V F CORP 10-Q

ITEM 2 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. VF Corporation (together with its subsidiaries, collectively known as “VF” or the “Company”) uses a 52/53 week fiscal year ending on the Saturday closest to March 31 of each year. The Company's current fiscal year runs from April 3, 2022 through April 1, 2023 ("Fiscal 2023"). Accordingly, this Form 10-Q presents our second quarter of Fiscal 2023. For presentation purposes herein, all references to periods ended September 2022 and September 2021 relate to the fiscal periods ended on October 1, 2022 and October 2, 2021, respectively. References to March 2022 relate to information as of April 2, 2022. All per share amounts are presented on a diluted basis and all percentages shown in the tables below and the following discussion have been calculated using unrounded numbers. References to the three and six months ended September 2022 foreign currency amounts below reflect the changes in foreign exchange rates from the three and six months ended September 2021 and their impact on translating foreign currencies into U.S. dollars. VF’s most significant foreign currency exposure relates to business conducted in euro-based countries. Additionally, VF conducts business in other developed and emerging markets around the world with exposure to foreign currencies other than the euro. On June 28, 2021, VF completed the sale of its Occupational Workwear business. The Occupational Workwear business was comprised primarily of the following brands and businesses: Red Kap ® , VF Solutions ® , Bulwark ® , Workrite ® , Walls ® , Terra ® , Kodiak ® , Work Authority ® and Horace Small ® . The business also included the license of certain Dickies ® occupational workwear products that have historically been sold through the business-to-business channel. The results of the Occupational Workwear business and the related cash flows have been reported as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively, through the date of sale. These changes have been applied to all periods presented. Refer to Note 4 to VF’s consolidated financial statements for additional information on discontinued operations. Unless otherwise noted, amounts, percentages and discussion for all periods included below reflect the results of operations and financial condition from VF’s continuing operations. RECENT DEVELOPMENTS Macroeconomic Environment The macroeconomic environment continues to dynamically evolve. Global trends, including inflationary pressures, are weakening consumer sentiment, negatively impacting consumer spending behavior and creating variable traffic patterns across channels. These conditions are leading to elevated inventories in certain markets and an increased promotional environment. Additionally, the strong U.S. dollar has resulted in unfavorable foreign currency exchange rate changes, which have significantly impacted the results of our international businesses. There is ongoing uncertainty around the global economy and macroeconomic environment, which we expect to continue and cause disruption and near-term challenges for our business. Russia-Ukraine Conflict In response to the ongoing conflict in Ukraine, all VF-operated retail locations within Russia are currently closed. Limited wholesale shipments to both Russia and Ukraine have resumed. Revenues in Russia and Ukraine represented less than 1% of VF's total Fiscal 2022 revenue. While we are not able to determine the ultimate length and severity of the conflict, we currently do not expect significant disruption to our business. For additional information, see the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Fiscal 2022 Form 10-K. Impact of COVID-19 The coronavirus ("COVID-19") pandemic significantly impacted global economic conditions, as well as VF's business operations and financial performance during Fiscal 2022 and continues to impact Fiscal 2023. VF-operated retail stores across the globe have been impacted due to COVID-19, including temporary closures for varying periods. In Fiscal 2023, the impacts have been most notable in the Asia-Pacific region, including Mainland China. VF is continuing to monitor the COVID-19 outbreak globally and will comply with guidance from government entities and public health authorities to prioritize the health and well-being of its employees, customers, trade partners and consumers. As COVID-19 uncertainty continues, retail store closures may recur. COVID-19 has also impacted some of VF's suppliers, including raw material suppliers, third-party manufacturers, logistics providers and other vendors. At this time, the majority of VF's supply chain is operational. Suppliers are complying with local health advisories and governmental restrictions which has resulted in product delays. The resurgence of COVID-19 lockdowns in key sourcing countries resulted in additional manufacturing capacity constraints and logistical challenges during Fiscal 2022 and the first and second quarters of Fiscal 2023; however, the situation has improved over time. VF has worked with its suppliers to minimize disruption and employed expedited freight as needed. VF's distribution centers are operational in accordance with local government guidelines while maintaining enhanced health and safety protocols. The COVID-19 pandemic is ongoing and dynamic in nature, and has driven global uncertainty and disruption. While we are not able to determine the ultimate length and severity of the COVID-19 pandemic, we expect ongoing disruption to our business. For additional information, see the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Fiscal 2022 Form 10-K. 29 VF Corporation Q2 FY23 Form 10-Q Table of Contents HIGHLIGHTS OF THE SECOND QUARTER OF FISCAL 2023 • Revenues were down 4% to $3.1 billion compared to the three months ended September 2021, including a 6% unfavorable impact from foreign currency. • Outdoor segment revenues increased 3% to $1.6 billion compared to the three months ended September 2021, including a 7% unfavorable impact from foreign currency. • Active segment revenues decreased 9% to $1.3 billion compared to the three months ended September 2021, including a 5% unfavorable impact from foreign currency. • Work segment revenues decreased 11% to $265.2 million compared to the three months ended September 2021, including a 2% unfavorable impact from foreign currency. • Direct-to-consumer revenues were down 4% over the 2021 period, including a 5% unfavorable impact from foreign currency. E-commerce revenues decreased 7% in the current period, including a 6% unfavorable impact from foreign currency. Direct-to-consumer revenues accounted for 37% of VF's net revenues for the three months ended September 2022. • International revenues decreased 5% compared to the three months ended September 2021, including a 13% unfavorable impact from foreign currency. Greater China (which includes Mainland China, Hong Kong and Taiwan) revenues decreased 15%, including a 5% unfavorable impact from foreign currency. International revenues represented 49% of VF's net revenues for the three months ended September 2022. • VF recorded