Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

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Derivative Financial Instruments and Hedging Activities
 9 Months Ended
Oct. 03, 2015
Derivative Financial Instruments and Hedging Activities

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 amounts of outstanding derivative contracts were $2.4 billion at September 2015, $1.9 billion at December 2014 and $1.8 billion at September 2014, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Japanese yen and Polish zloty. Derivative contracts have maturities up to 24 months.

The following table presents outstanding derivatives on an individual contract basis:

 

     Fair Value of Derivatives with
Unrealized Gains 		     Fair Value of Derivatives with
Unrealized Losses 		 
     September      December      September      September     December     September  
In thousands    2015      2014      2014      2015     2014     2014  

Foreign currency exchange contracts designated as hedging instruments

    $ 94,113       $ 104,860       $ 57,009       $ (46,808 )    $ (31,711 )    $ (29,419 ) 

Foreign currency exchange contracts not designated as hedging instruments

      112         404         204         (373 )      (58 )      (1,719 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

Total derivatives

    $ 94,225       $ 105,264       $ 57,213       $ (47,181 )    $ (31,769 )    $ (31,138 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

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 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 would be adjusted from the current gross presentation to the net amounts as detailed in the following table:

 

     September 2015     December 2014     September 2014  
In thousands    Derivative
Asset 		    Derivative
Liability 		    Derivative
Asset 		    Derivative
Liability 		    Derivative
Asset 		    Derivative
Liability 		 

Gross amounts presented in the Consolidated Balance Sheets

    $ 94,225      $ (47,181 )    $ 105,264      $ (31,769 )    $ 57,213      $ (31,138 ) 

Gross amounts not offset in the Consolidated Balance Sheets

      (36,597 )      36,597        (30,724 )      30,724        (22,863 )      22,863   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net amounts

    $ 57,628      $ (10,584 )    $ 74,540      $ (1,045 )    $ 34,350      $ (8,275 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

Derivatives are classified in the Consolidated Balance Sheets as current or noncurrent based on their maturity dates, as follows:

 

     September      December      September  
In thousands    2015      2014      2014  

Other current assets

    $ 85,405       $ 84,995       $ 41,875   

Accrued liabilities

      (40,969 )       (26,968 )       (25,177 ) 

Other assets

      8,820         20,269         15,338   

Other liabilities

      (6,212 )       (4,801 )       (5,961 ) 

Cash Flow Hedges

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating 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:

 

     Gain (Loss) on Derivatives      Gain (Loss) on Derivatives  
     Recognized in OCI      Recognized in OCI  
In thousands    Three Months Ended September      Nine Months Ended September  

Cash Flow Hedging Relationships

    2015      2014      2015      2014  

Foreign currency exchange

    $ 5,634       $ 51,351       $ 52,068       $ 43,586   
     Gain (Loss) Reclassified from      Gain (Loss) Reclassified from  
     Accumulated OCI into Income      Accumulated OCI into Income  
In thousands    Three Months Ended September      Nine Months Ended September  

Location of Gain (Loss)

    2015      2014      2015      2014  

Net sales

    $ (22,434 )     $ (7,657 )     $ (51,279 )     $ (7,539 ) 

Cost of goods sold

      39,142         (3,496 )       80,633         (13,199 ) 

Other income (expense), net

      7,541         (730 )       20,515         (1,945 ) 

Interest expense

      (1,078 )       (1,028 )       (3,200 )       (3,051 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 23,171       $ (12,911 )     $ 46,669       $ (25,734 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

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 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 Derivative      Gain (Loss) on Derivative  
     Location of Gain (Loss)    Recognized in Income      Recognized in Income  
In thousands    on Derivatives    Three Months Ended September      Nine Months Ended September  

Derivatives Not Designated as Hedges

   

Recognized in Income

    2015      2014      2015     2014  

Foreign currency exchange

    Other income (expense), net    $ 836       $ 35       $ (1,625 )    $ (4,835 ) 

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and nine-month periods ended September 2015 and September 2014.

At September 2015, accumulated OCI included $79.8 million of pretax net deferred gains for foreign currency 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 $28.3 million at September 2015, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. VF reclassified $1.1 million and $3.2 million of net deferred losses from accumulated OCI into interest expense during the three and nine-month periods ended September 2015, respectively, and $1.1 million and $3.1 million for the three and nine-month periods ended September 2014, respectively. VF expects to reclassify $4.6 million to interest expense during the next 12 months.