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 2, 2010

 

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 4, 2009, the last day of the registrant’s second fiscal quarter, was approximately $4,439,000,000, based on the closing price of the shares on the New York Stock Exchange.

 

As of January 30, 2010, there were 110,589,533 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 27, 2010 (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 105 pages.

The exhibit index begins on page 54.

 

 

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. In recent years, we have been implementing a growth plan 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 growing lifestyle brands, such as Vans^®, Reef^®, Kipling^®, Napapijri^®, 7 For All Mankind^®, Splendid^® and Ella Moss^®. At the same time, we have continued to invest in our other businesses through product line extensions, geographic expansion particularly in Asia, new retail store openings, product innovation, consumer research and other marketing initiatives. In addition, an important step in VF’s transformation was the sale in 2007 of our women’s imtimate apparel business, which had over $800 million in revenues but lower profit and growth prospects.

 

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, footwear, sportswear and occupational 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 17%, are derived from sales directly to consumers through VF-operated retail stores and internet sites. A global company, 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 some countries through licensees and distributors. To provide many types of products across numerous channels of distribution in different geographic areas, we balance efficient and flexible internally-owned manufacturing with sourcing of finished goods from independent contractors. We utilize state-of-the-art technologies for inventory replenishment that enable us to get consumer-right products, on time, 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 consolidated functions within VF.

 

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

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

 

 

Financial information regarding VF’s coalitions, as well as geographic information, are included in Note R 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 outdoor and activity-based businesses that represent a collection of lifestyle brands. Product offerings include outerwear, sportswear, footwear, equipment, backpacks, daypacks, luggage and accessories.

 

The North Face^® is our largest Outdoor & Action Sports Coalition brand. Its high performance outdoor apparel, equipment and footwear are sold across North and South America, Europe and Asia. (In Japan and South Korea, The North Face^® trademarks are owned by a third party.) The North Face^® apparel lines consist of outerwear, snow sports gear and functional sportswear and footwear for men, women and children. Its equipment line consists of tents, sleeping bags, backpacks, daypacks 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 also 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 50 VF-operated full price retail and outlet stores in the United States and Europe and online at www.thenorthface.com. The brand is also sold through over 250 The North Face^® retail stores operated by independent third parties dedicated to selling The North Face^® products in Europe and Asia.

 

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 200 owned Vans^® full-price retail and outlet stores primarily in the western 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, most of which bear the Vans^® trademarks. The Vans^® brand is marketed through a 50%-owned joint venture in Mexico. The Vans^® brand has been recognized as part of “The Facebook^® 50,” a ranking of brands developed by Slate magazine’s The Big Money website that are making the best use of the social networking site, Facebook^®. VF is the 70% owner of the Vans Warped Tour^® music festival, which presents over 50 alternative rock and heavy metal bands in performances in over 40 cities across North America each summer.

 

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^® daypacks 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 department stores in the United States. In Europe, Eastpak^® and JanSport^® backpacks and a line of Eastpak^® clothing are sold primarily through department and specialty stores, where the Eastpak^® brand is the leading backpack brand. The JanSport^® and Eastpak^® brands are also marketed throughout Asia by licensees and distributors. Eagle Creek^® adventure travel gear products include luggage, daypacks and accessories sold through specialty luggage stores, outdoor stores and department stores throughout the United States and Europe.

 

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, such as sport stores and fashion boutiques, and through VF-operated and independently-operated retail stores in several countries in Europe. The Napapijri^® brand is marketed through a majority-owned joint venture in Japan.

 

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 30 VF-operated and over 175 independently-operated retail stores. The Kipling^® business in North America is managed as part of the Sportswear Coalition.

 

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 and Canada.

 

We expect continued long-term growth in our Outdoor & Action Sports Coalition as we extend our brands into new product categories, open additional retail stores, expand geographically and acquire additional outdoor or activity-based lifestyle brands. Also, beginning in 2010, responsibility for the lucy^® brand has been moved to this Coalition. Specifically, management of the The North Face^® and lucy^® business units will work closely together to better leverage VF’s activity-based product development and retail operations experience.

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. Products also include shorts, casual pants, knit and woven tops and outerwear, which are designed to complement the jeanswear products and have helped to extend our brands.

 

In domestic markets, Lee^® products are sold primarily through national chain stores and specialty stores. Wrangler^® westernwear is marketed through western specialty stores. The Wrangler Hero^®, 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. Including all of its jeanswear brands, we believe that 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^® Khakis 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, on 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 jeans market internationally is also more fragmented than in the United States, 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 retail 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, such as China and through our majority-owned joint venture in India. In foreign markets where VF does not have owned operations, Lee^® and Wrangler^® jeanswear and related products are marketed through distributors, agents or licensees. Lee^® and Wrangler^® products are sold in over 500 independently operated mostly monobrand retail 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 and national chain channels of distribution through superior consumer insight and marketing strategies and continuous product innovation. In our international businesses, growth will be driven by expansion of our existing business in Asia where we have averaged in excess of 25% growth per year over the last three years.

 

Imagewear Coalition

 

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

 

The Image division provides uniforms and career occupational apparel for workers in North America and internationally, primarily in Europe, 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 The Force^® 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 division revenues are significantly affected by the overall level of U.S. industrial and service employment, which has been declining for the last two years. Approximately two-thirds

of Image division sales are to 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 factor 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.

 

The Image division also develops and manages uniform programs through custom-designed websites for major business customers (e.g., FedEx Corporation, AT&T, Air Canada, Continental Airlines and 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 and New York City Transit Authority). These websites give employees of these customers the convenience of shopping for their work and career apparel via the internet. This division is the nation’s largest supplier of nonmilitary apparel to the U.S. government.

 

In the Licensed Sports division, 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, NASCAR, MLB Players Association, and many 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 casual 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. In addition, the Licensed Sports division is a major supplier of licensed Harley-Davidson^® apparel marketed to Harley-Davidson dealerships. With the exception of the Major League Baseball license, loss of any license would not have a material effect on the Imagewear Coalition.

 

The opportunities to grow our Imagewear Coalition revenues include (i) extension of its product and service capabilities into new industrial and service apparel markets, (ii) growth of its Majestic^® brand for Major League Baseball and growth of our National Football League business through rights for additional apparel categories and new channels of distribution, (iii) market share gains in key licensed categories and (iv) extension of VF’s floor space management and replenishment capabilities to more retail doors, placing product-right assortments on the sales floor in each geographic market.

 

Sportswear Coalition

 

The Nautica^® brand is the principal lifestyle brand of the Sportswear Coalition. Nautica^® men’s sportswear, noted for its classic styling, is marketed through department stores and VF-operated outlet stores in better outlet centers. The Nautica Jeans Company^® line features fashionable 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. This retail channel has undergone significant consolidation in the last few years, resulting in numerous store closings, which has negatively impacted sales of Nautica^® brand products. 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 100 Nautica^® retail outlet stores in better outlet malls across the United States. These stores carry Nautica^® merchandise for men, women, boys, girls and infants. The product styles sold in the outlet stores are different from the Nautica^® styles sold to department and specialty store wholesale customers. These outlet stores also carry Nautica^® merchandise from licensees to complete their product assortment. In addition, independent licensees operate over 150 Nautica^® brand retail stores across the world.

 

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, children’s clothing, and accessories such as fragrances, watches and eyewear) and for nonapparel categories (e.g., bed and bath linens and accessories). Nautica^® products are licensed for sale in over 60 countries outside the United States. Our licensees’ wholesale sales of Nautica^® licensed products total approximately $400 million annually.

The Sportswear Coalition also includes the Kipling^® business in North America. Products include Kipling^® brand handbags, luggage, backpacks, totes and accessories. Beginning in 2010, Kipling^® handbags and accessories in the department store channel in the United States will be sold exclusively through Macy’s department stores. In addition, all product categories are sold in the United States through specialty luggage and bag stores, VF-operated retail stores and www.kipling.com and in Canada through specialty and department stores. About two-thirds of products sold in the United States are the same as those sold in Europe and other parts of the world, with the remainder designed for the U.S. market only.

 

We believe there is potential to improve Nautica^® brand revenue and profit performance through more accessible price points, store growth in existing Nautica^® retail outlet stores, growth in our online business and expansion of the licensed business internationally, particularly in Asia. There is also potential for expansion of our Kipling^® brand through our handbags and accessories relationship with Macy’s, Inc.