goodwill and intangible asset impairment charges of $229.0 million and $192.9 million, respectively, in the three months ended September 2022 related to the Supreme reporting unit. • Gross margin decreased 230 basis points to 51.4% compared to the three months ended September 2021, primarily driven by higher costs and increased discounts and other promotional activity, partially offset by price increases. • Earnings (loss) per share was $(0.31) compared to $1.18 in the 2021 period. The decrease was primarily driven by the goodwill and intangible asset impairment charges related to the Supreme reporting unit and lower profitability in the Active segment in the three months ended September 2022. ANALYSIS OF RESULTS OF OPERATIONS Consolidated Statements of Operations The following table presents a summary of the changes in net revenues for the three and six months ended September 2022 from the comparable period in 2021: (In millions) Three Months Ended September Six Months Ended September Net revenues — 2021 $ 3,198.2 $ 5,392.8 Organic 77.4 240.1 Impact of foreign currency (195.0) (290.7) Net revenues — 2022 $ 3,080.6 $ 5,342.2 VF reported a 4% and 1% decrease in revenues for the three and six months ended September 2022, respectively, compared to the 2021 periods. The revenue decrease in both periods was primarily driven by declines in the Active segment and a 6% and 5% unfavorable impact from foreign currency in the three and six months ended September 2022, respectively. Revenues in the Active segment during the three months ended September 2022 were impacted by weakness in the Americas region, primarily driven by declines in the Vans ® brand. Revenues in the Active segment during the three and six months ended September 2022 were also impacted by declines in the Asia-Pacific region, which has been negatively impacted by COVID-19 resurgence that has caused disruption and consumption pressure in the region, particularly in Mainland China. The decrease in both periods was partially offset by global growth in the Outdoor segment. Additional details on revenues are provided in the section titled “Information by Reportable Segment.” VF Corporation Q2 FY23 Form 10-Q 30 Table of Contents The following table presents the percentage relationships to net revenues for components of the Consolidated Statements of Operations: Three Months Ended September Six Months Ended September 2022 2021 2022 2021 Gross margin (net revenues less cost of goods sold) 51.4 % 53.7 % 52.4 % 54.8 % Selling, general and administrative expenses 40.6 36.2 45.0 40.7 Impairment of goodwill and intangible assets 13.7 — 7.9 — Operating margin (2.9) % 17.5 % (0.5) % 14.1 % Gross margin decreased 230 and 240 basis points in the three and six months ended September 2022, respectively, compared to the 2021 periods. The decreases were primarily driven by higher costs and increased discounts and other promotional activity, partially offset by price increases. The decrease for the six months ended September 2022 was also attributed to unfavorable mix as wholesale and Outdoor segment revenues, which generally have lower margins, represented a larger portion of VF consolidated revenues for the periods compared. Selling, general and administrative expenses as a percentage of total revenues increased 440 and 430 basis points during the three and six months ended September 2022, respectively, compared to the 2021 periods. Selling, general and administrative expenses increased $91.0 million and $210.1 million in the three and six months ended September 2022, respectively, compared to the 2021 periods, including $35.0 million and $108.0 million decreases in the estimated fair value of the contingent consideration liability associated with the Supreme acquisition, which were recognized in the selling, general and administrative expense line item in the three and six months ended September 2021, respectively. The increase was also due to higher corporate restructuring charges, direct-to-consumer and distribution costs, and investments in information technology in the three and six months ended September 2022. Net interest expen se decreased $0.5 million and $2.0 million during the three and six months ended September 2022, respectively, compared to the 2021 periods. The decrease in net interest expense in both the three and six months ended September 2022 was primarily due to the repayment of the $1.0 billion in aggregate principal of the 2.050% Senior Notes due April 2022, partially offset by higher short-term borrowings in the three and six months ended September 2022. Total outstanding debt averaged $5.3 billion in the six months ended September 2022 and $5.9 billion in the same period in 2021, with weighted average interest rates of 2.3% and 2.1% in the six months ended September 2022 and 2021, respectively. Other income (expense), net decreased $16.8 million and $120.6 million during the three and six months ended September 2022, respectively, compared to the 2021 periods. The decrease in both the three and six months ended September 2022 was primarily driven by lower net periodic pension income and higher foreign currency losses compared to the 2021 periods. The decrease in the six months ended September 2022 included a $91.8 million pension settlement charge, which resulted from the purchase of a group annuity contract and transfer of a portion of the assets and liabilities associated with the U.S. qualified defined benefit pension plan to an insurance company. VF recorded goodwill and intangible asset impairment charges of $229.0 million and $192.9 million, respectively, in the three and six months ended September 2022 related to the Supreme reporting unit. During the three months ended September 2022, due to continued increases in the federal funds rate and strengthening of the U.S. dollar relative to other currencies, the Company determined that a triggering event had occurred requiring impairment testing of the Supreme reporting unit goodwill and indefinite-lived trademark intangible asset. The impairment related to an increase in the market-based discount rates used in the valuations and the negative impact of foreign currency exchange rate changes on financial projections. The effective income tax rate for the six months ended September 2022 was 11.3% compared to 13.1% in the 2021 period. The six months ended September 2022 included a net discrete tax expense of $5.1 million, which primarily related to unrecognized tax benefits and interest. Excluding the $5.1 million net discrete tax expense in the 2022 period, the effective income tax rate would have been 13.9%. The six months ended September 2021 included a net discrete tax benefit of $0.2 million, which included a $3.4 million net tax expense related to unrecognized tax benefits and interest, a $1.4 million tax benefit related to stock compensation and a $2.4 million net tax benefit related to tax rate change on deferred tax items. The $0.2 million net discrete tax benefit in the 2021 period had an insignificant impact on the effective income tax rate. Without discrete items, the effective income tax rate for the six months ended September 2022 increased by 0.8% compared with the 2021 period primarily due to year-to-date losses generated in the current year. As a result of the above, income (loss) from continuing operations in the three months ended September 2022 was $(118.4) million ($(0.31) per diluted share) compared to $464.1 million ($1.18 per diluted share) in the 2021 period, and income (loss) from continuing operations in the six months ended September 2022 was $(174.4) million ($(0.45) per diluted share) compared to $618.0 million ($1.57 per diluted share) in the 2021 period. Refer to additional discussion in the “Information by Reportable Segment” section below. 