereinafter termed “Coalition Revenues” and “Coalition Profit”, respectively. VF management evaluates operating performance and makes investment and other decisions based on Coalition Revenues and Coalition Profit. Common costs such as information systems processing, retirement benefits and insurance are allocated to the coalitions based on appropriate metrics such as usage or employment.

Corporate costs (other than costs charged directly to the coalitions), impairment charges and net interest expense are not controlled by coalition management and therefore are excluded from the Coalition Profit performance measure used for internal management reporting. See Note Q to the Consolidated Financial Statements for a summary of our results of operations and other information by coalition, along with a reconciliation of Coalition Profit to Income Before Income Taxes. To leverage the scale of VF, there are a number of functions that are shared across all coalitions. Accordingly, coalition results are not necessarily indicative of operating results that would have been reported had each coalition been an independent, stand-alone entity during the periods presented.

 

The following tables present a summary of the changes in our Total Revenues and Coalition Profit by coalition during the last two years:

 

 

 

Operating results of the lucy^® business unit have been reclassified from the Contemporary Brands Coalition to the Outdoor & Action Sports Coalition consistent with the change in internal management reporting beginning in 2010.

 

Outdoor & Action Sports:

 

This coalition consists of VF’s outdoor and action sports-related businesses including The North Face^® brand apparel, footwear and equipment, Vans^® performance and casual footwear and apparel, JanSport^® and Eastpak^®

backpacks and apparel, Kipling^® bags and accessories, Napapijri^® outdoor-based sportswear, Reef^® beach-inspired footwear and apparel, lucy^® women’s apparel and Eagle Creek^® adventure travel gear.

 

The Outdoor & Action Sports Coalition achieved record revenues, operating income and operating margin in 2010. The 14% increase in revenues was driven by growth in The North Face^® and Vans^® brands of 18% and 20%, respectively, over the prior year. These brands experienced growth in both domestic and international markets. Direct-to-consumer revenues for this coalition rose 20% in 2010 over 2009, with double-digit growth in The North Face^®, Vans^®, Kipling^®, Napapijri^® and lucy^® retail businesses as we benefited from new store openings, growth in comp store sales and expansion of our e-commerce business. Revenues in Asia increased 31% in 2010 over the prior year.

 

Coalition Revenues in 2009 increased slightly on a reported basis compared with 2008 and 3% on a constant currency basis. Reported global revenues of The North Face^® increased by 6% (including a negative impact of 3% from foreign currency translation) and Vans^® increased by 5% (including a negative impact of 2% from foreign currency translation). In addition, revenues in Asia increased by more than 50%, largely due to increases in the Vans^® brand, which was just introduced into China in 2008. These increases were offset by the impact of foreign currency translation and revenue declines in the other coalition businesses.

 

The operating margin improvement in 2010 over 2009 was driven by (i) a 2.5% increase in gross margin, reflecting improvements in retail store performance and improved profitability on the disposal of distressed inventories, and (ii) the leverage of operating expenses on higher revenues. These operating margin improvements were partially offset by a significant increase in marketing spending that negatively impacted operating margin comparisons by 1.2% in 2010 compared with 2009.

 

Approximately one-half of the operating margin improvement in 2009 over 2008 resulted from an increased gross margin, with higher margin direct-to-consumer revenues making up a larger portion of total Coalition Revenues in 2009. In addition, the 2009 operating margin comparison benefited by 0.3% from a charge for cost reduction actions taken in 2008 that did not recur in 2009. The remainder of the operating margin improvement in 2009 over 2008 was due to lower spending, partially offset by continued investments to expand the direct-to-consumer business.

 

Jeanswear:

 

The Jeanswear Coalition consists of our global jeanswear businesses, led by the Wrangler^® and Lee^® brands.

 

Domestic jeanswear revenues increased 2% in 2010 over 2009, with 3% growth in both our Wrangler^® and Lee^® brands reflecting the positive impact of new products introduced during the year. Domestic jeanswear revenues declined 4% in 2009 from 2008 due to a difficult retail environment, including the loss of volume from customers who filed for bankruptcy in 2008 and a reduction in noncore Riders^® brand plus size and seasonal programs (some of which were reinstated in 2010).

 

International jeanswear revenues, including Europe, Canada, Mexico, Latin America and Asia, declined 3% in 2010, with lower revenues in Europe partially offset by 36% revenue growth in Asia and double-digit growth in all other foreign markets. The decline in Europe resulted from the decision in 2009 to exit our mass market jeans business in Europe, as well as continued difficult business conditions in the overall European jeanswear market.

 

Jeanswear revenues in international markets declined 18% in 2009 from 2008, with 8% of the decline resulting from the negative impact of foreign currency translation. The remainder of the decline was driven by recessionary conditions, especially in Europe, and the mass market jeans business exit in Europe. These declines were partially offset by a 14% increase in jeanswear revenues in Asia.

The improvement in operating margin in 2010 over 2009 resulted from a 2.6% higher gross margin reflecting (i) lower product costs, particularly in our U.S. jeanswear businesses, and (ii) lower levels of and improved profitability on the disposal of distressed inventories. Operating margin comparisons in 2010 also benefited from the 2009 exit of the European mass market jeans business, which had operating margins that were well below the coalition average. These benefits were partially offset by increased marketing spending and charges for cost reduction actions that negatively impacted 2010 operating margin comparisons by 0.8% and 0.3%, respectively.

 

The Jeanswear operating margin in 2009, compared with 2008, benefited by 1.0% from charges for cost reduction actions taken in 2008 that did not recur in 2009. The negative impact of higher distressed inventory provisions in our European businesses in 2009 was offset by lower spending across the coalition due in part to the 2008 cost reduction actions.

 

Imagewear:

 

The Imagewear Coalition consists of VF’s Image business (occupational apparel and uniforms) and Licensed Sports business (licensed high profile sports and lifestyle apparel).

 

Image business revenues increased 8% in 2010 over 2009 due to strength in the industrial and protective sectors resulting from the gradual economic recovery and the competitive advantage of our quick response service model. Licensed sports revenues increased 3% in 2010 over 2009 due primarily to growth in our licensed National Football League business.

 

Image business revenues declined 17% in 2009 from 2008 due to rising unemployment, particularly in the manufacturing and petrochemical sectors. Licensed sports revenues were down 8% in 2009 from 2008, resulting from lower attendance at sporting events and the overall weak retail environment and the highly discretionary nature of consumer spending on these products.