 

Contemporary Brands Coalition

 

Our Contemporary Brands Coalition is focused on premium-priced lifestyle brands. Formed in August 2007, the coalition was originally composed of the 7 For All Mankind^® and lucy^® brands. During 2009, the Coalition was expanded to include the John Varvatos^® brand (previously part of the Sportswear Coalition), which shares many product, customer and supply chain characteristics of the other Contemporary Brands businesses, and the Splendid^® and Ella Moss^® brands, which were acquired during the year.

 

7 For All Mankind^® is a Los Angeles-based brand of contemporary denim jeans and related products — knit and woven tops, sweaters, jackets and accessories — for women and men. Products are noted for their fit and for innovation in design, fabric and finish. We believe the 7 For All Mankind^® brand is the leading premium jeans brand in the United States, with the premium segment defined as jeans retailing for $150 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. In December 2009, Advertising Age magazine selected the 7 For All Mankind^® brand as one of its top ten new products of the decade, recognizing the brand for introducing premium denim to the American market and changing the way that consumers shop for jeans. With over two-thirds of its sales in the United States, the brand is marketed through premium department stores, such as Bloomingdale’s, Macy’s, Neiman Marcus, Nordstrom and Saks, and through specialty stores. In addition, we opened 13 retail stores in the United States during 2009, bringing the total to 28 stores in the United States. Internationally, sales are through department stores, such as Harrods, and specialty stores, plus several VF-operated retail stores. We are pursuing growth opportunities in several areas — additional direct-to-consumer expansion through company-operated and partnership retail stores, e-commerce, additional sportswear product offerings, further geographic expansion in Europe and Asia, and licensing.

 

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 somewhat more accessible price points. Products are sold through upscale department and specialty stores, primarily in the United States, several 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. John Varvatos.

 

In March 2009, VF completed the acquisition of Mo Industries Holdings, Inc., owner of the Splendid^® and Ella Moss^® brands of women’s premium sportswear. These brands are marketed to upscale department and specialty stores primarily in the United States. VF had acquired one-third of the outstanding equity of Mo Industries in June 2008. The first Splendid^® retail store was opened in 2009. A limited number of Splendid^® and Ella Moss^® stores are planned for 2010, along with several new shop-in-shops in major retail accounts.

 

The lucy^® brand of women’s lifestyle apparel is marketed through approximately 60 lucy^® branded retail stores across the United States and via the internet at www.lucy.com. lucy^® is an authentic activewear brand designed for versatility, comfort and fit that can be worn by today’s active woman from workout to weekend. The lucy^® retail stores emphasize the brand’s four core types of activity-based apparel — yoga, gym, running and outdoor adventure. Over 90% of the products in the lucy^® retail stores are lucy^® branded, with most of the balance being complementary VF brands, including a limited selection of The North Face^® apparel. Beginning in 2010, the lucy^®

business unit will become part of the Outdoor & Action Sports Coalition. The lucy^® brand shares attributes of our outdoor brands and will benefit from shared expertise in technical performance fabrics and product innovation.

 

During 2009, premium apparel sales were severely impacted by the recession, with many consumers significantly reducing spending for luxury goods, which has led to sharply lower same store sales comparisons in the upscale department store channel and the closing of a significant number of specialty shops. In 2010, we expect to see our Contemporary Brands businesses grow their revenues through additional retail and international expansion and product line extensions.

 

Direct-To-Consumer Operations

 

VF-operated retail stores are an integral part of our strategy for growing VF’s brands, particularly our lifestyle brands. Our full price retail 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 consumers. The proper presentation of products in our retail stores also helps to increase consumer purchases of VF products sold through our wholesale customers. VF-operated full price retail stores generally provide operating margins that are equal to or above VF averages and a return on investment above VF averages. In addition, VF operates outlet stores in both upscale outlet malls and in more traditional value-based locations. These outlet stores serve an important role in our overall inventory management by allowing VF to effectively 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 757 stores at the end of 2009. Of that total, there are 681 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^®, Lee^®, Wrangler^® and other products. Approximately three-fourths 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. In addition to the monobrand retail and outlet stores, we operate 76 VF Outlet stores across 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 three-fourths of the VF-operated retail stores are located in the United States. The remaining stores are located in Europe, Latin America and Asia.

 

Across the globe, internet sales (i.e., e-commerce) comprise a small but growing portion of total retail sales of apparel, footwear and accessories. E-commerce sales of apparel and footwear have become the second largest category of e-commerce purchases in the United States (behind travel purchases). At VF, e-commerce is a growing portion of our revenues as we currently market The North Face^®, Vans^®, Lee^®, 7 For All Mankind^®, lucy^®, Nautica^®, Kipling^® and other brands online in the United States, plus The North Face^® and other brands across Europe. Additional e-commerce sites will be rolled out for consumers in 2010.

 

Total retail store and e-commerce sales accounted for 17% of VF’s consolidated Total Revenues in 2009 and 16% in 2008. 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 retail stores and expanding our e-commerce presence for our lifestyle brands. During 2009, we opened 90 retail stores. For 2010, capital investments of approximately $60 million are planned for leasehold improvements, fixtures and equipment for approximately 80-90 new retail locations, concentrated where we see higher growth potential — Vans^®, The North Face^®, 7 For All Mankind^® and international.

 

In addition to the direct-to-consumer venues operated by VF, our licensees, distributors and other independent parties operate over 1,300 primarily monobrand retail stores dedicated to our brands. These stores — located primarily in Eastern Europe and Asia and focused on The North Face^®, Kipling^®, Nautica^®, Lee^® and Wrangler^® brands — have the appearance of VF-operated retail stores.

 

Licensing Arrangements

 

As part of our business strategy of expanding market penetration of VF-owned brands, we enter into licensing agreements for our brands for specific apparel and complementary product categories in identified geographic

regions if such arrangements with independent parties can provide more effective manufacturing, distribution and marketing of such products than could be achieved internally. These licensing arrangements relate to a broad range of VF brands and are for fixed terms of generally 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 sales of licensed products. Gross Royalty Income was $77.2 million in 2009, with the largest contribution from the Nautica^® brand.

 

In addition, licensees of our brands are generally required to spend a specified amount to advertise VF’s products ranging from 1% to 5% of their net licensed product sales. In some cases, these advertising amounts are remitted to VF for advertising on behalf of the licensees. 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.

 

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., NASCAR, major colleges, 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 ultimately bears the responsibility to deliver product to our customers. VF is highly skilled in managing the complexity associated with the supply chain. VF’s revenues are comprised of over 400 million units representing 500,000 SKUs spread over 30 brands. VF operates over 30 manufacturing facilities and utilizes over 1,600 contractor manufacturing facilities. We operate over 30 distribution centers and over 700 retail stores. Managing this complexity is made possible by our use of information systems technologies — with best-of-breed systems for product development, forecasting, order management, warehouse management, etc. attached to our core enterprise resource management platform.

 

Today, 16% of our products sold are manufactured in VF-owned facilities and 84% are products obtained from contractors, primarily in Asia. A combination of VF-owned and contracted production from different geographic regions provides flexibility and a competitive advantage in our 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, Poland 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 scheduled 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. 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 denim 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 a remaining total of $67.5 million of childrenswear for sale through our VF Outlet stores, with a minimum of $15.0 million per year. No single supplier represents more than 3% of our total cost of sales.

 

For the U.S. market, our current sourcing strategy includes a balance of VF-owned production and contracted production in the Western Hemisphere and contracted production from Asia. Products manufactured in VF facilities generally have a lower cost and shorter lead times than contracted production. Product obtained from contractors in the Western Hemisphere generally has a higher cost than product obtained from contractors in the Far East but gives

us greater flexibility and shorter lead times and allows for lower inventory levels. The vast majority of units sold and dollar value of domestic Net Sales in 2009 were manufactured by outside contractors, primarily in Asia. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a balanced approach to product sourcing.

 

Our independent contractors generally own the raw materials and ship to VF only finished, ready-for-sale products. These contractors are engaged through VF sourcing hubs in Hong Kong (with several satellite offices across Asia) and Miami. 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 growing 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 majority of sewing and finishing of VF-owned raw materials through a network of independent domestic and international 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 that are identified by the State Department as state sponsors of terrorism and are 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, environment sustainability or standards, compliance with local laws and reputations. In addition, our owned factories must also undergo certification by the independent, nonprofit organization Worldwide Responsible Accredited Production (“WRAP”) that promotes global ethics in manufacturing. VF, through its contractor monitoring program, audits the activities of the many independent businesses and contractors that produce VF-branded goods at locations across the globe. Each of the over 1,600 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 2009, and we do not anticipate difficulties in meeting our raw materials and contracting production requirements during 2010. 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 many 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 retail stores. Most distribution centers are operated by VF, and some support multiple brands. Our distribution centers use computer-controlled inventory management technology for efficient tracking and movement of products. A small portion of our distribution needs are met by contract distribution centers.