31 VF Corporation Q2 FY23 Form 10-Q Table of Contents Information by Reportable Segment VF's reportable segments are: Outdoor, Active and Work. We have included an Other category in the tables below for purposes of reconciliation of revenues and profit, but it is not considered a reportable segment. Included in this Other category are results primarily related to sourcing activities related to transition services. Refer to Note 14 to the consolidated financial statements for a summary of results of operations by segment, along with a reconciliation of segment profit to income (loss) before income taxes. The following tables present a summary of the changes in segment revenues and profit (loss) in the three and six months ended September 2022 from the comparable period in 2021 and revenues by region for our top 4 brands for the three and six months ended September 2022 and 2021: Segment Revenues: Three Months Ended September (In millions) Outdoor Active Work Other Total Segment revenues — 2021 $ 1,506.6 $ 1,392.2 $ 299.2 $ 0.2 $ 3,198.2 Organic 155.3 (52.2) (25.5) (0.2) 77.4 Impact of foreign currency (106.6) (79.9) (8.5) — (195.0) Segment revenues — 2022 $ 1,555.3 $ 1,260.1 $ 265.2 $ — $ 3,080.6 Six Months Ended September (In millions) Outdoor Active Work Other Total Segment revenues — 2021 $ 2,124.4 $ 2,694.2 $ 573.9 $ 0.3 $ 5,392.8 Organic 345.4 (48.1) (57.0) (0.2) 240.1 Impact of foreign currency (145.8) (132.0) (12.9) — (290.7) Segment revenues — 2022 $ 2,324.0 $ 2,514.1 $ 504.0 $ 0.1 $ 5,342.2 Segment Profit (Loss): Three Months Ended September (In millions) Outdoor Active Work Other Total Segment profit (loss) — 2021 $ 284.1 $ 284.3 $ 62.0 $ (0.4) $ 630.0 Organic (4.5) (85.7) (21.3) 0.2 (111.3) Impact of foreign currency (19.2) (18.3) (1.2) — (38.7) Segment profit (loss) — 2022 $ 260.4 $ 180.3 $ 39.5 $ (0.2) $ 480.0 Six Months Ended September (In millions) Outdoor Active Work Other Total Segment profit (loss) — 2021 $ 212.3 $ 555.2 $ 103.0 $ (0.6) $ 869.9 Organic 20.3 (130.5) (26.8) 0.2 (136.8) Impact of foreign currency (19.0) (30.4) (1.7) — (51.1) Segment profit (loss) — 2022 $ 213.6 $ 394.3 $ 74.5 $ (0.4) $ 682.0 VF Corporation Q2 FY23 Form 10-Q 32 Table of Contents Top Brand Revenues: Three Months Ended September 2022 (In millions) Vans ® The North Face ® Timberland ® (a) Dickies ® Total Americas $ 600.6 $ 522.7 $ 266.8 $ 129.7 $ 1,519.8 Europe 230.9 291.1 195.9 25.2 743.1 Asia-Pacific 120.6 137.0 61.5 31.5 350.6 Global $ 952.1 $ 950.8 $ 524.2 $ 186.4 $ 2,613.5 Three Months Ended September 2021 (In millions) Vans ® The North Face ® Timberland ® (a) Dickies ® Total Americas $ 677.3 $ 470.8 $ 283.3 $ 156.5 $ 1,587.9 Europe 263.1 307.9 192.8 25.4 789.2 Asia-Pacific 149.9 105.0 69.3 48.1 372.3 Global $ 1,090.3 $ 883.7 $ 545.4 $ 230.0 $ 2,749.4 Six Months Ended September 2022 (In millions) Vans ® The North Face ® Timberland ® (a) Dickies ® Total Americas $ 1,234.3 $ 780.1 $ 407.0 $ 260.9 $ 2,682.3 Europe 423.2 456.3 290.8 41.5 1,211.8 Asia-Pacific 241.5 195.5 95.8 54.4 587.2 Global $ 1,899.0 $ 1,431.9 $ 793.6 $ 356.8 $ 4,481.3 Six Months Ended September 2021 (In millions) Vans ® The North Face ® Timberland ® (a) Dickies ® Total Americas $ 1,291.2 $ 656.5 $ 429.9 $ 315.5 $ 2,693.1 Europe 475.0 436.7 267.6 39.6 1,218.9 Asia-Pacific 344.0 156.7 97.3 74.2 672.2 Global $ 2,110.2 $ 1,249.9 $ 794.8 $ 429.3 $ 4,584.2 (a) The global Timberland brand includes Timberland ® , reported within the Outdoor segment and Timberland PRO ® , reported within the Work segment. Note: Amounts may not sum due to rounding. 33 VF Corporation Q2 FY23 Form 10-Q Table of Contents The following sections discuss the changes in revenues and profitability by segment. For purposes of this analysis, royalty revenues have been included in the wholesale channel for all periods. Outdoor Three Months Ended September Six Months Ended September (Dollars in millions) 2022 2021 Percent Change 2022 2021 Percent Change Segment revenues $ 1,555.3 $ 1,506.6 3.2 % $ 2,324.0 $ 2,124.4 9.4 % Segment profit 260.4 284.1 (8.3) % 213.6 212.3 0.6 % Operating margin 16.7 % 18.9 % 9.2 % 10.0 % The Outdoor segment includes the following brands: The North Face ® , Timberland ® , Smartwool ® , Icebreaker ® and Altra ® . Global revenues for Outdoor increased 3% in the three months ended September 2022 compared to 2021, including a 7% unfavorable impact from foreign currency. Revenues in the Americas region increased 4%, including a 1% unfavorable impact from foreign currency. Revenues in the Europe region decreased 1%, including a 16% unfavorable impact from foreign currency. Revenues in the Asia-Pacific region increased 13%, including a 7% unfavorable impact from foreign currency. Global revenues for Outdoor increased 9% in the six months ended September 2022 compared to 2021, including a 7% unfavorable impact from foreign currency. Revenues in the Americas region increased 11%. Revenues in the Europe region increased 6%, including a 17% unfavorable impact from foreign currency. Revenues in the Asia-Pacific region increased 13%, including a 6% unfavorable impact from foreign currency. Global revenues for The North Face ® brand increased 8% and 15% in the three and six months ended September 2022, respectively, compared to the 2021 periods. This includes a 6% unfavorable impact from foreign currency in both the three and six months ended September 2022. The increases reflect growth in all regions that was led by the Asia-Pacific region, which increased 31% and 25% in the three and six months ended September 2022, respectively, including a 6% and 5% unfavorable impact from foreign currency in the respective periods. Global revenues for the Timberland ® brand decreased 6% and 1% in the three and six months ended September 2022, respectively, compared to the 2021 periods, driven by an 8% and 9% unfavorable impact from foreign currency in the respective periods. Revenues in the Europe region increased 2% and 9% in the three and six months ended September 2022, respectively, including a 17% unfavorable impact from foreign currency in both periods. Revenues in the Americas region decreased 12% and 9% in the three and six months ended September 2022, respectively, driven by lower wholesale shipments for the periods compared primarily due to supply chain challenges, including an unfavorable impact of 1% from foreign currency in the six months ended September 2022. Global direct-to-consumer revenues for Outdoor increased 6% in both the three and six