 

Operating margin increased 1.5% in 2010 over 2009 due to higher gross margins, resulting primarily from an improved mix of business. The remainder of the increase was driven by improved leverage of operating expenses on a higher level of revenues.

 

Operating margin declined in 2009 from 2008 due to revenue declines that negatively impacted the expense to revenue ratio and economic factors that affected obligations under royalty agreements in our licensed sports business.

 

Sportswear:

 

The Sportswear Coalition consists of our Nautica^® and Kipling^® brand businesses in North America (the Kipling^® brand outside of North America is managed by the Outdoor & Action Sports Coalition).

 

Sportswear Coalition Revenues were flat in 2010 compared with 2009. A 2% decline in Nautica^® brand revenues during 2010 due to lower volume in our owned outlet stores was offset by 30% growth in our Kipling^® brand revenues. The increase in Kipling^® brand revenues resulted from growth in direct-to-consumer revenues, performance in specialty stores and the successful launch in early 2010 of a new program that is exclusive with Macy’s, Inc.

The decline in Coalition Revenues in 2009 from 2008 was driven by a 13% decrease in Nautica^® brand revenues, resulting from difficult market conditions in the department store channel and lower volume in our owned outlet stores.

 

The Sportswear Coalition operating margins were flat in 2010 compared with 2009. An improvement in gross margin percentage of 0.7% resulted from (i) lower markdown activity in the department store channel and our outlet store channel, (ii) lower levels of excess inventory coming into 2010 and (iii) a higher percentage of Kipling^® revenues, which have higher gross margins than the coalition average. This improvement was offset by higher marketing spending.

 

The Sportswear Coalition operating margin improved in 2009 from 2008 due to aggressive cost and inventory reduction actions in our Nautica business. Also, the 2009 operating margin comparison benefited by 1.0% from charges for cost reduction actions taken in 2008 that did not recur in 2009, including the cost for the exit of the Nautica^® women’s wholesale sportswear business.

 

Contemporary Brands:

 

This coalition consists of the 7 For All Mankind^® brand of premium denim jeanswear and related apparel and the John Varvatos^® luxury apparel collection for men. This coalition also includes the operating results of the Splendid^® and Ella Moss^® brands comprised of the earnings from our one-third equity investment from June 2008 through March 2009, when the remaining two-thirds equity interest was purchased, and the consolidated operating results thereafter.

 

The growth in Coalition Revenues in 2010 resulted from the 2009 acquisition of the Splendid^® and Ella Moss^® brands, which contributed an incremental $24 million in revenues in 2010, and 10% revenue growth in our John Varvatos^® business. These increases were partially offset by a 3% decrease in global 7 For All Mankind^® brand revenues, reflecting volume declines due to continued soft conditions in the premium denim market. Expanding the 7 For All Mankind^® direct-to-consumer business is an important part of our growth strategy for this brand, and in 2010 we opened 20 retail stores.

 

The increase in Coalition Revenues in 2009 was due to the acquisition of the Splendid^® and Ella Moss^® brands. This increase was partially offset by an 8% decline in global 7 For All Mankind^® brand revenues, driven by challenging conditions in the U.S. upper tier department and specialty store channel. The 7 For All Mankind^® brand grew in Asia, where revenues nearly doubled, and in the brand’s direct-to-consumer business, where revenues more than tripled.

 

The decline in operating margin in 2010 compared with 2009 was driven by investments in new 7 For All Mankind^® retail stores, higher marketing spending, the write-off of fixtures at eight underperforming retail stores that had been opened in previous years and lower margins associated with selling excess quantities of inventory. The operating margin comparison was also negatively impacted by 1.5% due to the favorable resolution of a value-added tax and duty matter during 2009 that did not recur in 2010. These decreases were partially offset by improved operating results in our John Varvatos^® business, which had a positive operating margin in 2010 after generating operating losses in prior years.

 

Operating margins were negatively impacted in 2009 compared with 2008 by volume declines in our 7 For All Mankind^® wholesale business that negatively impacted the expense to revenue ratio, increased retail investments across the coalition and higher operating losses in 2009 in our John Varvatos^® business. The 2009 operating margin comparison benefited by 1.5% from charges in 2008 related to a value-added tax and duty matter and cost reduction initiatives that did not recur. Operating margins for the 7 For All Mankind^® and Splendid^® and Ella Moss^® brands in 2009 were above the coalition average, at 16% and 20%, respectively.

Other:

 

The Other business segment includes the VF Outlet business, which is a group of VF-operated outlet stores in the United States that sell a broad selection of excess quantities of VF products and other branded products. Revenues and profits of VF products are reported as part of the operating results of the applicable coalitions, while revenues and profits of non-VF products, which provide a broader selection of merchandise to attract consumer traffic, are reported in this business segment. While revenues in the Other business segment were flat in 2010 compared with 2009, the decline in revenues in 2009 from 2008 was due to the impact of the economic recession on consumer spending.

 

Reconciliation of Coalition Profit to Consolidated Income Before Income Taxes:

 

There are three types of costs necessary to reconcile total Coalition Profit, as discussed in the preceding paragraphs, to Income Before Income Taxes. These costs, discussed below, are Impairment of Goodwill and Trademarks, Interest, and Corporate and Other Expenses. See also Note Q to the Consolidated Financial Statements.

 

Impairment of Goodwill and Trademarks and Interest Expense, Net were discussed in the previous “Consolidated Statements of Income” section. Impairment of Goodwill and Trademarks is excluded from Coalition Profit as they represent charges that are not a part of the ongoing operations of the respective businesses. See the “Non-GAAP Financial Information” section below. Interest is excluded from Coalition Profit because substantially all of our financing costs are managed at the corporate office and are not under the control of coalition management.

 

Corporate and Other Expenses consists of corporate headquarters’ and similar costs that are not apportioned to the operating coalitions. These expenses are summarized as follows:

 

 

Information Systems and Shared Services — Included are costs of our management information systems and our centralized shared services center, which includes common financial, supply chain, human resources and customer management services that support our worldwide operations. Operating costs of information systems and shared services are charged to the coalitions based on utilization of those services, such as minutes of computer processing time, number of transactions or number of users. Costs to develop new computer applications that will be used across VF are not allocated to the coalitions. The increase in information systems and shared services costs in 2010 from 2009 resulted from the overall growth of our businesses, increased spending related to reconfiguring our western hemisphere sourcing organization and costs associated with changing third-party data center providers. The decrease in information systems and shared services costs in 2009 from 2008 is primarily due to reductions in third-party data center charges and amortization.