 

Seasonality

 

With its diversified product offerings, VF’s operating results are somewhat seasonal. On a quarterly basis and excluding the effect of acquisitions, consolidated Total Revenues for 2009 ranged from a low of approximately 21% of full year revenues in the second quarter to a high of 29% in the third quarter. This variation results primarily from the seasonal influences on revenues of our Outdoor & Action Sports Coalition, where 19% of the Coalition revenues

occurred in the second quarter and 33% in the third quarter of 2009. 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 increase.

 

Working capital requirements vary throughout the year. Working capital 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 2009, our advertising and promotion spending was $329.1 million, representing 4.6% 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 various sporting, music and other special events and sponsor a number of athletes and other 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. This includes shop-in-shops, which are separate retail sales areas with brand signage — a “store within a store” — dedicated to a specific VF brand within a customers’ location. We participate in concession arrangements with department store customers in China and some other international markets. In a typical concession, a department store provides a dedicated sales area, along with check-out, credit and other services, while VF bears the risk of inventory ownership. Concession sales associates may be employees of VF or the department store.

 

We participate in various retail customer incentive programs. Incentive programs with retailers include discounts, allowances and cooperative advertising funds. We also offer sales incentive programs directly to consumers in the form of rebate and coupon offers. Sales incentive offers with retailers and with consumers are recognized as sales discounts in arriving at reported Net Sales (except that cooperative advertising reimbursements of documented retailer advertising costs are reported as Advertising Expense, and free product with purchase offers are reported in Cost of Goods Sold).

 

Internet websites are maintained for most of our brands. Many of them are business-to-consumer e-commerce sites where consumers can order products from VF. Other consumer 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.

 

Our Outdoor & Action Sports, Jeanswear, Sportswear and Contemporary Brands 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 force about our products and related promotions.

 

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 consumer-connected and innovative products at competitive prices, producing high quality merchandise, providing high levels of service, ensuring product availability to the retail sales floor and enhancing recognition of its brands. We continually strive to improve on 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, have 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, primarily in Europe, and 17% are direct-to-consumer through VF-operated retail stores and e-commerce sites (which includes 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 27% of Total Revenues in 2009, 26% in 2008 and 27% in 2007. These larger customers included (in alphabetical order) Kohl’s Corporation, Macy’s, Inc., J.C. Penney Company, Inc., Sears Holding Corporation, Target Corporation and Wal-Mart Stores, Inc. Sales to the five largest customers amounted to approximately 21% of Total Revenues in 2009 and 2008 and 22% in 2007. Sales to VF’s largest customer, Wal-Mart Stores, Inc., totaled 11% of Total Revenues in 2009 and 2008 and 12% in 2007, substantially all of which were in the Jeanswear Coalition.

 

Employees

 

VF employed approximately 45,700 men and women at the end of 2009, of which approximately 19,600 were located in the United States. Approximately 800 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 20, 2010. 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. 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 27, 2010 (“2010 Proxy Statement”) that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 2, 2010, which information is incorporated herein by reference.

 

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 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.

 

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.

 

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 2010 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 May 7, 2009.

 

 

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.

 

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. Consumer spending is influenced by a number of factors, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment and wages), business conditions, interest rates, availability of credit, housing costs, the level of securities markets, energy prices and tax rates in the international, national, regional and local markets where VF’s products are sold. Consumer spending was constrained during 2009, and a further decline in general economic conditions could further reduce the level of consumer spending.

 

We do not expect a significant improvement in business conditions and consumer spending in the near future. 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 a negative impact on retail sales of apparel and other consumer products. Reduced sales by our wholesale customers may lead to lower retail inventory levels, reduced orders to suppliers like VF, or order cancellations. Reduced sales by some of our wholesale customers, along with the possibility of their reduced access to, or inability to access, the credit markets, may result in various retailers experiencing significant financial difficulties. Financial difficulties of customers could result in reduced sales to those customers or could result in store closures, bankruptcies or liquidations. Higher credit risk relating to receivables from customers experiencing financial difficulty may result. 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 retail 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 reduced purchases of VF’s products through VF-operated retail stores and websites. This could have a material adverse effect on VF’s financial condition and results of operations.

 

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

 

 

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. In addition, if we misjudge fashion trends and market conditions, we could be faced with significant excess inventories for some products that we may have to sell at a loss or missed opportunities that may result in lost sales.

 

VF’s results of operations could be materially harmed if VF is unable to accurately forecast demand for its products.

 

We often schedule internal production and place orders for products with independent manufacturers before our customers’ orders are firm. Therefore, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include:

 

 

Inventory levels in excess of customer 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 customer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to VF’s reputation and customer relationships. There can be no assurance that we will be able to successfully manage inventory levels to exactly meet future order and reorder 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 profits.

 

A few of VF’s customers account for a significant portion of revenues. Sales to VF’s ten largest customers were 27% of Total Revenues in fiscal 2009, with Wal-Mart Stores, Inc. accounting for 11% 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 decrease significantly the number 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 market. These developments could result in a reduction in the number of stores that carry VF’s products, increased ownership concentration within the retail industry, increased credit exposure or increased retailer 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. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause VF’s gross margin to decline if we are unable to offset price reductions with comparable reductions in operating costs. If VF’s sales prices decline 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.

 

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

 

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 such fabrics depend on demand and market prices for the raw materials used to produce them, particularly cotton. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. In the future, VF may not be able to pass higher costs on to its customers.

 

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 and customers to new geographies, 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 or achieve planned cost savings. We may have difficulty identifying acquisition targets, and we may not be able to successfully integrate a newly acquired business or achieve expected 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 managers. 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 a variety of foreign laws and regulations, unexpected changes in regulatory requirements, new tariffs or other barriers to 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 upon the import or export of our products in the future, 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 one-third of VF’s 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. In recent months, 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 2009, approximately 84% of VF’s products sold were produced by and 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, Poland and the Middle East. Although no single supplier and no one country is critical to VF’s production needs, any of the following could materially and adversely affect 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 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, thereby 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. Additionally, we require all suppliers making VF-branded apparel, whether directly for VF or for its licensees, to comply with VF’s Terms of Engagement and Global Compliance Principles. Our staff and third parties retained for such purposes periodically visit and audit the operations of VF’s owned and operated facilities and those of independent contractors manufacturing product for VF to determine compliance. However, we do not control independent manufacturers or their labor and other business practices. 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, the shipment of finished products to VF could be interrupted, orders could be cancelled, relationships could be terminated, and VF’s reputation could be damaged. Any of these events 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 strategy 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. VF may have difficulty accessing capital markets for short or long-term financing.

 

During the last two years, the global capital and credit markets have experienced extreme levels of 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.

Although VF had over $700 million of cash and equivalents at the end of 2009, 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 two years, and all commercial paper borrowings were repaid by the end of each year. In addition, VF may 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 committed 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.

 

If we were to have difficulty in accessing the short or long-term capital markets, VF has $1.3 billion of committed domestic and international bank credit facilities that expire in October 2012. Continued distress in the financial markets could, however, 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 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. With the shift in product mix to higher priced brands in recent years, VF is more susceptible to infringement of its intellectual property rights. Some of VF’s brands, such as The North Face^®, Vans^®, JanSport^®, Nautica^®, Wrangler^® and Lee^® brands, enjoy significant worldwide consumer recognition, and the generally higher pricing of such 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 or otherwise adversely affect VF 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, such as 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 maintain the value of VF’s brands.

 

During 2009, $77.2 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, among other things, approval rights over design, production processes and 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 its distribution facilities to warehouse and, using its own employees or in some cases independent contractors, to ship product to its customers. VF’s distribution system includes computer-controlled and automated equipment, which means its operations are complicated and 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 objectives for operating efficiencies could be materially adversely affected.

VF’s balance sheet includes a significant amount of intangible assets and goodwill. A decline in the estimated 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.

 

Under current accounting standards, we estimate the fair value of acquired assets, including intangible assets, and assumed liabilities arising from a business acquisition. The excess, if any, of the cost of the acquired business over the fair value of net tangible and intangible assets acquired is goodwill. The goodwill is then assigned to a business unit or “reporting unit” within VF, which depends on how the acquired business will be operated after integration into VF.

 

We evaluate trademark intangible assets that are not amortized and goodwill 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 methodologies 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 2009, we recognized goodwill and intangible asset impairment charges totaling $122.0 million.