months ended September 2022 compared to the 2021 periods, including an 8% and 6% unfavorable impact from foreign currency in the respective periods. The increase was primarily due to strength in The North Face ® brand. Global wholesale revenues increased 2% and 11% in the three and six months ended September 2022, respectively, compared to the 2021 periods, including a 7% unfavorable impact from foreign currency in both periods. Operating margin decreased in the three and six months ended September 2022 compared to the 2021 periods primarily due to increased discounts and other promotional activity and higher costs, including materials, freight, direct-to-consumer and distribution expenses, which were partially offset by price increases in both periods. The decrease for the six months ended September 2022 was also impacted by unfavorable channel mix, partially offset by leverage of operating expenses on increased revenues. VF Corporation Q2 FY23 Form 10-Q 34 Table of Contents Active Three Months Ended September Six Months Ended September (Dollars in millions) 2022 2021 Percent Change 2022 2021 Percent Change Segment revenues $ 1,260.1 $ 1,392.2 (9.5) % $ 2,514.1 $ 2,694.2 (6.7) % Segment profit 180.3 284.3 (36.6) % 394.3 555.2 (29.0) % Operating margin 14.3 % 20.4 % 15.7 % 20.6 % The Active segment includes the following brands: Vans ® , Supreme ® , Kipling ® , Napapijri ® , Eastpak ® and JanSport ® . Global revenues for Active decreased 9% in the three months ended September 2022 compared to the 2021 period, including a 5% unfavorable impact from foreign currency. Revenues in the Americas region decreased 9%, including a 1% unfavorable impact from foreign currency. Revenues in the Europe region decreased 8%, driven by a 15% unfavorable impact from foreign currency. Revenues in the Asia-Pacific region decreased 17%, including an 8% unfavorable impact from foreign currency, and a 37% decrease in Greater China including a 4% unfavorable impact from foreign currency. Global revenues for Active decreased 7% in the six months ended September 2022 compared to the 2021 period, including a 5% unfavorable impact from foreign currency. Revenues in the Americas region decreased 2%. Revenues in the Europe region decreased 5%, driven by a 14% unfavorable impact from foreign currency. Revenues in the Asia-Pacific region decreased 26%, including a 7% unfavorable impact from foreign currency, and a 46% decrease in Greater China including a 2% unfavorable impact from foreign currency. Vans ® brand global revenues decreased 13% and 10% in the three and six months ended September 2022, respectively, compared to the 2021 periods. This includes a 5% and 4% unfavorable impact from foreign currency in the three and six months ended September 2022, respectively. The overall declines were driven by a 20% and 30% decrease in the Asia-Pacific region for the three and six months ended September 2022, respectively, including a 6% and 4% unfavorable impact from foreign currency in the respective periods. Revenues in the Americas region decreased 11% and 4% in the three and six months ended September 2022, respectively. Revenues in the Europe region decreased 12% and 11% in the three and six months ended September 2022, respectively, driven by a 14% and 13% unfavorable impact from foreign currency in the respective periods. Global direct-to-consumer revenues for Active decreased 9% and 10% in the three and six months ended September 2022, respectively, compared to the 2021 periods, including a 4% unfavorable impact from foreign currency in both periods. The decrease was primarily due to declines in the Americas region, which decreased 8% in both the three and six months ended September 2022. Global wholesale revenues decreased 10% and 2% in the three and six months ended September 2022, respectively, and included an 8% and 6% unfavorable impact from foreign currency in the respective periods. The decrease was primarily due to a 24% and 32% decrease in the Asia-Pacific region in the three and six months ended September 2022, respectively, including a 5% and 3% unfavorable impact from foreign currency in the respective periods. Wholesale revenues in the Americas region decreased 10% and increased 10% in the three and six months ended September 2022, respectively. Wholesale revenues in the Europe region decreased 5% and 3% in the three and six months ended September 2022, respectively, driven by a 15% unfavorable impact from foreign currency in both periods. Operating margin decreased in the three and six months ended September 2022 compared to the 2021 periods, reflecting lower leverage of operating expenses due to decreased revenues in both periods. The decreases were also impacted by increased discounts and other promotional activity, higher freight costs and unfavorable channel mix, which were partially offset by price increases. 35 VF Corporation Q2 FY23 Form 10-Q Table of Contents Work Three Months Ended September Six Months Ended September (Dollars in millions) 2022 2021 Percent Change 2022 2021 Percent Change Segment revenues $ 265.2 $ 299.2 (11.4) % $ 504.0 $ 573.9 (12.2) % Segment profit 39.5 62.0 (36.3) % 74.5 103.0 (27.7) % Operating margin 14.9 % 20.7 % 14.8 % 17.9 % The Work segment includes the following brands: Dickies ® and Timberland PRO ® . Global Work revenues decreased 11% in the three months ended September 2022 compared to the 2021 period, including a 2% unfavorable impact from foreign currency. Revenues in the Americas region decreased 8%, including a 1% unfavorable impact from foreign currency. Revenues in the Europe region decreased 1% , driven by a 17% unfavorable impact from foreign currency. Revenues in the Asia-Pacific region decreased 35%, including an 8% unfavorable impact from foreign currency. Global Work revenues decreased 12% in the six months ended September 2022 compared to the 2021 period, including a 2% unfavorable impact from foreign currency. Revenues in the Americas region decreased 11%. Revenues in the Europe region increased 5%, including a 16% unfavorable impact from foreign currency. Revenues in the Asia-Pacific region decreased 27%, including a 7% unfavorable impact from foreign currency. Dickies ® brand global revenues decreased 19% and 17% in the three and six months ended September 2022, respectively, compared to the 2021 periods, including a 4% and 3% unfavorable impact from foreign currency in the respective periods. The decline was primarily driven by a decrease of 17% in the Americas region in both the three and six months ended September 2022, reflecting a more conservative inventory posture by the brand's largest U.S. customer. The decline in the three and six months ended September 2022 was also attributed to a decrease in the Asia-Pacific region of 35% and 27%, respectively, including an 8% and 7% unfavorable impact from foreign currency in the respective periods. Revenues in the Europe region decreased 1% and increased 5% in the three and six months ended September 2022, respectively, including a 17% and 16% unfavorable impact from foreign currency in the respective periods. Operating margin decreased in the three and six months ended September 2022 compared to the 2021 periods, reflecting lower leverage of operating expenses due to decreased revenues in both periods. The decreases were also impacted by higher costs, including materials and freight, which were partially offset by price increases and favorable channel mix. Reconciliation of Segment Profit to Income (Loss) Before Income Taxes There are three types of costs necessary to reconcile total segment profit to consolidated income (loss) from continuing operations before income taxes. These costs are (i) impairment of goodwill and intangible assets, which is excluded from segment profit because these costs are not part of the ongoing operations of the businesses, (ii) corporate and other expenses, discussed below, and (iii) interest expense, net, which was discussed in the “Consolidated Statements of Operations” section. Three Months Ended September Six Months Ended September (Dollars in millions) 2022 2021 Percent Change 2022 2021 Percent Change Impairment of goodwill and intangible assets $ 421.9 $ — 100.0 % $ 421.9 $ — 100.0 % Corporate and other expenses 158.2 64.0 147.2 % 391.5 91.9 326.0 % Interest expense, net 33.9 34.4 (1.4) % 65.2 67.1 (2.9) % Corporate and other expenses are those that have not been allocated to the segments for internal management reporting, including (i) information systems and shared service costs, (ii) corporate headquarters costs, and (iii) certain other income and expenses. The increase in corporate and other expenses was driven by an increase in corporate restructuring charges of $41.9 million and $46.6 million in the three and six months ended September 2022, respectively, and increases in information technology costs of $19.1 million and $36.4 million in the three and six months ended September 2022, respectively. The increase in the six months ended September 2022 also included a $91.8 million pension settlement charge. Additionally, the increase in the three and six months ended September 2022 when compared to the 2021 periods was driven by a $35.0 million and $108.0 million decrease in the estimated fair value of the contingent consideration liability associated with the Supreme acquisition in the three and six months ended September 2021, respectively. VF Corporation Q2 FY23 Form 10-Q 36 Table of Contents International Operations International revenues decreased 5% and 3% in the three and six months ended September 2022, respectively, compared to the 2021 periods. Foreign currency had an unfavorable impact of 13% and 11% on international revenues in the three and six months ended September 2022, respectively. Revenues in the Europe region decreased 4% and increased 1% in the three and six months ended September 2022, respectively, including a 16% and 15% unfavorable impact from foreign currency in the respective periods. In the Asia-Pacific region, revenues decreased 6% and 12% in the three and six months ended September 2022, respectively. Foreign currency had an unfavorable impact of 8% and 6% on Asia-Pacific revenues in the three and six months ended September 2022, respectively. Revenues in Greater China decreased 15% and 23% in the three and six months ended September 2022, respectively, which was negatively impacted by COVID-19 resurgence in Mainland China. Foreign currency had an unfavorable impact of 5% and 4% on Greater China revenues in the three and six months ended September 2022, respectively. International revenues were 49% of total revenues in both the three-month periods ended September 2022 and 2021, and 47% and 48% of total revenues in the six-month periods ended September 2022 and 2021, respectively. Direct-to-Consumer Operations Direct-to-consumer revenues decreased 4% and 5% in the three and six months ended September 2022, respectively, compared to the 2021 periods, including a 5% and 4% unfavorable impact from foreign currency in the respective periods. VF's e-commerce business decreased 7% and 13% during the three and six months ended September 2022, respectively, including a 6% and 5% unfavorable impact from foreign currency in the respective periods. Revenues from VF-operated retail stores decreased 3% during the three months ended September 2022 driven by a 4% unfavorable impact from foreign currency in the period, and revenues were flat for the six months ended September 2022, including a 3% unfavorable impact from foreign currency. There were 1,283 VF-operated retail stores at September 2022 compared to 1,358 at September 2021. Direct-to-consumer revenues were 37% of total revenues in both the three-month periods ended September 2022 and 2021, and 40% and 42% of total revenues in the six-month periods ended September 2022 and 2021, respectively. 37 VF Corporation Q2 FY23 Form 10-Q Table of Contents ANALYSIS OF FINANCIAL CONDITION Consolidated Balance Sheets The following discussion refers to significant changes in balances at September 2022 compared to March 2022: • Increase in accounts receivable — primarily due to the seasonality of the business and timing of wholesale shipments. • Increase in inventories — driven by increased in-transit inventory resulting from the modification of terms with the majority of our suppliers to take ownership of inventory near point of shipment rather than destination, the seasonality of the business and softening consumer demand. • Increase in other current assets — primarily due to an increase in derivative assets resulting from unrealized gains on foreign currency exchange contracts. • Decrease in intangible assets — primarily due to a $192.9 million impairment charge related to the Supreme ® indefinite-lived trademark intangible asset recorded in the three months ended September 2022. • Decrease in goodwill — primarily due to a $229.0 million goodwill impairment charge related to the Supreme reporting unit recorded in the three months ended September 2022. • Increase in short-term borrowings — primarily due to an increase in commercial paper borrowings to support working capital requirements. • Increase in the current portion of long-term debt — due to the reclassification of €850.0 million ($831.2 million) of long-term notes due in September 2023, partially offset by the repayment of $500.0 million of long-term notes in April 2022. • Increase in accounts payable — primarily due to the increase of in-transit inventory. • Decrease in long-term debt — due to the reclassification of €850.0 million ($831.2 million) of long-term notes due in September 2023. The following discussion refers to significant changes in balances at September 2022 compared to September 2021: • Increase in inventories — driven by increased in-transit inventory resulting from the modification of terms with the majority of our suppliers to take ownership of inventory near point of shipment rather than destination, a rebuild of inventory levels given supply chain disruption and softening consumer demand. • Increase in other current assets — primarily due to an increase in derivative assets resulting from unrealized gains on foreign currency exchange contracts. • Decrease in intangible assets — primarily due to a $192.9 