Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

v3.4.0.3
Derivative Financial Instruments and Hedging Activities
 3 Months Ended
Apr. 02, 2016
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 $2.3 billion at March 2016, $2.4 billion at December 2015 and $2.1 billion at March 2015, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Japanese yen, Polish zloty and Swedish krona. 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 		 
In thousands    March
2016		      December
2015		      March
2015		      March
2016 		    December
2015		     March
2015		  

Foreign currency exchange contracts designated as hedging instruments

    $ 71,007       $  105,536       $ 158,557       $ (43,149 )    $ (27,896)      $ (42,975)   

Foreign currency exchange contracts not designated as hedging instruments

      609         255         342         (507 )      (136 )      (707 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

Total derivatives

    $ 71,616       $ 105,791       $ 158,899       $  (43,656)      $  (28,032)      $ (43,682 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

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:

 

     March 2016     December 2015     March 2015  
In thousands    Derivative
Asset		     Derivative
Liability		     Derivative
Asset		     Derivative
Liability		     Derivative
Asset		     Derivative
Liability		  

Gross amounts presented in the Consolidated

             

Balance Sheets

    $ 71,616      $ (43,656 )    $ 105,791      $ (28,032 )    $ 158,899      $ (43,682 ) 

Gross amounts not offset in the Consolidated

             

Balance Sheets

      (36,554 )      36,554        (22,213 )      22,213        (42,701 )      42,701   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net amounts

    $ 35,062      $ (7,102 )    $ 83,578      $ (5,819 )    $ 116,198      $ (981 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

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

 

In thousands    March
2016		      December
2015		      March
2015		  

Other current assets

    $ 64,429       $ 92,796       $ 138,564   

Accrued liabilities

      (31,369 )       (25,776 )       (37,949 ) 

Other assets

      7,187         12,995         20,335   

Other liabilities

      (12,287 )       (2,256 )       (5,733 ) 

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:

 

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

Cash Flow Hedging Relationships

    2016      2015  

Foreign currency exchange

    $ (15,783 )     $ 68,010   
In thousands    Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended March 		 

Location of Gain (Loss)

    2016      2015  

Net sales

    $ (4,963 )     $ (17,055 ) 

Cost of goods sold

      43,837         19,368   

Selling, general and administrative expenses

      (978 )       —     

Other income (expense), net

      1,503         6,835   

Interest expense

      (1,104 )       (1,053 ) 
  

 

 

     

 

 

  

Total

    $ 38,295       $ 8,095   
  

 

 

     

 

 

  

Derivative Contracts Not Designated as Hedges

VF uses derivative contracts to manage foreign currency exchange risk on third-party accounts receivable and payable, as well as intercompany borrowings. 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 transaction gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:

 

In thousands

Derivatives Not Designated as Hedges

   

Location of Gain (Loss)

on Derivatives

Recognized in Income

    Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended March 		 
      2016      2015  

Foreign currency exchange

    Cost of goods sold    $ 1,504       $ —     

Foreign currency exchange

    Other income (expense), net      (1,285 )       (1,031 ) 
     

 

 

     

 

 

  

Total

       $ 219       $ (1,031 ) 
     

 

 

     

 

 

  

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 2016 and March 2015.

At March 2016, accumulated OCI included $57.0 million of pre-tax 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 pre-tax net deferred loss in accumulated OCI was $26.1 million at March 2016, 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 of net deferred losses from accumulated OCI into interest expense in each of the three-month periods ended March 2016 and March 2015, and expects to reclassify $4.6 million to interest expense during the next 12 months.