 

At December 2009, VF had approximately $1.0 billion of indefinite-lived trademark intangible assets and $1.4 billion of goodwill on its balance sheet. These assets are not required to be amortized under current accounting rules. In addition, VF had approximately $0.5 billion of intangible assets that are being amortized under current accounting rules. Goodwill and intangible assets combined represent 45% of VF’s Total Assets and 76% 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 2010 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. Specifically regarding our Contemporary Brands Coalition, the recession of the last two years has particularly impacted the upper tier or premium department and specialty store channel of distribution and, in many cases, products sold through this premium channel. While no impairment is indicated for any of our business units within this coalition, if the premium channel does not improve from recessionary levels or if the growth strategies of our business units are not successful, it is possible that an impairment charge would be required. 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 2009 due primarily to the decline in market value of the plans’ investment portfolios, resulting from the global financial and credit crisis that began near the end of 2007. This resulted in recognition of a significant liability representing the underfunded status of our plans and a significant charge to Stockholders’ Equity in our Consolidated Balance Sheets at the end of 2008 and 2009, as well as a significant increase in our 2009 pension expense. If the pension plans’ investments were to decline in value or if the level of interest rates were to decline from the current level, the pension plans could be further underfunded, resulting in recognition of additional underfunded liabilities and additional charges to Stockholders’ Equity in our Consolidated Balance Sheets, higher pension expense and possibly additional cash contributions to fund the plans.

 

VF’s defined benefit pension plans were underfunded at the end of 2009, resulting in recognition of $238.8 million of pension liabilities at the end of 2009. Differences between actual results and amounts estimated using actuarial assumptions (e.g., investment returns, discount rate, mortality) are deferred and amortized in future years’ pension cost. Deferred actuarial losses included in Stockholders’ Equity totaled $266.0 million. Primarily because of these deferred actuarial losses, our pension cost increased from $10.8 million in 2008 to $98.0 million in 2009. To improve the funded status of our pension plans, we made over $200 million of discretionary contributions to our plans during 2009.

A further decrease in the value of our 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 pension plans to a fully funded status 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 2009 are summarized below by reportable segment:

 

 

 

 

Approximately 66% 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 7,100,000 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.

 

 

On September 22, 2009, the U.S. Environmental Protection Agency filed a lawsuit against VF Outdoor, Inc. alleging violations of the Federal Insecticide, Fungicide and Rodenticide Act resulting from the alleged sale of unregistered pesticides in shoes. The lawsuit was filed with the Regional Hearing Clerk of the U.S. Environmental Protection Agency, Region IX. The parties entered into an agreement to settle the proceeding in the first quarter of 2010. 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 2009, 2008 and 2007, along with dividends declared, are as follows:

 

 

As of January 30, 2010, there were 4,526 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 Apparel, Accessories & Luxury Goods Subindustry Index (“S&P Apparel Index”) for the five calendar years ended December 31, 2009. The S&P Apparel Index at the end of 2009 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., Unifirst Corporation, VF Corporation, Volcom, Inc. and The Warnaco Group, Inc. The graph assumes that $100 was invested on December 31, 2004, in each of VF Common Stock, the S&P 500 Index and the S&P Apparel Index, and that all dividends were reinvested. The graph plots the respective values on the last trading day of calendar years 2004 through 2009. 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 Apparel Index
VF Common Stock closing price on December 31, 2009 was $73.24

 

TOTAL SHAREHOLDER RETURNS

 

 

Issuer purchases of equity securities:

 

 

 

 

 

The following table sets forth selected consolidated financial data for the five years ended January 2, 2010. 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 leading global marketer of branded lifestyle and other apparel 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 several consumer product categories. In addition, we market occupational apparel to resellers and major corporate and government 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 VF-operated retail stores and internet websites.

 

VF’s businesses are grouped into five product categories, and by brands within those product categories, for management and internal financial reporting purposes. These groupings of businesses are referred to as “coalitions.” Both management and VF’s Board of Directors evaluate operating performance at the coalition level, which is consistent with that used for management incentive compensation. These coalitions represent VF’s reportable segments. These groupings of businesses are summarized as follows:

 

 

Impact of the Current Global Economic Environment

 

The global recession that began near the end of 2007 is the longest and most severe recession in the last several decades. This recession, which has resulted in flat-to-falling consumer income levels, sharp declines in real estate and global securities markets, volatility in commodity and currency markets, significant increases in unemployment, numerous retailer and other bankruptcies, and unprecedented government stimulus programs, has led to a decline in consumer spending that has impacted VF as well as most other companies. Recent statistics indicate that the U.S. and global economies are showing some signs of stability, but unemployment is still very high and consumer spending remains weak.

Consumer spending represents about 70% of the domestic economy, and spending at retail represents about one-half of that. The general reduction in household wealth and income over the last two years, along with reduced availability of consumer credit and increased savings and debt repayment rates, has reduced consumer purchases of discretionary items such as apparel. Reduced consumer spending has had a significant impact on sales in all retail channels, and particularly in sales of premium, higher priced products in the upper tier distribution channels. Although there are some signs of stabilization, consumer confidence remains weak. We believe economic conditions will remain difficult and that consumer spending will remain constrained in global markets through 2010.

 

In response to these market conditions, VF was aggressive in reducing costs and lowering inventory levels during 2009. However, we have continued to invest in our brands and, in 2010, are expecting to increase our investments in advertising, product development and retail store expansion. These investments, totaling $50 million, will be very targeted and concentrated in those businesses with the strongest opportunities for growth, including The North Face^®, Vans^® and 7 For All Mankind^® brands, and our business in Asia. A portion of these investments will be targeted at further strengthening our product innovation and sustainability platforms. We believe that the strength of our brands is fundamental to our success in this economic climate.

 

Long-term Financial Targets

 

While our long-term revenue and earnings growth targets, as described below, were not achieved in 2009 due to global recessionary conditions and are not expected to be achieved in 2010, our long-term targets remain intact. These targets are summarized below:

 

 

 

Income before net interest expense, after income taxes

Average stockholders’ equity, plus average short and long-term debt

 

Excluding the effect of the impairment charge discussed in the “Analysis of Results of Continuing Operations” section below, we earned a 12.6% return on invested capital in 2009, compared with a 13.5% return in 2008. Our returns in these years were negatively impacted by the global economic conditions discussed above, our 2008 cost reduction initiatives, our incremental pension expense in 2009 and by our 2007 acquisitions. Newly acquired businesses generally have a lower than average return on invested capital in their earlier years of ownership. We expect our return on invested capital to improve in 2010 and move closer to the long-term target of 17%.

 

 

Strategic Objectives

 

Our strategy for growth consists of six drivers:

 

1. Build more global, growing lifestyle brands. Focus on building more global, growing lifestyle brands with an emphasis on activity-based brands.

 

2. Expand our share with winning customers. Develop brand and product strategies that will enable us to gain market share with successful, growing retail partners.

 

3. Stretch brands and customers to new geographies. Grow our international presence, particularly in China, Europe, India and Brazil.

 

4. Expand our direct-to-consumer business. Increase the portion of revenues obtained from VF-operated monobrand retail stores and e-commerce.

 

5. Fuel the growth. Maintain our competitive advantage by leveraging our supply chain and information technology capabilities across VF to drive lower costs and inventory levels, increase productivity and integrate acquisitions efficiently to generate savings that can be reinvested in our brands.

 

6. Build new growth enablers. Support our growth plans by identifying and developing high potential employees and by building a diverse team of talented leaders with specific focus on consumer insight and innovation.

 

Highlights of 2009

 

There were several notable actions and achievements in 2009:

 

 

 

Analysis of Results of Continuing 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 declined 6% in 2009, with 2% of the decline due to foreign currency translation. The effect of global recessionary conditions on consumer spending affected all of our businesses in 2009. In spite of the recession, we reported growth in our Outdoor & Action Sports businesses in 2009. Revenues increased in 2008 due to overall unit volume increases and organic growth in our Outdoor & Action Sports businesses and the benefit of a full year of operations of our Contemporary Brands businesses acquired in 2007. 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 where VF conducts the majority of its business (primarily the European euro countries) negatively impacted revenue by $156 million in 2009 relative to 2008. A weaker U.S. dollar benefited revenues by $109 million in 2008 relative to 2007. The weighted average translation rate for the euro was $1.39 per euro during 2009, compared with $1.47 during 2008 and $1.36 during 2007.