 

Corporate Headquarters’ Costs — Headquarters’ costs include compensation and benefits of corporate management and staff, certain legal and professional fees, and administrative and general expenses, which are

not apportioned to the coalitions. The increase in corporate headquarters’ costs in 2010 from 2009 was primarily driven by higher incentive compensation, increased contributions to the VF Foundation and significantly higher investments in strategy and innovation. The decline in corporate headquarters’ costs in 2009 from 2008 was due to reduced spending as part of our cost reduction efforts.

 

Trademark Maintenance and Enforcement — Legal and other costs of registering, maintaining and enforcing the majority of VF’s trademarks, plus related costs of licensing administration, are controlled by a centralized trademark and licensing staff and are not allocated to the coalitions.

 

Other — This category includes (i) costs that result from corporate programs or corporate-managed decisions that are not allocated to the business units for internal management reporting, (ii) adjustments to convert the earnings of certain business units using the FIFO inventory valuation method for internal reporting to the LIFO method for consolidated financial reporting and (iii) other consolidating adjustments, the most significant of which is related to the expense of our centrally-managed U.S. defined benefit pension plans. Coalition Profit of the business units includes only their current year service cost component of pension expense. Pension costs totaling $46.9 million for 2010 and $83.1 million for 2009, primarily representing amortization of deferred actuarial losses, were recorded in “other” expense. These costs were not significant in 2008.

 

Analysis of Financial Condition

 

Balance Sheets

 

Accounts Receivable at December 2010 were in line with the balance at December 2009. Increases in accounts receivable related to higher wholesale revenues near the end of 2010 compared with the 2009 period were offset by (i) an improvement in collections reflected in lower days’ sales outstanding and (ii) an increase in accounts receivable balances sold, as discussed in the “Liquidity and Cash Flows” section below and in Note C to the Consolidated Financial Statements.

 

Inventories increased 12% at December 2010 over the December 2009 balance due to (i) expected revenue growth in the first quarter of 2011 compared with the prior year period, (ii) rising inventory costs and (iii) accelerated purchases of fabric in anticipation of the expected price increases. These increases were partially offset by an improvement in our number of days of inventory on hand, compared with the end of 2009.

 

Property, Plant and Equipment at the end of 2010 was in line with the balance at the end of 2009 as the amount of depreciation expense approximated capital spending in 2010.

 

Total Intangible Assets and Goodwill decreased in 2010 due to the impairment charges discussed above, amortization of intangible assets and the impact of foreign currency translation, partially offset by the addition of intangible assets and goodwill related to the Vans Mexico acquisition.

 

Other Assets were higher at December 2010 due to an increase in deferred income tax assets, resulting primarily from the goodwill and intangible asset impairment charge discussed above.

 

Short-term Borrowings at December 2010 and December 2009 consisted of $36.6 million and $45.5 million, respectively, under international borrowing agreements.

 

The Current Portion of Long-term Debt was lower at December 2010 than December 2009 due to the payment of $200.0 million of 8.5% notes upon their maturity in 2010.

 

The increase in Accounts Payable at December 2010 compared with December 2009 resulted from the timing of inventory purchases and other payments.

 

The increase in Accrued Liabilities at December 2010 over December 2009 was driven primarily by higher incentive compensation accruals and the overall growth of our businesses.

 

Other Liabilities at December 2010 decreased from 2009 due to (i) lower deferred income taxes and (ii) a reduction in the underfunded status of our defined benefit pension plans at the end of 2010, as discussed in the following paragraph.

The recessionary conditions during 2008 resulted in a significant decline in the value of the investment portfolios of our defined benefit pension plans. As a result, our pension liability was over $400 million higher than pension assets at December 2008. To improve the funded status of our pension plans, we contributed over $200 million to these plans during 2009 and over $100 million in 2010. Accordingly, the plans’ underfunded status reported in our 2009 and 2010 Consolidated Balance Sheets was reduced to $250.9 million and $207.4 million, respectively. See Note M to the Consolidated Financial Statements and the “Critical Accounting Policies and Estimates” section below for a discussion of liability and equity balances related to defined benefit pension plans.

 

Liquidity and Cash Flows

 

The financial condition of VF is reflected in the following:

 

 

For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and total capital is defined as debt plus stockholders’ equity. Our ratio of net debt to total capital, with net debt defined as debt less cash and equivalents and total capital defined as net debt plus stockholders’ equity, was 4.5% at the end of 2010.

 

VF’s primary source of liquidity is its strong cash flow provided by operating activities. Cash generated from operations, which was $1,001.3 million in 2010, $973.5 million in 2009 and $679.5 million in 2008, is primarily dependent on the level of Net Income, changes in accounts receivable, investments in inventories and other working capital components. Net Income was $573.5 million, $458.5 million and $602.8 million in 2010, 2009 and 2008, respectively. Net Income in 2010 and 2009 were negatively impacted by noncash pretax impairment charges for goodwill and intangible assets of $201.7 million and $122.0 million, respectively.

 

Operating cash flow for 2010 and 2009 included $100.0 million and $200.0 million, respectively, of discretionary contributions to our U.S. qualified defined benefit pension plan. There were no contributions to this plan in 2008. VF has adequate liquidity to meet future funding requirements. We will continue to evaluate the funded status of our retirement plans and future funding requirements.

 

The significant change in deferred income taxes for 2010 was driven by an increase in deferred income tax assets, resulting primarily from the goodwill and intangible asset impairment charges in 2010.

 

The net change in operating asset and liability components provided an increase to operating cash flow of $90.4 million in 2010 and $228.1 million in 2009, in contrast to reducing operating cash flows by $150.6 million in 2008. The positive cash generation from these components in 2010 was due to higher incentive compensation accruals and other accrued liabilities resulting from business growth in 2010. The increase in accounts payable at the end of 2010 was primarily offset by higher inventory levels.

 

The positive cash generation from these components in 2009 was driven by our aggressive management of inventory levels and the sale of selected accounts receivable discussed in the paragraph below. The changes in operating cash flows from other current assets during 2009 resulted from an unusually high amount of prepaid income taxes at the end of 2008. Operating cash flow in 2008 benefited from an additional week of collections on accounts receivable in the 53^rd week of the fiscal year in that collections sharply exceeded credit sales in that week.