million impairment charge related to the Supreme ® indefinite-lived trademark intangible asset recorded in the three months ended September 2022. • Decrease in g oodwill — primarily due to a $229.0 million goodwill impairment charge related to the Supreme reporting unit recorded in the three months ended September 2022. • Increase in short-term borrowings — primarily due to an increase in commercial paper borrowings to support working capital requirements. • Decrease in the current portion of long-term debt — due to the early redemption of $500.0 million in December 2021 and repayment of the remaining $500.0 million of long-term notes in April 2022, which is partially offset by the reclassification of €850.0 million ($831.2 million) of long-term notes due in September 2023. • Increase in accounts pa yable — primarily due to the increase of in-transit inventory. • Decrease in long-term debt — due to the reclassification of €850.0 million ($831.2 million) of long-term notes due in September 2023. • Decrease in other liabilities — primarily due to a decrease in the accrual for unrecognized tax benefits and other accrued income taxes resulting from the reclassification to accrued liabilities. Liquidity and Capital Resources We consider the following to be measures of our liquidity and capital resources: September March September (Dollars in millions) 2022 2022 2021 Working capital $342.3 $1,272.7 $1,585.5 Current ratio 1.1 to 1 1.4 to 1 1.5 to 1 Net debt to total capital 68.9% 61.0% 62.0% The decrease in the current ratio at September 2022 compared to both March 2022 and September 2021 was primarily due to a net increase in current liabilities driven by higher short-term borrowings and accounts payable, partially offset by a net increase in current assets driven by higher inventories for the periods compared as discussed in the "Consolidated Balance Sheets" section above. For the ratio of net debt to total capital, net debt is defined as short-term and long-term borrowings, in addition to operating lease liabilities, net of unrestricted cash. Total capital is defined as net debt plus stockholders’ equity. The increase in the net debt to total capital ratio at September 2022 compared to March 2022 and September 2021 was primarily driven by an increase in net debt to support working capital demands at September 2022 and a decrease in stockholders' equity for the periods compared. VF Corporation Q2 FY23 Form 10-Q 38 Table of Contents The increase in net debt was primarily attributed to the increase in short-term borrowings, as discussed in the "Consolidated Balance Sheet" section above. The decrease in stockholders' equity as of September 2022 compared to March 2022 was primarily driven by payments of dividends and net losses in the period, and the decrease compared to September 2021 was primarily due to payments of dividends and share repurchases, partially offset by net income in the period. VF’s primary source of liquidity is its expected annual cash flow from operating activities. Cash from operations is typically lower in the first half of the calendar year as inventory builds to support peak sales periods in the second half of the calendar year. Cash provided by operating activities in the second half of the calendar year is substantially higher as inventories are sold and accounts receivable are collected. Additionally, direct-to-consumer sales are highest in the fourth quarter of the calendar year. VF's additional sources of liquidity include available borrowing capacity against its Global Credit Facility and term debt facility, available cash balances and international lines of credit. In summary, our cash flows from continuing operations were as follows: Six Months Ended September (In thousands) 2022 2021 Cash used by operating activities $ (913,957) $ (177,227) Cash provided (used) by investing activities (131,704) 1,052,885 Cash provided (used) by financing activities 408,764 (359,853) Cash Used by Operating Activities Cash flows related to operating activities are dependent on net income (loss), adjustments to net income (loss) and changes in working capital . The increase in cash used by operating activities in the six months ended September 2022 compared to September 2021 is primarily due to an increase in net cash used by working capital and lower earnings for the periods compared. Cash Provided (Used) by Investing Activities The decrease in cash provided by investing activities in the six months ended September 2022 was primarily due to $616.5 million of net proceeds from the sale of the Occupational Workwear business and $598.8 million of proceeds from sale of short-term investments in the six months ended September 2021. Capital expenditures decreased $54.6 million and software purchases increased $5.7 million in the six months ended September 2022 compared to the 2021 period. Cash Provided (Used) by Financing Activities The increase in cash provided by financing activities during the six months ended September 2022 was primarily due to a net increase in short-term borrowings of $1.4 billion for the periods compared, which was partially offset by a $500.0 million payment of long-term debt, the $57.0 million payment of Supreme contingent consideration and a $27.9 million decrease in net proceeds from the issuance of Common Stock for the periods compared. Share Repurchases VF did not purchase shares of its Common Stock in the open market during the six months ended September 2022 or the six months ended September 2021 under the share repurchase program authorized by VF's Board of Directors. As of the end of September 2022, VF h ad $2.5 billion re maining for future repurchases under its share repurchase authorization. VF will continue to evaluate its use of capital, giving priority to investments in organic growth, business acquisitions and direct shareholder return in the form of dividends and share repurchases. Revolving Credit Facility and Short-term Borrowings VF relies on its ability to generate cash flows to finance its ongoing operations. In addition, VF has significant liquidity from its available cash balances and credit facilities. VF maintains a $2.25 billion senior unsecured revolving line of credit (the “Global Credit Facility”) that expires November 2026. VF may request an unlimited number of one year extensions so long as each extension does not cause the remaining life of the Global Credit Facility to exceed five years, subject to stated terms and conditions. The Global Credit Facility may be used to borrow funds in U.S. dollars or any alternative currency (including euros and any other currency that is freely convertible into U.S. dollars, approved at the request of the Company by the lenders) and has a $75.0 million letter of credit sublimit. In addition, the Global Credit Facility supports VF’s U.S. commercial paper program for short-term, seasonal working capital requirements and general corporate purposes, including acquisitions and share repurchases. Outstanding short-term balances may vary from period to period depending on the level of corporate requirements. VF has restrictive covenants on its Global Credit Facility, including a consolidated net indebtedness to consolidated net capitalization financial ratio covenant starting at 70% with future step downs. The calculation of consolidated net indebtedness is net of unrestricted cash. As of September 2022, the covenant calculation excludes consolidated operating lease liabilities. As of September 2022, VF was in compliance with all covenants. VF has a commercial paper program that allows for borrowings of up to $2.25 billion to the extent that it has borrowing capacity under the Global Credit Facility. There wer e $1.7 billion in commercial paper borrowings as of September 2022 . Standby letters of credit issued as of September 2022 were $24.9 million, leaving approximately $539.9 million available for borrowing against the Global Credit Facility at September 2022. Additionally, VF had $552.8 million of cash and equivalents at September 2022. VF ha s $94.8 million of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either VF or the banks. Total outstanding balances under these arrangements were $7.5 million at September 2022. 39 VF Corporation Q2 FY23 Form 10-Q Table of Contents Maturity On April 25, 2022, VF repaid the remaining $500.0 million in aggregate principal amount of its outstanding 2.050% Senior Notes due April 2022, in accordance with the terms of the notes. Term Debt Facility On August 11, 2022, the Company entered into a delayed draw Term Loan Agreement (the “DDTL Agreement”). Under the DDTL Agreement, the lenders have agreed to provide up to three separate delayed draw term loans (each, a “Delayed Draw”) to the Company in an aggregate principal amount of up to $1.0 billion (which may be increased to $1.1 billion subject to the terms and conditions of the DDTL Agreement). The DDTL Agreement has a stated termination date of the earlier of December 30, 2024 or the two-year anniversary of the latest Delayed Draw under the DDTL Agreement. Subject to the terms and conditions of the DDTL Agreement, the Company may request extensions of the stated termination date. Any commitments of the lenders to provide Delayed Draws that remain undrawn will automatically terminate on December 30, 2022. VF completed its first draw under the DDTL Agreement of $800.0 million on October 18, 2022, which will mature no later than December 30, 2024. Supply Chain Financing Program During the first quarter of Fiscal 2023, VF reinstated its voluntary supply chain finance ("SCF") program. The SCF program enables a significant portion of our suppliers of inventory to leverage VF's credit rating to receive payment from participating financial institutions prior to the payment date specified in the terms between VF and the supplier. The SCF program is administered through third-party platforms that allow participating suppliers to track payments from VF and elect which VF receivables, if any, to sell to the financial institutions. The transactions are at the sole discretion of both the suppliers and financial institutions, and VF is not a party to the agreements and has no economic interest in the supplier's decision to sell a receivable. The terms between VF and the supplier, including the amount due and scheduled payment dates, are not impacted by a supplier's participation in the SCF program. Amounts due to suppliers who voluntarily participate in the SCF program are included in the accounts payable line item in VF's Consolidated Balance Sheets and VF payments made under the SCF program are reflected in cash flows from operating activities in VF's Consolidated Statements of Cash Flows. VF has been informed by the participating financial institutions that amounts payable to them for suppliers who voluntarily participated in the SCF program and included in the accounts payable line item in VF's Consolidated Balance Sheet was $201.2 million at September 2022. The amounts settled through the SCF program during the three and six months ended September 2022 were $417.2 million and $432.2 million, respectively. During the three months ended September 2022, VF extended its payment terms with eligible suppliers under the SCF program. The extended payment terms are expected to have a positive impact on Fiscal 2023 cash flows from operating activities; however, the change is not expected to have a material impact on VF's long-term overall liquidity or capital resources. Rating Agencies VF’s credit agency ratings allow for access to additional liquidity at competitive rates. At the end of September 2022, VF’s long-term debt ratings were ‘A-’ by Standard & Poor’s ("S&P") Global Ratings and ‘Baa1’ by Moody’s Investors Service, and commercial paper ratings by those rating agencies were ‘A-2’ and ‘P-2’, respectively. VF's credit rating outlook was revised to 'negative' from 'stable' by S&P in June 2022 and Moody's in October 2022. On October 31, 2022, S&P downgraded VF's long-term debt rating to 'BBB+', while maintaining VF's commercial paper rating of 'A-2' and credit rating outlook of 'negative'. None of VF’s long-term debt agreements contain acceleration of maturity clauses based solely on changes in credit ratings. However, 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, plus any accrued and unpaid interest, if required by the respective holders of the notes. The change of control provision applies to all notes, except for the 2033 notes. Dividends The Company paid cash dividends of $0.50 per share and $1.00 per share during the three and six months ended September 2022, respectively, and the Company has declared a cash dividend of $0.51 per share that is payable in the third quarter of Fiscal 2023. Subject to approval by its Board of Directors, VF intends to continue to pay its regularly scheduled dividend. Contractual Obligations Management’s Discussion and Analysis in the Fiscal 2022 Form 10-K provided a table summarizing VF’s material contractual obligations and commercial commitments at the end of Fiscal 2022 that would require the use of funds. As of September 2022, there have been no material changes in the amounts of unrecorded commitments disclosed in the Fiscal 2022 Form 10-K, except as noted below: • Inventory purchase obligations decreased by approximately $1.3 billion at the end of September 2022 primarily due to changes in terms with suppliers that increased in-transit inventory and the timing of fulfilled orders following periods of supply chain disruption. As previously reported, VF petitioned the U.S. Tax Court (the “Court”) to resolve an Internal Revenue Service ("IRS") dispute regarding the timing of income inclusion associated with VF’s acquisition of The Timberland Company in September 2011. While the IRS argues that all such income should have been immediately included in 2011, VF has reported periodic income inclusions in subsequent tax years. Both parties moved for summary judgment on the issue. On January 31, 2022, the Court issued its opinion in favor of the IRS and on July 14, 2022 issued its final decision. VF believes the opinion of the Court was in error based on the technical merits and filed a notice of appeal on October 7, 2022. On October 19, 2022, VF paid $875.7 million related to the 2011 taxes and interest being disputed, which will be recorded as a tax receivable based on the technical merits of our position with regards to the case. VF continues to believe its timing and treatment of the income inclusion is appropriate and VF is vigorously defending its position. However, should the Court opinion ultimately be upheld on appeal, this tax receivable will not be collected by VF. If the Court opinion is upheld, VF should be entitled to a refund of taxes paid on the periodic inclusions that VF has reported. However, any such refund could VF Corporation Q2 FY23 Form 10-Q 40 Table of Contents be substantially reduced by potential indirect tax effects resulting from application of the Court opinion. Deferred tax liabilities, representing VF’s future tax on annual inclusions, would also be released. The net impact to tax expense is estimated to be up to $730 million. There continues to be uncertainty about the duration and extent of the impact of the challenging macroeconomic environment and COVID-19 pandemic. However, management believes that VF has sufficient liquidity and flexibility to operate during and after the disruptions caused by the challenging macroeconomic environment and COVID-19 pandemic, and meet its current and long-term obligations as they become due. Recent Accounting Pronouncements Refer to Note 2 to VF’s consolidated financial statements for information on recently issued accounting standards. 41 VF Corporation Q2 FY23 Form 10-Q Table of Contents Critical Accounting Policies and Estimates Management has chosen accounting policies it considers to be appropriate to accurately and fairly report VF’s operating results and financial position in conformity with generally accepted accounting principles in the United States of America. Our critical accounting policies are applied in a consistent manner. Significant accounting policies are summarized in Note 1 to the consolidated financial statements included in the Fiscal 2022 Form 10-K. The application of these accounting policies requires management to 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. Management evaluates these estimates and assumptions, and may retain outside consultants to assist in the evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis in the Fiscal 2022 Form 10-K. Except as disclosed in Note 1 to VF's consolidated financial statements, there have been no material changes in VF's accounting policies from those disclosed in our Fiscal 2022 Form 10-K. Refer to Note 16 for additional detail of critical accounting estimates during the three months ended September 2022, which were associated with impairment testing of the Supreme reporting unit goodwill and indefinite-lived trademark intangible asset. Cautionary Statement on Forward-looking Statements From time to time, VF may make oral or written statements, including statements in this quarterly report, that constitute “forward-looking statements” within the meaning of the federal securities laws. These include statements concerning plans, objectives, projections and expectations relating to VF’s operations or economic performance and assumptions related thereto. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. Forward-looking statements are not guarantees, and actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of VF to differ materially from those expressed or implied by forward-looking statements include, but are not limited to: risks arising from the widespread outbreak of an illness or any other communicable disease, or any other public health crisis, including the coronavirus (COVID-19) global pandemic; the level of consumer demand for apparel, footwear and accessories; disruption to VF’s distribution system; changes in global economic conditions and the financial strength of VF’s customers, including as a result of current inflationary pressures; fluctuations in the price, availability and quality of raw materials and contracted products; disruption and volatility in the global capital and credit markets; VF’s response to changing fashion trends, evolving consumer preferences and changing patterns of consumer behavior; intense competition from online retailers and other direct-to-consumer business risks; third-party manufacturing and product innovation; increasing pressure on margins; VF’s ability to implement its business strategy; VF’s ability to grow its international, direct-to-consumer and digital businesses; VF's ability to transform its model to be more consumer-minded, retail-centric and hyper-digital; retail industry changes and challenges; VF's ability to create and maintain an agile and efficient operating model and organizational structure; VF’s and its vendors’ ability to maintain the strength and security of information technology systems; the risk that VF’s facilities and systems and those of our third-party service providers may be vulnerable to and unable to anticipate or detect data or information security breaches and data or financial loss; VF’s ability to properly collect, use, manage and secure business, consumer and employee data and comply with privacy and security regulations; foreign currency fluctuations; stability of VF's vendors' manufacturing facilities and VF's ability to establish and maintain effective supply chain capabilities; continued use by VF’s suppliers of ethical business practices; VF’s ability to accurately forecast demand for products; continuity of members of VF’s management; VF's ability to recruit, develop or retain qualified employees; VF’s ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment such as the recent impairment charges related to the Supreme ® reporting unit goodwill and indefinite-lived trademark intangible asset; maintenance by VF’s licensees and distributors of the value of VF’s brands; VF’s ability to execute acquisitions and dispositions and integrate acquisitions; business resiliency in response to natural or man-made economic, political or environmental disruptions; changes in tax laws and additional tax liabilities, including the timing of income inclusion associated with our acquisition of the Timberland ® brand in 2011; legal, regulatory, political, economic, and geopolitical risks, including those related to the current conflict in Ukraine; changes to laws and regulations; adverse or unexpected weather conditions; VF's indebtedness and its ability to obtain financing on favorable terms, if needed, could prevent VF from fulfilling its financial obligations; climate change and increased focus on environmental, social and governance issues; and tax risks associated with the spin-off of our Jeanswear business completed in 2019. More information on potential factors that could affect VF’s financial results is included from time to time in VF’s public reports filed with the Securities and Exchange Commission, including VF’s Annual Report on Form 10-K. VF Corporation Q2 FY23 Form 10-Q 42 Table of Contents ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There have been no significant changes in VF’s market risk exposures from what was disclosed in Item 7A in the Fiscal 2022 Form 10-K.