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

 

 

Gross margins increased 1.4% in 2009 over 2008 and 1.0% in 2008 over 2007 from the impact of our direct-to-consumer operations, which have gross margin percentages higher than VF averages. In addition, our aggressive management of inventory levels in 2009 resulted in gross margin improvement due to a lower impact from the disposal of excess and obsolete inventory. The increase in 2009 was partially offset by lower gross margins in our European jeanswear and imagewear businesses. The 2008 increase was partially offset by lower gross margins primarily in our European jeanswear business. See the “Information by Business Segment” section below.

 

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

 

Marketing, Administrative and General Expenses as a percent of revenues increased 1.4% in 2008 over 2007 due to the growth in our direct-to-consumer business and 0.7% due to nonrecurring charges from the cost reduction actions mentioned above. These increases were partially offset by lower incentive compensation and other spending reductions in 2008.

 

We include costs of cooperative advertising, licensing, retail stores, and shipping and handling in Marketing, Administrative and General Expenses, as stated in our significant accounting policies in Note A to the Consolidated Financial Statements. Some apparel companies classify cooperative advertising costs as a reduction of Net Sales and licensing costs as a reduction to Royalty Income. Further, some classify retail store costs and shipping and handling costs in Cost of Goods Sold. Accordingly, our gross margin and operating expenses may not be directly comparable with other apparel companies.

 

We completed our annual impairment testing for goodwill and indefinite-lived trademark intangible assets in the fourth quarter of 2009. Based on our assessment of current and expected future 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 goodwill at its Reef^®, Nautica^®, and lucy^® business units exceeded their fair values and the carrying values of trademark intangible assets at its Reef^® and lucy^® business units exceeded their fair values. Accordingly, VF recorded noncash impairment charges totaling $122.0 million ($114.4 million net of related income tax benefits) to reduce the carrying values of goodwill and trademark intangible assets of these business units to their fair values. Of this total, Reef^® represented $36.7 million, Nautica^® represented $58.5 million, and lucy^® represented $26.8 million (in each case, 23%, 14% and 26% of its combined goodwill and nonamortized trademark intangible assets). For additional information, see Notes H and U to the Consolidated Financial Statements and the “Critical Accounting Policies and Estimates” section below. References to financial results excluding the impact of the impairment charge reflect non-GAAP measures and are addressed below in the “Non-GAAP Financial Information” section.

 

Interest income decreased $3.9 million in 2009 and $3.2 million in 2008 primarily due to lower interest rates. Interest expense (including bank fees and amortization of deferred costs and a hedging gain) decreased $8.1 million in 2009 due to reduced short-term borrowing levels and lower interest rates. Interest expense increased $21.9 million in 2008 due to an increase in debt related to the issuance of $600.0 million of senior long-term notes in October 2007 to fund our 2007 acquisitions. This increase was partially offset by lower short-term borrowing rates. Average interest-bearing debt outstanding totaled approximately $1,364 million for 2009, $1,454 million for 2008 and

$1,080 million for 2007. The weighted average interest rate on outstanding debt was 6.1% for 2009, 6.3% for 2008 and 6.4% for 2007.

 

The effective income tax rate was 29.9% in 2009 and 26.2% excluding the impairment charge discussed above. These rates compared with 28.9% in 2008 and 32.3% in 2007. 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 2.7%. During 2008, we recorded tax benefits of $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 that lowered our 2008 annual tax rate by 2.9%. In addition, during 2008, we recorded tax benefits of $11.5 million to reflect updated assessments of previously accrued amounts, which lowered our 2008 annual tax rate by 1.4%. During 2007, we recorded tax benefits of $12.0 million related primarily to expirations of statutes of limitations in several international jurisdictions that lowered our 2007 annual tax rate by 1.3%. The remaining declines in the effective income tax rate in 2009 (excluding the impairment charge) from 2008 and in 2008 from 2007 were primarily attributed to growth in our international businesses in jurisdictions having effective tax rates that are substantially lower than the United States.

 

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. (All per share amounts are presented on a diluted basis.) Earnings per share in 2009 were $5.16 excluding a $1.03 impairment charge for goodwill and intangible assets. Earnings per share in 2009 were also negatively impacted by (i) incremental pension expense in our defined benefit pension plans of $0.48 over the 2008 level and (ii) an unfavorable impact of $0.18, compared with 2008, from translating foreign currencies into a stronger U.S. dollar. Earnings per share in 2009 benefited from the absence of nonrecurring charges of $0.30 per share for cost reduction actions taken in the fourth quarter of 2008.

 

Net Income Attributable to VF Corporation decreased 2% to $602.7 million in 2008 from $613.2 million in 2007, while earnings per share increased to $5.42 in 2008 from $5.41 in 2007. Cost reduction actions taken during the fourth quarter of 2008 lowered earnings per share by $0.30. Cost reduction actions completed in 2007, partially offset by the gain on exiting the H.I.S^® business, reduced 2007 earnings per share by $0.06. In translating foreign currencies into the U.S. dollar, the weaker U.S. dollar had a $0.15 favorable impact on earnings per share in 2008 compared with 2007. Discrete tax items accounted for an incremental benefit of $0.16 in 2008 earnings per share over 2007. Earnings per share increased slightly in 2008 on lower Income from Continuing Operations due to the reduced number of diluted shares outstanding in 2008.

 

Information by Business Segment

 

For business segment reporting purposes, Coalition Revenues and Coalition Profit represent net sales, royalty income and operating expenses under the direct control of an individual coalition, along with its share of centralized corporate expenses directly related to the coalition and amortization of acquisition-related intangible assets. Corporate expenses not apportioned to the coalitions, impairment charges for goodwill and intangible assets, net interest expense and a significant portion of our pension expense are excluded from Coalition Profit.

 

See Note R 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 from Continuing Operations 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 business coalition been an independent, stand-alone entity during the periods presented. Further, VF’s presentation of Coalition Profit may not be comparable with similar measures used by other companies.

The following 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 John Varvatos business unit for 2007 and 2008 have been reclassified from the Sportswear Coalition to the Contemporary Brands Coalition reflecting the change in internal management responsibility, which began in 2009.

 

Outdoor & Action Sports:

 

 

The Outdoor & Action Sports 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^® daypacks and apparel, Kipling^® bags and accessories, Napapijri^® outdoor-based sportswear, Reef^® beach-inspired footwear and apparel and Eagle Creek^® adventure travel gear.

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 two largest brands in this coalition increased in 2009 — The North Face^® by 6% (including a negative impact of 3% from foreign currency translation) and Vans^® 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.

 

Coalition Revenues increased in 2008 led by global unit gains from strong consumer demand for our The North Face^®, Vans^®, Kipling^®, Napapijri^® and Eastpak^® brands. Growth in these brands, particularly The North Face^® and Vans^®, included geographic expansion and the opening of additional owned retail locations. Domestic revenues for our outdoor and action sports businesses increased 11%, while international revenues increased 21% with the favorable effects of foreign currency accounting for 6% of this increase.

 

Approximately one-half of the operating margin improvement in 2009 over 2008 resulted from increased gross margins in our outdoor and action sports businesses, with their 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 an $8.3 million nonrecurring charge in 2008 related to cost reduction actions. 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.

 

The increase in operating margin in 2008 over 2007 was driven by higher revenues, resulting in improved leverage of operating expenses, and growth in our international and direct-to-consumer operations, where operating margins are higher. These improvements were partially offset by the charge related to cost reduction actions mentioned above.

 

Jeanswear:

 

 

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

 

Domestic jeanswear revenues declined 4% in 2009 from 2008 due primarily 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. Despite these reductions, we believe that we are gaining market share in our Wrangler^® men’s, Lee^® men’s and women’s, and core Riders^® women’s businesses, driven by the success of new product innovation. Domestic jeanswear revenues decreased 8% in 2008 from 2007 due to a very difficult retail environment caused by the deteriorating global economy that impacted the Lee, mass market and western specialty businesses.

 

Jeanswear revenues in international markets, including Europe, Canada, Mexico, Latin America and Asia, 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 decision earlier in 2009 to exit our mass market jeans business in Europe. These declines were partially offset by a 14% increase in jeanswear revenues in Asia.

 

Jeanswear revenues in international markets increased 2% in 2008 over 2007. Foreign currency translation positively impacted international jeanswear 2008 revenues by 5%. Therefore, revenues on a constant currency basis were down in 2008, reflecting difficult economic conditions in key European countries and the sale of the H.I.S^® business in 2007, which accounted for $25 million of revenues in that year. These declines were partially offset by revenue growth in our Asia business.

The Jeanswear operating margin comparison in 2009 benefited by 1.0% from nonrecurring charges in 2008 of $27.3 million related to cost reduction actions. 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 cost reduction actions taken in 2008.

 

Jeanswear operating margin in 2008 was negatively impacted compared with 2007 due to the charges in 2008 discussed above, lower revenues that negatively impacted the expense to revenue ratio, increased promotional activities and higher product costs. The 2007 operating margin was favorably impacted by 0.2% related to the gain on the sale of H.I.S^® trademarks and related intellectual property during that year.

 

Imagewear:

 

 

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

 

Image apparel 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. Coalition Revenues were flat in both our Image and Licensed Sports divisions in 2008 compared with 2007.

 

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 division.

 

The operating margin decline in 2008 from 2007 reflected difficult market conditions in the fourth quarter of 2008 that especially affected consumer spending in our Licensed Sports division. In addition, the 2008 operating results included a $2.0 million nonrecurring charge for cost reduction activities that negatively impacted the operating margin by 0.2% and additional investments in advertising that accounted for 0.4% of the margin decline.

 

Sportswear:

 

 

The Sportswear Coalition consists of our Nautica^® lifestyle brand and the Kipling^® brand business in North America (whereas the Kipling^® brand is managed as part of the Outdoor & Action Sports Coalition outside North America).

 

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

 

Coalition Revenues were down 7% in 2008 compared with 2007, with an 11% decrease in our Nautica^® brand revenues partially offset by a double-digit revenue gain in our Kipling^® brand businesses. The decline in the Nautica business resulted from the very challenging department and outlet store trends mentioned above and the exit in early 2008 of our women’s wholesale business.

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 $5.8 million in nonrecurring charges in 2008 related to cost reduction actions, including the exit of the Nautica^® women’s wholesale sportswear business.

 

Sportswear Coalition operating margin declined in 2008 from 2007 due to lower Nautica^® brand revenues that negatively impacted the expense to revenue ratio and increased markdown activity related to a highly promotional retail environment. In addition, as mentioned above, the 2008 operating results included nonrecurring charges for cost reduction actions that negatively impacted the operating margin by 1.0%.

 

Contemporary Brands:

 

 

This coalition consists of the 7 For All Mankind^® brand of premium denim jeanswear and related apparel, John Varvatos^® luxury apparel collection for men and lucy^® brand of women’s activewear. 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 increase in Coalition Revenues in 2009 was driven by the acquisition of the Splendid^® and Ella Moss^® brands in March 2009. This increase was partially offset by an 8% decline in our global 7 For All Mankind^® brand revenues, driven by challenging conditions in the U.S. upper tier department and specialty store channel. We did experience growth in both the 7 For All Mankind^® Asia business, where revenues nearly doubled, and the direct-to-consumer business, where revenues more than tripled. We continued to expand this brand’s reach with 21 retail store openings in 2009.

 

The increase in Coalition Revenues in 2008 was due to a full year of ownership of the 7 For All Mankind^® and lucy^® brands.

 

Operating margin was negatively impacted in 2009 compared with 2008 due to 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 our lucy^® and John Varvatos^® businesses. The 2009 operating margin comparison benefited by 1.5% from nonrecurring charges in 2008 related to an unremitted value-added tax and duty matter and cost reduction initiatives. Operating margins for our 7 For All Mankind^®, Splendid^® and Ella Moss^® brands in 2009 were above the coalition average at 16% and 20%, respectively.

 

The operating margin decline in 2008 from 2007 reflects high levels of promotion and markdown-related expenses as a result of the significant impact of the economic downturn on the more upscale department stores. In addition, as mentioned above, the 2008 operating results included nonrecurring charges that negatively impacted operating margin by 1.5%.

 

Other:

 

The Other business segment includes the VF Outlet business, which is a group of VF-operated retail 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 (primarily women’s intimate apparel, childrenswear, hosiery, underwear and accessories, which provide a broader selection of merchandise to attract consumer traffic) are reported in this business segment. Revenues in the Other business segment declined in 2009 due to the impact of the economic recession on consumer spending.

 

Reconciliation of Coalition Profit to Consolidated Income from Continuing Operations Before Income Taxes:

 

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

 

Impairment of Goodwill and Trademarks was discussed in the previous “Consolidated Statements of Income” section. These charges resulted from our annual impairment review of these assets.

 

Interest Expense, Net was discussed in the previous “Consolidated Statements of Income” section. Interest is excluded from Coalition Profit because substantially all of our financing costs are managed at the corporate office and are not under the control of coalition management.

 

Corporate and Other Expenses consists of corporate 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 decrease in information systems and shared services costs in 2009 from 2008 is primarily due to reductions in third-party data center charges and common systems amortization. The decrease in information systems and shared services costs in 2008 from 2007 resulted primarily from information systems costs incurred in 2007 for transition services provided to the acquirer of our intimate apparel business that did not recur in 2008. The reimbursement of these costs from the acquirer in 2007 is separately presented above.

 

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 decline in corporate headquarters’ costs in 2009 from 2008 was due to reduced spending as part of our cost reduction efforts. The decrease in corporate headquarters’ costs in 2008 from 2007 resulted primarily from lower management incentive compensation.

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 these other adjustments 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 $83.1 million for 2009, primarily representing amortization of deferred actuarial losses, were recorded in “other” expense. These costs were not significant in prior years.

 

Analysis of Financial Condition

 

Balance Sheets

 

Accounts Receivable decreased 9% in 2009 due to the sale of $74.2 million of selected accounts receivable, as discussed in the “Liquidity and Cash Flows” section below.

 

Inventories declined 17% in 2009, reflecting our aggressive management of inventory levels during the economic downturn.

 

Other Current Assets decreased at December 2009 from 2008 due primarily to a decrease in prepaid income taxes.

 

Property, Plant and Equipment was lower at the end of 2009 compared with 2008 as depreciation expense exceeded our capital spending in 2009.

 

Intangible Assets increased in 2009 due to the Mo Industries acquisition in March 2009, partially offset by the impairment charge and amortization.

 

Goodwill increased in 2009 due to the Mo Industries acquisition in March 2009, partially offset by the impairment charge.

 

Other Assets decreased at December 2009 due to (i) the completion of the acquisition of Mo Industries in March 2009, resulting in the elimination of the $80.5 million equity investment in one-third of its stock, and (ii) a reduction in deferred income tax assets. These decreases were partially offset by an increase in the investment securities held for VF’s deferred compensation plans.

 

VF has a $1.0 billion senior unsecured committed domestic revolving bank credit agreement that supports issuance of up to $1.0 billion in commercial paper and a €250.0 million (U.S. dollar equivalent of $358.3 million) senior unsecured committed international revolving bank credit agreement. There were no borrowings under these credit agreements at December 2009 or December 2008. Short-term Borrowings under other international borrowing agreements were $45.5 million at December 2009 and $53.6 million at December 2008.

 

The decline in Accounts Payable from 2008 to 2009 is consistent with the decline in inventories discussed above. Accrued Liabilities decreased in 2009 due primarily to the payments of the obligations associated with the cost reduction actions taken in the fourth quarter of 2008.

 

Total Long-term Debt at December 2009 and December 2008 was comparable. At September 2009, $200.0 million of notes, due October 1, 2010, were reclassified to Current Portion of Long-term Debt.

 

Other Liabilities decreased due to the reduction in the underfunded status of our defined benefit pension plans at the end of 2009, as discussed in the following paragraph. This decrease is partially offset by higher deferred income taxes and deferred compensation liabilities.

 

The global credit crisis and the related significant declines in global securities markets during 2008 resulted in a significant decline in the value of the investment portfolios of our defined benefit pension plans. As a result, our defined benefit pension plans are in an underfunded status, with our projected pension benefit obligations exceeding

the value of our plans’ investment assets. In December 2008, the underfunded status of $414.9 million was recognized as a liability in our Consolidated Balance Sheet. To improve the funded status of our pension plans, we contributed over $200 million to these plans during 2009. Accordingly, the plans’ underfunded status recognized in our 2009 Consolidated Balance Sheet was reduced to $250.9 million. See Note N to the Consolidated Financial Statements and the “Critical Accounting Policies and Estimates” section below for a discussion of asset, 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, was 10.7% at the end of 2009.

 

VF’s primary source of liquidity is its strong cash flow provided by operating activities. Cash generated from operations, which was $973.5 million in 2009, $679.5 million in 2008 and $833.6 million in 2007, is primarily dependent on the level of Net Income, changes in accounts receivable, investments in inventories and other working capital components. Net Income was $458.5 million, $602.8 million, and $592.2 million in 2009, 2008 and 2007, respectively. The decline in Net Income in 2009 was primarily due to a noncash pretax impairment charge for goodwill and intangible assets of $122.0 million.