 

In 2009, VF entered into an agreement to sell selected trade accounts receivable, on a nonrecourse basis, to a financial institution. This agreement allows VF to have up to $192.5 million of accounts receivable held by the financial institution at any point in time. After the sale, VF continues to service and collect these accounts receivable on behalf of the financial institution but does not retain any other interests in the receivables. At the end of 2010 and 2009, accounts receivable in the Consolidated Balance Sheets had been reduced by $112.3 million and $74.2 million, respectively, related to balances sold under this program. Net proceeds of this accounts receivable sale program are recognized as part of the change in accounts receivable in cash provided by operating activities in the Consolidated Statements of Cash Flows. This program resulted in increases of $38.1 million and $74.2 million in operating cash flow in 2010 and 2009, respectively.

VF will rely on its continued strong cash generation to finance ongoing operations as well as most other circumstances that may arise. VF has significant existing liquidity from its available cash balances and debt capacity, supported by its strong credit rating. At the end of 2010, $983.3 million was available for borrowing under VF’s $1.0 billion senior unsecured domestic revolving bank credit facility, with $16.7 million of standby letters of credit issued under the agreement. This credit facility is used primarily to support our seasonal commercial paper borrowings. Also at the end of 2010, €250.0 million (U.S. dollar equivalent of $334.2 million) was available for borrowing under VF’s senior unsecured international revolving bank credit facility.

 

VF’s liquidity position is also enhanced by its favorable credit agency ratings, which allow for access to additional capital at competitive rates. At the end of 2010, VF’s long-term debt ratings were ‘A minus’ by Standard & Poor’s Ratings Services and ‘A3’ by Moody’s Investors Service, and commercial paper ratings were ‘A-2’ and ‘Prime-2’, respectively, by those rating agencies. Both agencies have a ‘stable’ outlook for VF. Existing long-term debt agreements do not contain acceleration of maturity clauses based solely on changes in credit ratings. However, for the $600.0 million of senior notes issued in 2007, if there were a change in control of VF and, as a result of the change in control, the notes were rated below investment grade by recognized rating agencies, then VF would be obligated to repurchase the notes at 101% of the aggregate principal amount of notes repurchased, plus any accrued and unpaid interest.

 

Cash of $38.3 million, $212.3 million and $93.4 million was used for acquisitions in 2010, 2009 and 2008, respectively, which is net of cash balances in the acquired companies. These acquisitions were funded with existing VF cash balances.

 

Capital expenditures were $111.6 million in 2010, compared with $85.9 million in 2009 and $124.2 million in 2008. Capital expenditures in each of these years primarily related to our retail store rollout, distribution network and information systems. We expect that capital spending could reach $225 million in 2011, reflecting the need for office and distribution space for our expanding international and domestic outdoor businesses as well as an accelerated retail store opening plan. This spending will be funded by cash flow from operations.

 

During 2010, 2009 and 2008, VF purchased 5.1 million, 1.6 million and 2.0 million shares, respectively, of its Common Stock in open market transactions. The cost of these transactions was $411.8 million, $112.0 million and $149.7 million with an average price of $81.11 in 2010, $71.80 in 2009 and $74.86 in 2008. Under its current authorization from the Board of Directors, VF may purchase an additional 6.6 million shares. We will continue to evaluate future share repurchases considering funding required for business acquisitions, our Common Stock price and levels of stock option exercises.

 

Cash dividends totaled $2.43 per common share in 2010, compared with $2.37 in 2009 and $2.33 in 2008. Our dividend payout rate was 46.9% of our diluted earnings per share in 2010, 57.4% in 2009 and 43.0% in 2008 (37.6% in 2010 and 46.0% in 2009 excluding the effects of the noncash goodwill and intangible asset impairment charges in those years). On a longer term basis, we expect to pay dividends of approximately 40% of our diluted earnings per share. The current indicated annual dividend rate for 2011 is $2.52 per share.

Following is a summary of VF’s contractual obligations and commercial commitments at the end of 2010 that will require the use of funds:

 

 

 

 

We have other financial commitments at the end of 2010 that are not included in the above table but may require the use of funds under certain circumstances:

 

 

 

During 2010, VF used cash flows from operations to meet its obligations when due and, for seasonal needs, limited issuance of commercial paper; there were no borrowings under our domestic or international bank facilities during the year. Credit market conditions and the general contraction of liquidity in the United States and global capital markets during the second half of 2008 and continuing into 2009 had a significant impact on the ability of many companies to access the commercial paper and other capital markets. VF was able to issue commercial paper for seasonal working capital needs during this period reflecting our investment grade credit rating. If the commercial paper markets were not available, VF has a total of $1.3 billion of liquidity available under its domestic and international revolving bank credit agreements that do not expire until October 2012. Management believes that VF’s cash balances and funds provided by operating activities, as well as unused bank credit lines, additional borrowing capacity and access to equity markets, taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures and to maintain our dividend payout policy and (iii) flexibility to meet investment opportunities that may arise.

 

We do not participate in transactions with unconsolidated entities or financial partnerships established to facilitate off-balance sheet arrangements or other limited purposes.

 

Risk Management

 

VF is exposed to risks in the ordinary course of business. We regularly assess and manage our exposures to these risks through our operating and financing activities and, when appropriate, by (i) taking advantage of naturally offsetting exposures within VF, (ii) purchasing insurance from commercial carriers or (iii) the use of derivative financial instruments. Some of our potential risks are discussed below:

 

Insured risks — We self-insure a substantial portion of our employee group medical, worker’s compensation, vehicle, property, director and officer, and general liability exposures and purchase insurance from highly rated commercial carriers for losses in excess of retained exposures.

 

Cash and equivalents risks — VF had $792.2 million of cash and equivalents at the end of 2010, which includes demand deposits, institutional money market funds that invest in obligations issued or guaranteed by the U.S. or foreign governments and short-term time deposits of foreign commercial banks. We continually monitor the credit ratings of VF’s financial institutions. Similarly, we monitor the credit quality of cash equivalents and fixed income investments in our defined benefit pension plan portfolio.

 

Defined benefit pension plan risks — VF is subject to funding and earnings risks of its defined benefit pension plans. VF’s pension plans were substantially fully funded at the end of 2007. At the end of 2010, the plans are underfunded due primarily to substantial investment portfolio losses incurred in 2008 and an increase in projected benefit obligations because of a decline in the discount rate used to value those obligations. Declines in the funded status of our plans were offset in part by VF contributions of over $100 million to the plans during 2010 and over $200 million during 2009, as well as investment performance that has exceeded our actuarial return assumption. Accordingly, at the end of 2010, VF has a $207.4 million liability representing the underfunded status of the plans ($1,211.6 million of plan assets compared with a projected benefit obligation of $1,419.0 million) and a $433.8 million pretax balance in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity. We will continue to evaluate the funded status of our retirement plans and future funding requirements. Further, as more fully described in the “Critical Accounting Policies and Estimates” section below, we have begun to take actions that will limit the risk in investments of our domestic defined benefit pension plans and reduce the year-to-year variability of our domestic plans’ funded status and resulting pension expense.

 

Interest rate risks — We limit the risk of interest rate fluctuations by managing our mix of fixed and variable interest rate debt. In addition, we may use derivative financial instruments to manage our interest rate risk. Since all of our long-term debt has fixed interest rates, our interest rate exposure relates to changes in interest rates on our variable rate short-term borrowings, which averaged approximately $45 million during 2010. However, any change in interest rates would also affect interest income earned on VF’s cash equivalents. Based on the low levels of

variable rate borrowings and the levels of cash equivalents during 2010, the effect on reported net income of a hypothetical 1.0% change in interest rates would not be significant.

 

Foreign currency exchange rate risks — VF is a global enterprise subject to the risk of foreign currency fluctuations. Approximately 30% of our revenues in 2010 were generated in international markets. Most of our foreign businesses operate in functional currencies other than the U.S. dollar. If the U.S. dollar strengthened relative to the euro or other foreign currencies where we have operations, there would be a negative impact on VF’s operating results upon translation of those foreign operating results into the U.S. dollar. We do not hedge the translation of foreign currency operating results into the U.S. dollar, however we do hedge foreign currency transactions as discussed later in this section.

 

Assets and liabilities in these foreign businesses are subject to fluctuations in foreign currency exchange rates. We have an international bank credit agreement that provides for up to €250.0 million (U.S. dollar equivalent of $334.2 million at December 2010) of euro-denominated borrowings. Although there were no borrowings under this agreement during 2010, borrowings under the agreement could be used to reduce the exposure to currency rate changes for our euro-denominated net assets. Net advances to and investments in our foreign businesses in Europe, Latin America and Asia are considered to be long-term, and accordingly, foreign currency transaction effects on those long-term advances are deferred as a component of Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity. We do not hedge net investments in foreign subsidiaries, which could impact the U.S. dollar value of those investments.

 

We monitor net foreign currency market exposures and enter into derivative foreign currency contracts to hedge the effects of exchange rate fluctuations for a significant portion of our forecasted foreign currency cash flows or specific foreign currency transactions. Use of these financial instruments allows us to reduce the overall exposure to risks from exchange rate fluctuations on VF’s cash flows and earnings, since gains and losses on these contracts will offset losses and gains on the cash flows or transactions being hedged. Our practice is to hedge a portion of net foreign currency cash flows forecasted for periods of up to 20 months (relating to cross-border inventory purchases, production costs, product sales and intercompany royalty payments) by buying or selling primarily U.S. dollar contracts against various currencies. Currently, we use only forward exchange contracts but may use options or collars in the future.

 

For cash flow hedging contracts outstanding at the end of 2010, if there were a hypothetical change in foreign currency exchange rates of 10% compared with rates at the end of 2010, it would result in a change in fair value of those contracts of approximately $80 million. However, any change in the fair value of the hedging contracts would result in an offsetting change in the fair value of the underlying balance sheet positions impacted by the currency rate changes.

 

Counterparty risks — VF is exposed to credit-related losses in the event of nonperformance by counterparties to derivative hedging instruments. To manage this risk, we have established counterparty credit guidelines and enter into derivative transactions only with financial institutions with ‘A minus/A3’ investment grade credit ratings or better. We continually monitor the credit rating of, and our hedging positions with, each counterparty. Additionally, we utilize a portfolio of financial institutions to minimize our exposure to potential counterparty defaults and will adjust our positions if necessary. We also monitor counterparty risk for derivative contracts within our defined benefit pension plans.

 

Commodity price risks — VF is exposed to market risks for the pricing of cotton and other fibers, which may impact fabric prices. To manage risks of fabric prices, we negotiate prices for denim and other fabrics in advance when possible. We have not historically managed commodity price exposures by using derivative instruments.

 

Deferred compensation and related investment security risks — VF has nonqualified deferred compensation plans in which liabilities to the plans’ participants are based on the market values of investment funds selected by the participants. The risk of changes in the market values of the participants’ investment selections is hedged by VF’s investment in a portfolio of securities that substantially mirror the participants’ investment selections. Increases and decreases in deferred compensation liabilities are substantially offset by corresponding increases and decreases in the market value of VF’s investments, resulting in an insignificant net exposure to our operating results and financial position.

Critical Accounting Policies and Estimates

 

We have chosen accounting policies that we believe are appropriate to accurately and fairly report VF’s operating results and financial position in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are summarized in Note A to the Consolidated Financial Statements.

 

The application of these accounting policies requires that we make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis. Because our business cycle is relatively short (i.e., from the date that we place an order to manufacture or purchase inventory until that inventory is sold and the trade receivable is collected), actual results related to most estimates are known within a few months after any balance sheet date. In addition, we may retain outside specialists to assist us in valuations of business acquisitions, impairment testing of goodwill and intangible assets, equity compensation, pension benefits and self-insured liabilities. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known.

 

We believe the following accounting policies involve the most significant management estimates, assumptions and management judgments used in preparation of our Consolidated Financial Statements or are the most sensitive to change from outside factors. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

 

Inventories

 

Our inventories are stated at the lower of cost or market value. Cost includes all material, labor and overhead costs incurred to manufacture or purchase the finished goods. Overhead allocated to manufactured product is based on the normal capacity of our plants and does not include amounts related to idle capacity or abnormal production inefficiencies. Market value is based on a detailed review at each business unit, at least quarterly, of all inventories on the basis of individual styles or individual style-size-color stock-keeping units (“SKUs”) to identify slow moving or excess products, discontinued and to-be-discontinued products, and off-quality merchandise. This review matches inventory on hand, plus current production and purchase commitments, with current and expected future sales orders. For those units in inventory that are identified as slow-moving or excess or off-quality, we estimate their market value based on historical experience and current realization trends. This evaluation, performed using a systematic and consistent methodology, requires forecasts of future demand, market conditions and selling prices. If the forecasted market value, on an individual style or SKU basis, is less than cost, we provide an allowance to reflect the lower value of that inventory. This methodology recognizes inventory exposures, on an individual style or SKU basis, at the time such losses are evident rather than at the time goods are actually sold. Historically, these estimates of future demand and selling prices have not varied significantly from actual results due to our timely identification and rapid disposal of these reduced value inventories.

 

Physical inventory counts are taken on a regular basis. We provide for estimated inventory losses that have likely occurred since the last physical inventory date. Historically, our physical inventory shrinkage has not been significant.

 

Long-lived Assets

 

We allocate the purchase price of an acquired business to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill. We evaluate fair value using three valuation techniques — the replacement cost, market and income methods — and weight the valuation methods based on what is most appropriate in the circumstances. The process of assigning fair values, particularly to acquired intangible assets, is highly subjective.

 

Our depreciation policies for property, plant and equipment reflect judgments on their estimated economic lives and residual value, if any. Our amortization policies for intangible assets reflect judgments on the estimated

amounts and duration of future cash flows expected to be generated by those assets. In evaluating expected benefits to be received for customer-related intangible assets, we consider historical attrition patterns for various groups of customers. For license-related intangible assets, we consider historical trends and anticipated license renewal periods based on our experience in renewing or extending similar arrangements, regardless of whether there are explicit renewal provisions.

 

We review property and definite-lived intangible assets for possible impairment on an ongoing basis to determine if events or changes in circumstances indicate that it is more likely than not that the carrying amount of an asset may not be fully recoverable. We test for possible impairment at the asset or asset group level, which is the lowest level for which there are identifiable cash flows that are largely independent. We measure recoverability of the carrying value of an asset or asset group by comparison with estimated undiscounted cash flows expected to be generated by the asset. If the forecasted total of undiscounted cash flows exceeds the carrying value of the asset, there is no impairment charge. If the undiscounted cash flows are less than the carrying value of the asset, we estimate the fair value of the asset based on the present value of its future cash flows and recognize an impairment charge for the excess of the asset’s carrying value over its fair value.

 

Indefinite-lived intangible assets, consisting of major trademarks, and goodwill are not subject to amortization. Rather, we evaluate those assets for possible impairment as of the beginning of the fourth quarter as part of our annual strategic planning process, or more frequently if events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset may exceed its fair value. Fair value of an indefinite-lived trademark intangible asset is based on an income approach using the relief-from-royalty method. Under this method, forecasted global revenues for products sold with the trademark are assigned a royalty rate that would be charged to license the trademark (in lieu of ownership) from an independent party, and fair value is the present value of those forecasted royalties avoided by owning the trademark. If the fair value of the trademark intangible asset exceeds its carrying value, there is no impairment charge. If the fair value of the trademark is less than its carrying value, an impairment charge would be recognized for the difference.

 

We assess the recoverability of the carrying value of goodwill at each reporting unit having goodwill using the required two-step approach. Our reporting units are either our coalitions or a business unit if discrete financial information is available and reviewed by coalition management. Two or more business units may be aggregated for impairment testing if they have similar economic characteristics. In the first step of the goodwill impairment test, we compare the carrying value of a business unit, including its recorded goodwill, to the fair value of the business unit. We estimate the fair value of a business unit using both income-based and market-based valuation methods. The principal method used is an income-based method in which the business unit’s forecasted future cash flows are discounted to their present value. In the market-based valuation method, the fair value of a business unit is estimated using multiples of revenues and of earnings before interest, taxes, depreciation and amortization (“EBITDA”) for (i) a group of comparable public companies and (ii) recent transactions, if any, involving comparable companies. Based on the range of fair values developed from the income and market-based methods, we determine the appropriate estimated fair value for the business unit. If the fair value of the business unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the fair value of the business unit is less than its carrying value, we perform the second step of the goodwill impairment test to determine the impairment charge, if any. The second step involves a hypothetical allocation of the fair value of the business unit to its net tangible and intangible assets (excluding goodwill) as if the business unit were newly acquired, which results in an implied fair value of the goodwill. The amount of the impairment charge is the excess of the recorded goodwill over the implied fair value of the goodwill.

 

The income-based fair value methodology requires management’s assumptions and judgments regarding economic conditions in the markets in which we operate and conditions in the capital markets, many of which are outside of management’s control. At the business unit level, fair value estimation requires management’s assumptions and judgments regarding the effects of overall economic conditions on the specific business unit,

along with assessment of the business unit’s strategies and forecasts of future cash flows. Forecasts of individual business unit cash flows involve management’s estimates and assumptions regarding:

 

 

Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of our business units.

 

In our 2010 evaluation of goodwill and indefinite-lived trademark intangible assets, we concluded that the carrying values of goodwill and of trademark intangible assets at our 7 For All Mankind^® business unit exceeded their respective fair values based on the analysis of current and expected future economic conditions in conjunction with finalizing our strategic plan in the fourth quarter of 2010. Accordingly, we recognized impairment charges in our 2010 Consolidated Statement of Income of $195.2 million to write down the carrying value of the goodwill and $6.6 million to write down the carrying value of the nonamortized trademark intangible assets. Similarly in the prior year, we concluded that the carrying values of goodwill at our Reef^®, Nautica^® and lucy^® business units and the carrying values of trademark intangible assets at our Reef^® and lucy^® business units exceeded their respective fair values. Accordingly, we recognized impairment charges in our 2009 Consolidated Statement of Income of $101.9 million to write down the carrying value of their goodwill and $20.1 million to write down the carrying value of their trademark intangible assets. The noncash charges of $201.7 million in 2010 and $122.0 million in 2009 did not have a significant impact on our financial position or debt covenants and no impact on our liquidity. The charges were based on estimates and judgments; changes to the fair value assumptions potentially would have resulted in different goodwill or intangible asset impairment charges. See Notes F, G and T of the Consolidated Financial Statements for additional information about the impairment charges recorded for these business units.

 

At the date of our most recent impairment test, except for the 7 For All Mankind^® business unit discussed above and the Splendid and Ella Moss^® business unit discussed below, the estimated fair value of each of our business units exceeded its respective carrying value by at least 15%, and the estimated fair value of each indefinite-lived trademark intangible asset exceeded its respective carrying value by at least 20%. Accordingly, no other goodwill or trademark impairment charges were recorded. The Splendid^® and Ella Moss^® business unit has been part of our Contemporary Brands Coalition since our acquisition of those brands in 2009. The Splendid^® and Ella Moss^® brands are premium-priced lifestyle brands marketed to upscale department and specialty stores. In addition, the rollout of owned stores is a significant component in the growth model for these brands. Although the Splendid^® and Ella Moss^® brands have primarily performed as planned since their acquisition, there has not been significant growth in fair value of the business. Accordingly, at October 3, 2010 (the date of our annual impairment test), the business unit’s fair value was $304.2 million, which exceeded its carrying value by 7%. Goodwill in this business unit was $142.4 million. Further, the estimated fair value of the trademarks of this business unit exceeded their recorded amount ($98.9 million) by 19%.

 

It is possible that our conclusions regarding impairment or recoverability of goodwill or trademark intangible assets in any business unit could change in future periods if, for example, (i) our businesses do not perform as projected, (ii) overall economic conditions in 2011 or future years vary from our current assumptions, (iii) business conditions or our strategies for a specific business unit change from our current assumptions, (iv) investors require higher rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly

traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA. A future impairment charge for goodwill or intangible assets could have a material effect on our consolidated financial position or results of operations.

 

Stock Options

 

We use a lattice option-pricing model to estimate the fair value of stock options granted to employees and nonemployee members of the Board of Directors. We believe that a lattice model provides a refined estimate of the fair value of options because it can incorporate (i) historical option exercise patterns and multiple assumptions about future option exercise patterns for each of several groups of option holders and (ii) inputs that vary over time, such as assumptions for interest rates and volatility. We performed an annual review of all assumptions and believe that the assumptions employed in the valuation of each option grant are reflective of our outstanding options and underlying Common Stock and of our groups of option participants. Our lattice valuation is based on the assumptions listed in Note O to the Consolidated Financial Statements.

 

One of the critical assumptions in the valuation process is estimating the expected average life of the options before they are exercised. For each option grant, we based our estimates on evaluations of the historical and expected option exercise patterns for each of the groups of option holders that have historically exhibited different option exercise patterns. These evaluations included (i) voluntary stock option exercise patterns based on a combination of changes in the price of VF Common Stock and periods of time that options are outstanding before exercise and (ii) involuntary exercise patterns resulting from turnover, retirement and mortality.

 

Volatility is another critical assumption requiring judgment. We based our estimate of future volatility on a combination of implied and historical volatility. Implied volatility was based on short-term (6 to 9 months) publicly traded near-the-money options on VF Common Stock. We measure historical volatility over a ten year period, corresponding to the contractual term of the options, using daily stock prices. Our assumption for valuation purposes was that expected volatility starts at a level equal to the implied volatility and then transitions to the historical volatility over the remainder of the ten year option term.

 

Pension Obligations

 

VF sponsors a qualified defined benefit pension plan covering most full-time domestic employees employed before 2005 and an unfunded supplemental defined benefit plan that provides benefits in excess of the limitations imposed by income tax regulations. VF also sponsors defined benefit plans covering selected international employees. The selection of actuarial assumptions for determining our projected pension benefit liabilities and our annual pension expense is significant due to the long time period over which benefits are accrued and paid. We annually update participant demographics and the expected amount and timing of benefit payments. We review annually the principal economic actuarial assumptions, summarized in Note M to the Consolidated Financial Statements, and modify them based on current rates and trends. We also periodically review and modify as necessary other plan assumptions such as rates of compensation increases, retirement, termination, disability and mortality. We believe our assumptions appropriately reflect the participants in and benefits provided by the plans and result in the best estimate of the plans’ future experience. Actual results may vary from the actuarial assumptions used.

 

One of the critical assumptions used in the actuarial model is the discount rate. (This discussion of discount rate, and the discussion of return on assets in the next paragraph, relate specifically to our U.S. pension plans, which comprise over 90% of plan assets and projected benefit obligations of our combined domestic and international plans.) The discount rate is used to estimate the present value of future cash outflows required to meet our projected benefit obligations. The discount rate reflects the estimated interest rate that VF could use to settle its projected benefit obligations at the valuation date. Our discount rate assumption is based on current market interest rates. We select our discount rate based on matching high quality corporate bond yields to the timing of projected benefit payments to participants in our U.S. pension plans. We use the population of U.S. corporate bonds rated ‘Aa’ by Moody’s Investors Service or, if a Moody’s rating is not available, bonds rated ‘Aa’ by two other recognized rating services. From this population of over 600 such bonds having at least $50 million outstanding that are noncallable/nonputtable unless with make-whole provisions, we exclude the highest and lowest yielding bonds. The plans’

projected benefit payments are matched to current market interest rates over the expected payment period, and a present value is developed that produces a single discount rate that recognizes our plans’ distinct liability characteristics. We believe that those ‘Aa’ rated issues meet the “high quality” intent of the applicable accounting standards and that our 2010 discount rate of 5.65% appropriately reflects current market conditions and the long-term nature of projected benefit payments to participants in our domestic pension plans. This lower discount rate, compared with the rate of 6.05% at the end of 2009, reflects the general decline in yields of U.S. government obligations and high quality corporate bonds during 2010. The discount rate for our plans may differ from the rates used by other companies because of longer expected duration of benefit payments reflecting (i) the higher percentage of female participants with a longer life expectancy and (ii) the higher percentage of inactive participants who will not begin receiving vested benefits for many years.

 

Another critical assumption of the actuarial model is the expected long-term rate of return on investments. Our investment objective is to maximize the long-term return through a diversified portfolio of assets with an acceptable level of risk. These risks include market, interest rate, credit, liquidity and foreign securities risks. Investment assets consist of domestic and international equity, corporate and governmental fixed income, real estate and commodity securities. We develop a projected rate of return for each of our investment asset classes based on many factors, including recent and historical returns, the estimated inflation rate, the premium to be earned in excess of a risk-free return, the premium for equity risk and the premium for longer duration fixed income securities. The weighted average projected long-term rates of return of the various assets held by the qualified plan provide the basis for the expected long-term rate of return actuarial assumption. Our rate of return assumption was 7.75% in 2010 and 8.00% in 2009 and 2008. Although we have not changed the overall target mix of investments, we have over the last two years altered the investment mix to improve investment performance by (i) adding commodities as an asset class, (ii) increasing the allocation to fixed income investments, (iii) reducing the allocation to equity investments and (iv) increasing the allocation in equities to more international investments. As the qualified plan becomes more fully funded, our intent is to lengthen the average duration of fixed income investments to more closely match expected benefit payments so that the effect of interest rate changes on our plan’s investments will be better correlated with the benefit obligations the investments are intended to fund. The changes in asset allocation should, over time, reduce the year-to-year variability of our domestic plan’s funded status and resulting pension expense. Based on an evaluation of market conditions, projected market returns and planned changes in investment mix, we will continue to use a rate of return assumption of 7.75% for our U.S. plan for 2011. We monitor our plan’s asset allocation to balance anticipated investment returns with risk.

 

The funded status of our defined benefit pension plans is reflected in the balance sheet as the excess (or deficiency) of pension plan assets compared with projected benefit obligations payable to plan participants. The market value of our pension plan investment assets declined significantly in 2008 due to the global credit and financial market crisis, which resulted in the plans being underfunded by over $400 million at the end of 2008. During 2009, the underfunded balance declined to $250.9 million primarily due to $200 million of discretionary VF cash contributions to the domestic plan and investment earnings on plan assets, partially offset by an increase in projected benefit obligations resulting from a reduction in the discount rate during the year. During 2010, the underfunded status of the plans improved once again due to $100 million of discretionary VF cash contributions and earnings on plan assets, partially offset by an increase in projected benefit obligations due to a further reduction in the discount rate during the year. The resulting underfunded status of $207.4 million is presented in the 2010 Consolidated Balance Sheet as $5.9 million of current liabilities and $201.5 million of noncurrent liabilities. The funded status of our plans recognized in our Consolidated Balance Sheets could change significantly in future years depending on investment portfolio performance, the level of VF contributions to the plans, changes in the discount rate used to value projected benefit obligations, or other factors.

 

Differences in any year between actual results and the respective actuarial assumptions (e.g., investment performance, discount rates and other assumptions) do not affect that year’s pension expense but instead are deferred as unrecognized actuarial gains or losses in Accumulated Other Comprehensive Income in the balance sheet. At the end of 2010, there were $433.8 million of pretax deferred actuarial losses that resulted primarily from the substantial investment losses incurred during 2008 and the decline in discount rates over the last two years. These accumulated unrecognized actuarial losses resulted in an after tax amount of $266.1 million in Accumulated Other Comprehensive Income (Loss) in our 2010 Consolidated Balance Sheet. Our policy is to amortize any

unrecognized actuarial gains and losses to future years’ pension expense as follows: amounts which exceed 20% of beginning of the year projected benefit obligations are amortized over five years; amounts between the greater of 10% of projected benefit obligations or plan assets and 20% of projected benefit obligations are amortized over the expected average remaining service of active participants; and amounts less than the greater of 10% of projected benefit obligations or plan assets are not amortized.

 

Pension expense recognized in our financial statements was $67.6 million in 2010, $98.0 million in 2009 and $10.8 million in 2008. This compares with the cost of pension benefits actually earned by our covered active employees (commonly called “service cost”) of $18.1 million in 2010 and an average of $16.5 million per year over the last three years. Pension expense for 2010 and 2009 was significantly higher than the annual service cost because those years included the cost of amortizing the higher level of unrecognized actuarial losses (as discussed in the preceding paragraph). Looking forward, we expect our 2011 pension expense to decrease to approximately $50 million due to an increase in plan assets at the end of 2010.

 

The sensitivity of changes in actuarial assumptions on our 2010 pension expense and on projected benefit obligations at the end of 2010, all other factors being equal, is illustrated by the following:

 

 

As previously mentioned, we made a $100 million and a $200 million discretionary contribution to our domestic qualified pension plans during 2010 and 2009, respectively. Future funding obligations for our defined benefit plans depend on funding requirements under applicable laws and regulations, the interest rates used to determine those funding requirements and future performance of the plans’ investment portfolio. VF is not required under applicable regulations, and does not currently intend, to make a contribution to its domestic qualified pension plan during 2011 but does intend to make cash contributions totaling approximately $11 million during 2011 to its other pension plans. We believe that VF has sufficient liquidity to make any required contributions to our pension plans in future years.

 

We have taken several steps to reduce the risk and volatility in our pension plans and their impact on our financial statements. Beginning in 2005, VF’s domestic defined benefit plans were closed to new entrants, which did not affect the benefits of existing plan participants at that date or their accrual of future benefits. Domestic employees hired after 2004, plus employees at certain acquired businesses not covered by those plans, participate in a defined contribution plan with VF contributing amounts based on a percentage of eligible compensation. As discussed in previous paragraphs, we made significant cash contributions to return the plans to a more fully funded status and have modified our investment strategy for plan assets. Finally, we have begun settling some participants’ accrued obligations by allowing a lump sum distribution election. On a longer-term basis, we believe the year-to-year variability of our retirement benefit expense should decrease.

 

Income Taxes

 

As a global company, VF is subject to income taxes and files income tax returns in over 100 domestic and foreign jurisdictions each year. The calculation of our income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal and factual interpretation and significant management judgment.

 

VF’s income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. We have reviewed all issues raised upon examination, as well as any exposure for issues that may be raised in future examinations. We have evaluated these potential issues under the “more-

likely-than-not” standard of the accounting literature. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. Our income tax expense could be materially affected to the extent we prevail in a tax position or when the statute of limitations expires for a tax position for which valuation allowances have been established, or to the extent we are required to pay amounts greater than the established valuation allowances. We do not currently anticipate any material impact on earnings from the ultimate resolution of income tax uncertainties. There are no accruals for general or unknown tax expenses.

 

We have recorded $178.7 million of deferred income tax assets related to operating loss and capital loss carryforwards, and we have recorded $137.2 million of valuation allowances against those assets. Realization of deferred tax assets related to operating loss and capital loss carryforwards is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws. If we believe that we will not be able to generate sufficient taxable income or capital gains to offset losses during the carryforward periods, we have recorded valuation allowances to reduce those deferred tax assets to amounts expected to be ultimately realized. In addition, we have recorded $12.7 million of valuation allowances against deferred income tax assets unrelated to operating loss and capital loss carryforwards. If in a future period we determine that the amount of deferred tax assets to be realized differs from the net recorded amount, we would record an adjustment to income tax expense in that future period.

 

We have not provided U.S. income taxes on a portion of our foreign subsidiaries’ undistributed earnings because these earnings are permanently reinvested in the respective foreign jurisdictions. If we were to decide to remit those earnings to the United States in a future period, our provision for income taxes could increase in that period.

 

Non-GAAP Financial Information

 

VF is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by VF from translating our foreign revenues and expenses into U.S. dollars. These exchange rate fluctuations can have a significant effect on reported operating results and, accordingly, can affect the comparability of reported results.

 

To better explain our operating results, we use constant currency information, which excludes the effects of changes in foreign currency translation rates, to provide a framework to assess how our businesses performed relative to prior periods. Accordingly, we have provided supplemental constant currency financial information, which is a non-GAAP financial measure, in the “Analysis of Results of Operations” section. Constant currency information represents the current year reported revenues after adjustment to eliminate the translation effects of changes in exchange rates. To calculate Coalition Revenues on a constant currency basis, revenues for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

We believe the following supplemental constant currency financial information is useful to investors to facilitate comparisons of operating results and better identify trends in our businesses: