Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

v3.5.0.2
Derivative Financial Instruments and Hedging Activities
 6 Months Ended
Jul. 02, 2016
Derivative Financial Instruments and Hedging Activities

Note O – 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 June 2016, $2.4 billion at December 2015 and $2.5 billion at June 2015, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Swedish krona, 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 		 
In thousands    June 2016      December 2015      June 2015      June 2016     December 2015     June 2015  

Foreign currency exchange contracts designated as hedging instruments

    $ 91,691       $ 105,536       $ 136,265       $ (33,171 )    $ (27,896 )    $ (56,786 ) 

Foreign currency exchange contracts not designated as hedging instruments

      —           255         400         (280 )      (136 )      (43 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

Total derivatives

    $ 91,691       $ 105,791       $ 136,665       $ (33,451 )    $ (28,032 )    $ (56,829 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

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:

 

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

Gross amounts presented in the Consolidated

             

Balance Sheets

    $ 91,691      $ (33,451 )    $ 105,791      $ (28,032 )    $ 136,665      $ (56,829 ) 

Gross amounts not offset in the Consolidated

             

Balance Sheets

      (20,145 )      20,145        (22,213 )      22,213        (52,154 )      52,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net amounts

    $ 71,546      $ (13,306 )    $ 83,578      $ (5,819 )    $ 84,511      $ (4,675 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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

 

In thousands    June 2016      December 2015      June 2015  

Other current assets

    $ 78,021       $ 92,796       $ 122,749   

Accrued liabilities

      (27,329 )       (25,776 )       (49,522 ) 

Other assets

      13,670         12,995         13,916   

Other liabilities

      (6,122 )       (2,256 )       (7,307 ) 

 

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 June 		     Gain (Loss) on Derivatives
Recognized in OCI
Six Months Ended June 		 

Cash Flow Hedging Relationships

    2016      2015      2016      2015  

Foreign currency exchange

    $ 39,049       $ (21,576 )     $ 23,266       $ 46,434   
In thousands    Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended June 		     Gain (Loss) Reclassified from
Accumulated OCI into Income
Six Months Ended June 		 

Location of Gain (Loss)

    2016      2015      2016      2015  

Net sales

    $ 2,284       $ (11,790 )     $ (2,679 )     $ (28,845 ) 

Cost of goods sold

      20,772         22,123         64,609         41,491   

Selling, general and administrative expenses

      (1,535 )       —           (2,513 )       —     

Other income (expense), net

      624         6,139         2,127         12,974   

Interest expense

      (1,121 )       (1,069 )       (2,225 )       (2,122 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 21,024       $ 15,403       $ 59,319       $ 23,498   
  

 

 

     

 

 

     

 

 

     

 

 

  

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 June 		    Gain (Loss) on Derivatives
Recognized in Income
Six Months Ended June 		 
      2016     2015     2016     2015  

Foreign currency exchange

    Cost of goods sold    $ (769 )    $ —        $ 735      $ —     

Foreign currency exchange

    Other income (expense), net      199        (1,430 )      (1,086 )      (2,461 ) 
     

 

 

    

 

 

    

 

 

    

 

 

  

Total

       $ (570 )    $ (1,430 )    $ (351 )    $ (2,461 ) 
     

 

 

    

 

 

    

 

 

    

 

 

  

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and six-month periods ended June 2016 and June 2015.

At June 2016, accumulated OCI included $60.2 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 $25.0 million at June 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 $1.2 million and $2.3 million of net deferred losses from accumulated OCI into interest expense in each of the three and six-month periods ended June 2016, respectively, and $1.0 million and $2.1 million for the three and six-month periods ended June 2015, respectively. VF expects to reclassify $4.6 million to interest expense during the next 12 months.