 

Operating cash flow for 2009 included $200.0 million of discretionary contributions to our U.S. qualified defined benefit pension plan. There were no contributions to this plan in 2007 or 2008 because of the funded status of the plan at the beginning of each of those years. Although VF is not required and does not currently intend to make a funding contribution to the domestic qualified plan during 2010, management is committed to returning each of our defined benefit plans to a fully funded status. 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 net change in operating asset and liability components provided an increase to operating cash flow of $228.1 million in 2009, in contrast to reducing operating cash flows by $150.6 million in 2008 and $12.5 million in 2007. 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 flow from other current assets 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; that is, collections sharply exceeded credit sales in the additional week. Operating cash flow in 2007 benefited from an unusually high accounts payable balance at the end of 2007, related to the timing of payments, that resulted in higher accounts payable disbursements in 2008.

 

During September 2009, VF entered into an agreement to sell selected trade accounts receivable, on a revolving basis, to a financial institution. This agreement covers the sale of up to $105.0 million of accounts receivable on a nonrecourse basis. Net proceeds of this accounts receivable sale program are recognized in the Statement of Consolidated Cash Flows as part of the accounts receivable component of cash from operations. The December 2009 balance of Accounts Receivable has been reduced by $74.2 million for amounts that had been sold under this program.

 

To finance ongoing operations and most unusual circumstances that may arise, VF anticipates relying on continued future strong cash generation. In addition, VF has significant existing liquidity from its available cash balances and debt capacity, supported by its strong credit rating. At the end of 2009, $985.2 million was available for borrowing under VF’s $1.0 billion senior unsecured committed domestic revolving bank credit facility, with

$14.8 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 2009, €250.0 million (U.S. dollar equivalent of $358.3 million) was available for borrowing under VF’s senior unsecured committed international revolving bank credit facility.

 

We used cash of $212.3 million, $93.4 million and $1,060.6 million for acquisitions in 2009, 2008 and 2007, respectively, which is net of cash balances in the acquired companies. These acquisitions were funded with existing VF cash balances as well as for the 2007 acquisitions short-term commercial paper borrowings and bank borrowings. In 2007, we received $348.7 million in proceeds from the sale of our intimate apparel business.

 

Capital expenditures were $85.9 million in 2009, compared with $124.2 million and $113.9 million in 2008 and 2007, respectively. Capital expenditures in each of these years primarily related to our retail stores, distribution network and information systems, as well as maintenance spending across our global supply chain. We expect that capital spending could reach $110 million in 2010. Capital spending will be funded by cash flow from operations.

 

During 2007, VF received $592.8 million in proceeds from the issuance of $600.0 million principal amount of 5.95% senior notes due in 2017 and 6.45% senior notes due in 2037. Also during 2007, VF paid $78.1 million under the international bank credit agreement and $33.0 million in notes related to the Nautica acquisition. See Note L to the Consolidated Financial Statements.

 

At the end of 2009, 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.

 

During 2009, 2008 and 2007, VF purchased 1.6 million, 2.0 million and 4.1 million shares, respectively, of its Common Stock in open market transactions. The cost of these transactions was $112.0 million, $149.7 million and $350.0 million with an average price of $71.80 in 2009, $74.86 in 2008 and $85.03 in 2007. The primary objective of our share repurchase program is to offset, on a long-term basis, dilution caused by awards under equity compensation plans. Under its current authorization from the Board of Directors, VF may purchase an additional 11.6 million shares (including 10.0 million shares authorized subsequent to the end of 2009). We currently intend to repurchase at least 3.0 million shares in 2010 and 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 $2.37 per common share in 2009, compared with $2.33 in 2008 and $2.23 in 2007. Our dividend payout rate was 46.0% in 2009 (excluding the effect of the noncash goodwill and intangible asset impairment charge), compared with payout rates of 43.0% in 2008 and 42.7% in 2007. 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 2010 is $2.40 per share.

Following is a summary of VF’s contractual obligations and commercial commitments at the end of 2009 that will require the use of funds:

 

 

 

 

We have other financial commitments at the end of 2009 that are not included in the above table but may require the use of funds under certain circumstances:

 

 

During 2009 VF met its obligations when due from cash flows from operations and, for seasonal needs, 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 2008, particularly during the last half of that year and continuing into early 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 (although for generally shorter maturities and at higher spreads over U.S. Treasury interest rates than in prior years) reflecting our investment grade credit rating and a $1.0 billion committed revolving bank credit facility that supports our commercial paper program. If the commercial paper markets were not available, VF has a total of $1.3 billion of liquidity available under its domestic and international committed 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 committed 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 a variety of risks in the ordinary course of business (discussed below), and we regularly assess these potential risks. We 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) creating offsetting positions through the use of derivative financial instruments. Derivative financial instruments are contracts whose value is based on, or “derived” from, changes in the value of an underlying currency exchange rate, interest rate or other financial asset or index. We do not use derivative financial instruments for trading or speculative purposes.

 

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

 

Cash and equivalents risks — VF had $731.5 million of cash and equivalents at the end of 2009. Cash equivalents are highly liquid investments that mature within three months of their purchase. These investments consist of institutional money market funds that invest only in obligations issued or guaranteed by the U.S. government and time deposits in highly rated U.S. and foreign commercial banks. Considering recent credit market conditions and the weakened financial condition of many banks and other financial institutions, we continually monitor VF’s cash equivalents and the credit ratings of VF’s financial institutions. Similarly, we monitor the credit quality of cash equivalents and fixed income investments in our pension plan portfolios.

 

Defined benefit pension plan risks — VF is subject to funding risks of its defined benefit pension plans. Due to substantial pension plan investment portfolio losses incurred in 2008, VF recognized a significant liability representing the underfunded status of the plans and a significant charge to Stockholders’ Equity at the end of 2008. We contributed over $200 million to the plans during 2009 and are committed to returning the plans to a fully funded status, including making further contributions, if necessary, in future years. At the end of 2009, the underfunded status of the plans had improved to $250.9 million.

 

Interest rate risks — We limit the risk of interest rate fluctuations on net income and cash flows by managing our mix of fixed and variable interest rate debt. In addition, we may also use derivative financial instruments to minimize our interest rate risk. Since all of our long-term debt has fixed interest rates, our interest rate exposure relates to changes in interest rates on variable rate short-term borrowings for seasonal working capital needs. These variable rate borrowings averaged approximately $220 million during 2009. However, any change in interest rates would also affect interest income earned on VF’s cash equivalents. Based on average amounts of borrowings having variable interest rates and cash equivalents during 2009, 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 2009 were generated in international markets. Substantially all of our foreign businesses operate in functional currencies other than the U.S. dollar. Assets and liabilities in these foreign businesses are subject to fluctuations in foreign currency exchange rates. During 2007, we entered into an international bank credit agreement that provides for euro-denominated borrowings. Although there were no borrowings under this agreement during 2009, 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, primarily in Europe, Latin America and Asia, are considered to be long-term, and accordingly, foreign currency translation effects on those net assets are deferred as a component of Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity. We do not hedge these net investments and do not hedge the translation of foreign currency operating results into the U.S. dollar.

 

We monitor net foreign currency market exposures and in the ordinary course of business 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 exchange rate movements on VF’s cash flows, 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 our 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.

 

If there were a hypothetical adverse change in foreign currency exchange rates of 10% compared with rates at the end of 2009, the expected effect on the change in fair value of the hedging contracts outstanding would result in an unrealized loss on the Consolidated Balance Sheet of approximately $90 million. Based on changes in the timing and amount of foreign currency exchange rate movements, the actual unrealized loss could differ. However, any such change in the fair value of the hedging contracts would also 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. We manage our fabric prices by obtaining fixed price commitments for denim and other fabrics, in some cases for up to one year in advance. VF has not historically managed, nor do we currently intend to manage, commodity price exposures by using derivative instruments.

 

Deferred compensation and related investment security risks — VF has nonqualified deferred compensation plans in which liabilities accrued for the plans’ participants are based on market values of investment funds that are selected by the participants. The risk of changes in the market values of the participants’ investment selections is hedged by VF’s investment in a portfolio of securities that substantially mirrors the investment selections underlying the deferred compensation liabilities. 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 of these estimates are known within a few months after any balance sheet date. In addition, we may retain outside specialists to assist in our evaluation in areas such as determining the fair value of acquired assets and assumed liabilities in a business acquisition, testing goodwill and intangible assets for possible impairment, 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 in each business unit, at least quarterly, of all inventories on the basis of individual styles or individual style-size-color stockkeeping 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 method or 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 whenever 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. 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 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 a 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 asset 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 a required two-step approach. Our reporting units are either our coalitions or a component of a coalition if that component is a business unit for which 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 methodologies. The principal method used is an income-based method in which the business unit’s forecasted cash flows are discounted to a 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. We evaluate the range of fair values developed from the income and market-based methods and determine the best fair value estimate for our 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 amount of 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 goodwill. The amount of the impairment charge is the excess of the recorded goodwill over the implied fair value of 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 U.S. capital markets, many of which are outside 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.

 

We evaluated our goodwill and indefinite-lived trademark intangible assets for possible impairment during the fourth quarter of 2009. Based on analysis of current and expected future economic conditions and our updated strategic plan for each of our business units, 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 in our 2009 Consolidated Statement of Income impairment charges of $101.9 million to write down the carrying value of goodwill and $20.1 million to write down the carrying value of nonamortized trademark intangible assets. The total noncash charge of $122.0 million had an insignificant impact on our financial position and no impact on our liquidity or debt agreements. The charge was based on significant estimates and judgments by management; changes to the fair value assumptions used for the Reef^®, Nautica^® and lucy^® business units potentially would have resulted in different goodwill or intangible asset impairment charges. See Notes G, H and U of the Consolidated Financial Statements for additional information about the impairment charges recorded for these business units.

 

For our other business units, the estimated fair values of those business units and the fair values of their trademark intangible assets exceeded their respective carrying values as of the beginning of the fourth quarter of 2009. Accordingly, no goodwill or trademark impairment charges were recorded for our other business units.

 

For our Reef^®, Nautica^® and lucy^® business units and for our other business units, it is possible that our conclusions regarding impairment of goodwill or trademark intangible assets could change in future periods if, for example, (i) overall economic conditions in 2010 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 multiples of revenues and EBITDA. A future impairment change 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 a rigorous 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 P to the Consolidated Financial Statements.

 

One of the critical assumptions in the valuation process is estimating the expected average life of the options before exercise. For each option grant, we based our estimates on evaluations of the historical and expected option exercise patterns for each of several 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 measured historical volatility over a ten year period,

corresponding to the contractual term of the options, using daily stock price observations. 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 initially employed before 2005 and an unfunded supplemental defined benefit plan that provides benefits that exceed limitations imposed by income tax regulations. VF also sponsors defined benefit plans covering selected international employees. The selection of appropriate actuarial assumptions for determination of our projected pension benefit liabilities and of 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 N 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 are reflective of 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 the assets and projected benefit liabilities 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 at each measurement date. The discount rate reflects the interest rate inherent in the price that VF could 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 be made 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 500 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 equivalent 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 2009 discount rate of 6.05% 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 6.50% at the end of 2008, reflects stabilization of the credit markets in the past year and the general decline in yields of high quality corporate bonds of all maturities. The discount rate for our plans may be higher than rates used for plans at some other companies because of our plans’ longer duration of expected benefit payments due to (i) a higher percentage of female participants with a longer life expectancy and (ii) a 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 investment assets in our domestic qualified plan’s pension trust. Our investment objective is to maximize the long-term return on a diversified portfolio of assets at an acceptable level of risk. These risks include market, interest rate, credit, liquidity and foreign securities risks. Investment assets are comprised of a diversified portfolio 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 several factors, including 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 of the projected long-term rates of return for the various classes of assets held by the qualified plan provides the basis for the expected long-term rate of return actuarial assumption. Our rate of return assumption was 8.00% in 2009 and 2008 and 8.25% in 2007. The rate of return is a forward-looking assumption. While our actual compounded annual rate of return was lower than the 8.00% assumption for the trailing 10 and 15 year periods, our compounded rate of return since 1981 has exceeded 9%. We

have not changed the overall target mix of investment assets during 2009; however, we altered the investment mix to add commodities as a new asset class. Looking forward, we plan to increase the allocation of equity investments to international equity investments and reduce the allocation to domestic equity investments. As the qualified plan becomes fully funded, our intent is to lengthen the average duration of fixed income investments to more closely match expected benefit payments, thereby better matching the effect of interest rate changes on a portion of the value of our plan’s investment assets with the benefit obligations they are intended to fund. These changes in asset allocation should, over time, reduce the year-to-year variability of our domestic plan’s funded status and resulting pension expense. We will constantly challenge our plan’s asset allocation, giving consideration to changes that will appropriately balance anticipated investment returns with risk. Based on an evaluation of market conditions, projected market returns and planned changes in investment mix, we will be using a rate of return assumption of 7.75% for our U.S. plan for 2010.

 

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. In 2008, there was a significant decline in the market value of our pension plan investment assets due to the global credit and financial market crisis, which resulted in the plans being underfunded by $414.9 million at the end of 2008. This underfunded status was presented in our 2008 Consolidated Balance Sheet by recognition of liabilities of that amount. Our underfunded status improved during 2009 primarily from substantial VF cash contributions to the plans totaling over $200 million and significant investment earnings on pension plan assets, partially offset by an increase in projected benefit obligations due to a decline in the discount rate during the year. The resulting underfunded status in our 2009 Consolidated Balance Sheet was $250.9 million, represented by $3.3 million of current liabilities and $247.6 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 pension 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. The substantial investment losses incurred in 2008 was the primary reason that the plans had over $450 million of pretax accumulated unrecognized actuarial losses at the end of 2008, which resulted in deferred actuarial losses of $291.0 million after tax in Accumulated Other Comprehensive Income (Loss) in our 2008 Consolidated Balance Sheet. During 2009, investment returns in our pension plans substantially exceeded the actuarially assumed investment return, resulting in a deferred actuarial gain. This was partially offset, however, by a deferred actuarial loss in 2009 from an increase in our projected benefit obligations resulting from a lower discount rate used to value those obligations at the end of 2009. Accordingly, our net pretax cumulative unrecognized actuarial losses of $431.5 million at the end of 2009 resulted in deferred actuarial losses of $266.0 million after tax in Accumulated Other Comprehensive Income (Loss) in our 2009 Consolidated Balance Sheet. Our policy is to amortize any unrecognized actuarial gains and losses to pension expense as follows: amounts totaling less than 10% of the lower of investment assets or projected benefit obligations at the beginning of the year are not amortized; amounts totaling 10% to 20% of projected benefit obligations are amortized over the expected average remaining service of active participants; and amounts in excess of 20% of projected benefit obligations are amortized over five years.

 

Pension expense recognized in our financial statements was $98.0 million in 2009, $10.8 million in 2008 and $13.1 million in 2007. This compares with the cost of pension benefits actually earned by our covered active employees (commonly called “service cost”) of $14.9 million in 2009 and an average of $17.7 million per year over the last three years. Pension expense for 2009 was significantly higher than the annual service cost because 2009 included a significant cost component for amortization of accumulated unrecognized actuarial losses (as discussed in the preceding paragraph). Looking forward, our 2010 pension expense will also include a significant cost component (but lower than in 2009) for amortization of accumulated unrecognized actuarial losses. With this lower amortization cost component for 2010 and, more importantly, greater assumed earnings due to the sharp increase in plan assets during 2009 (including over $200 million of VF contributions), we expect our 2010 pension expense to decline to approximately $66 million.

The sensitivity of changes in actuarial assumptions on our 2009 pension expense and on projected benefit obligations at the end of 2009, all other factors being equal, is illustrated by the following:

 

 

As previously mentioned, we made $200.0 million of discretionary contributions to our domestic qualified pension plan during 2009. VF is not required under applicable regulations, and does not currently intend, to make a contribution to the domestic qualified pension plan during 2010 but does intend to make contributions totaling approximately $8 million during 2010 to its other pension plans. We believe that VF has sufficient liquidity to make contributions to our pension plans, as necessary, in future years to return the plans to a fully or substantially fully funded status.

 

Beginning in 2005, VF’s domestic defined benefit plans were closed to new entrants, which did not affect the benefits of 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. Funds contributed are invested as directed by the participants. This defined contribution feature did not have a significant effect on our total retirement benefit expense over the last three years. However, on a longer-term basis, the service cost component of our defined benefit plans’ expense will decline as a percentage of our total retirement benefit expense, and the year-to-year variability of our retirement benefit expense should decrease.

 

Income Taxes

 

As a global company, VF is subject to income tax 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 is greater than 50% likely 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 accruals have been established, or to the extent we are required to pay amounts greater than established accruals. 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 $143.6 million of deferred income tax assets related to operating loss and capital loss carryforwards, and we have recorded $99.2 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 and tax planning strategies. If in our judgment it appears 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 $11.2 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 we have asserted that these earnings are indefinitely 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: