Note N – Derivative Financial Instruments and Hedging Activities

Summary of Derivative Financial Instruments

All of VF’s outstanding derivative financial instruments are forward foreign currency exchange contracts. Although derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. The notional amount of outstanding derivative contracts was $1.9 billion at March 2014, December 2013 and March 2013, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Japanese yen and Polish zloty. Derivative contracts have maturities up to 24 months.

The following table presents outstanding derivatives on a gross basis by individual contract:

 

		Fair Value of Derivatives with Unrealized Gains												Fair Value of Derivatives with Unrealized Losses
		March 2014				December 2013				March 2013				March 2014				December 2013				March 2013
In thousands
Foreign currency exchange contracts designated as hedging instruments		$	16,936			$	15,964			$	48,156			$	(38,660	)		$	(46,627	)		$	(8,933	)
Foreign currency exchange contracts dedesignated as hedging instruments			—				—				571				—				—				(864	)
Foreign currency exchange contracts not designated as hedging instruments			117				124				90				(638	)			(164	)			(78	)
Total derivatives		$	17,053			$	16,088			$	48,817			$	(39,298	)		$	(46,791	)		$	(9,875	)

VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. However, if VF were to offset and record the asset and liability balances of all of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets as of March 2014, December 2013 and March 2013 would be adjusted from the current gross presentation to the net amounts as detailed in the following table:

 

		March 2014								December 2013								March 2013
		Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability
In thousands
Gross amounts presented in the Consolidated Balance Sheets		$	17,053			$	(39,298	)		$	16,088			$	(46,791	)		$	48,817			$	(9,875	)
Gross amounts not offset in the Consolidated Balance Sheets			(10,320	)			10,320				(11,641	)			11,641				(6,110	)			6,110
Net amounts		$	6,733			$	(28,978	)		$	4,447			$	(35,150	)		$	42,707			$	(3,765	)

 

Derivatives are classified as current or noncurrent based on their maturity dates, as follows:

 

		March				December				March
In thousands		2014				2013				2013
Other current assets		$	13,765			$	12,699			$	36,830
Accrued liabilities (current)			(34,982	)			(36,622	)			(8,018	)
Other assets (noncurrent)			3,288				3,389				11,987
Other liabilities (noncurrent)			(4,316	)			(10,169	)			(1,857	)

Cash Flow Hedges

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:

 

In thousands		Gain (Loss) on Derivatives Recognized in OCI Three Months Ended March
Cash Flow Hedging Relationships		2014				2013
Foreign currency exchange		$	3,696			$	55,493
In thousands		Gain (Loss) Reclassified from Accumulated OCI into Income Three Months Ended March
Location of Gain (Loss)		2014				2013
Net sales		$	1,660			$	(155	)
Cost of goods sold			(5,364	)			3,858
Other income (expense), net			(708	)			1,092
Interest expense			(1,004	)			(957	)
Total		$	(5,416	)		$	3,838

Derivative Contracts Dedesignated as Hedges

Cash flow hedges of some forecasted sales to third parties have historically been dedesignated as hedges when the sales were recognized. At that time, hedge accounting was discontinued and the amount of unrealized hedging gain or loss was recognized in net sales. These derivatives remained outstanding as an economic hedge of foreign currency exposures associated with the ultimate collection of the related accounts receivable, during which time changes in the fair value of the derivative contracts were recognized directly in earnings. As discussed below in Derivative Contracts Not Designated as Hedges, VF now utilizes separate derivative contracts to manage foreign currency risk related to the balance sheet exposures. Accordingly, 2013 was the last year during which dedesignations were recognized related to these cash flow hedges.

For the three month period ended March 2013, VF recorded a net impact of less than $1.0 million in other income (expense), net, for derivatives dedesignated as hedging instruments.

Derivative Contracts Not Designated as Hedges

VF uses derivative contracts to manage foreign currency exchange risk on intercompany loans as well as intercompany and third party accounts receivable and payable. These contracts are not designated as hedges, and are recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:

 

				Gain (Loss) on Derivatives
		Location of Gain (Loss)		Recognized in Income
In thousands		on Derivatives		Three Months Ended March
Derivatives Not Designated as Hedges		Recognized in Income		2014				2013
Foreign currency exchange		Other income (expense), net		$	(856	)		$	1,269

 

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three month periods ended March 2014 and March 2013.

At March 2014, accumulated OCI included $19.5 million of pretax net deferred losses for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.

VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in 2021 and 2033, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pretax net deferred loss in accumulated OCI was $34.6 million at March 2014, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. Of the $34.6 million, approximately $4.1 million is expected to be reclassified to earnings during the next 12 months.