VF Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Retirement and Savings Benefit Plans

Retirement and Savings Benefit Plans

12 Months Ended

Dec. 31, 2016

Compensation and Retirement Disclosure [Abstract]

VF has several retirement and savings benefit plans covering eligible employees. VF retains the right to curtail or discontinue any of the plans, subject to local regulations.

Defined Benefit Pension Plans

Defined benefit plans provide pension benefits based on participant compensation and years of service. VF sponsors a noncontributory qualified defined benefit pension plan covering most full-time U.S. employees employed before 2005 (the “U.S. qualified plan”) and an unfunded supplemental defined benefit pension plan that provides benefits in excess of limitations imposed by income tax regulations (together, the “U.S. plans”). The U.S. qualified plan is fully funded at the end of 2016, and VF’s net underfunded status primarily relates to obligations under the unfunded U.S. nonqualified defined benefit plan. The U.S. plans comprise 92% of VF’s total defined benefit plan assets and 90% of VF’s total projected benefit obligations at December 2016, and the remainder relates to non-U.S. defined benefit plans.

The components of pension cost for VF’s defined benefit plans were as follows:



	2016			2015			2014
	In thousands
Service cost — benefits earned during the year	$	25,839		$	29,223		$	24,163
Interest cost on projected benefit obligations	68,020			77,620			81,496
Expected return on plan assets	(99,540		)	(111,095		)	(90,674		)
Settlement charges	50,922			4,062			—
Amortization of deferred amounts:
Net deferred actuarial losses	65,212			61,966			37,518
Deferred prior service costs	2,584			3,038			5,445
Total pension expense	$	113,037		$	64,814		$	57,948
Weighted average actuarial assumptions used to determine pension expense:
Discount rate in effect for determining service cost	4.54		%	3.93		%	4.64		%
Discount rate in effect for determining interest cost	3.56		%	3.93		%	4.64		%
Expected long-term return on plan assets	5.81		%	6.05		%	4.73		%
Rate of compensation increase	3.90		%	3.91		%	3.53		%

The following provides a reconciliation of the changes in fair value of VF’s defined benefit plan assets and projected benefit obligations for each year, and the funded status at the end of each year:



	2016			2015
	In thousands
Fair value of plan assets, beginning of year	$	1,755,374		$	1,628,254
Actual return on plan assets	191,219			(56,624		)
VF contributions	24,031			273,520
Participant contributions	3,644			3,483
Benefits paid	(286,271		)	(87,994		)
Currency translation	(14,700		)	(5,265		)
Fair value of plan assets, end of year	1,673,297			1,755,374
Projected benefit obligations, beginning of year	1,912,015			1,999,947
Service cost	25,839			29,223
Interest cost	68,020			77,620
Participant contributions	3,644			3,483
Actuarial loss (gain)	100,242			(101,387		)
Benefits paid	(286,271		)	(87,994		)
Plan amendments	—			(1,510		)
Currency translation	(15,162		)	(7,367		)
Projected benefit obligations, end of year	1,808,327			1,912,015
Funded status, end of year	$	(135,030	)	$	(156,641	)

Pension benefits are reported in the Consolidated Balance Sheets as a net asset or liability based on the overfunded or underfunded status of the defined benefit plans, assessed on a plan-by-plan basis.



	2016			2015
	In thousands
Amounts included in Consolidated Balance Sheets:
Noncurrent assets (Note H)	$	41,281		$	9,273
Current liabilities (Note J)	(10,669		)	(8,480		)
Noncurrent liabilities (Note L)	(165,642		)	(157,434		)
Funded status	$	(135,030	)	$	(156,641	)
Accumulated other comprehensive loss, pre-tax:
Net deferred actuarial losses	$	476,071		$	586,828
Deferred prior service costs	14,883			17,459
Total accumulated other comprehensive loss, pre-tax	$	490,954		$	604,287
Accumulated benefit obligations	$	1,717,786		$	1,827,521
Weighted average actuarial assumptions used to determine pension obligations:
Discount rate	3.87		%	4.29		%
Rate of compensation increase	3.78		%	3.90		%

Accumulated benefit obligations at any measurement date are the present value of vested and unvested pension benefits earned, without considering projected future compensation increases. Projected benefit obligations are the present value of vested and unvested pension benefits earned, considering projected future compensation increases.

At the end of fiscal 2015, the Company changed to the spot rate approach to measure service and interest costs for our defined benefit plans. Previously, the same single equivalent discount rate determined for measuring the projected benefit obligation was also used to determine service cost and interest cost. Under the new spot rate approach, the full yield curve is applied separately to cash flows for each projected benefit obligation, service cost, and interest cost for a more precise calculation. The Company accounted for this as a change in accounting estimate and, accordingly, applied the spot rate approach on a prospective basis in calculating 2016 pension expense.

In 2016, the Company offered former employees in the U.S. qualified plan a one-time option to receive a distribution of their deferred vested benefits. Approximately 9,400 participants accepted a distribution, representing 66% of eligible participants and a 23% reduction in the total number of plan participants at the beginning of the year. In December 2016, the plan paid $197.1 million in lump-sum distributions to settle $224.7 million of projected benefit obligations related to these participants. VF recorded $50.9 million in settlement charges during 2016 to recognize the related deferred actuarial losses in accumulated OCI.

VF recorded $4.1 million in settlement charges during 2015, related to the recognition of deferred actuarial losses resulting from lump-sum payments of retirement benefits to participants in VF’s supplemental defined benefit pension plan.

Deferred actuarial gains and losses are changes in the amount of either the benefit obligation or the value of plan assets resulting from differences between expected amounts for a year using actuarial assumptions and the actual results for that year. These amounts are deferred as a component of accumulated OCI and amortized to pension expense in future years as follows: amounts in excess of 20% of projected benefit obligations at the beginning of the year are amortized over five years; amounts between (i) 10% of the greater of projected benefit obligations or plan assets and (ii) 20% of projected benefit obligations are amortized over the expected average remaining years of service of active participants; and amounts less than the greater of 10% of projected benefit obligations or plan assets are not amortized. Deferred prior service costs related to plan amendments are also recorded in accumulated OCI and amortized to pension expense on a straight-line basis over the average remaining years of service for active employees. The estimated amounts of accumulated OCI to be amortized to pension expense in 2017 are $45.4 million of deferred actuarial losses and $2.9 million of deferred prior service costs.

Management’s investment objectives are to invest plan assets in a diversified portfolio of securities to provide long-term growth, minimize the volatility of the value of plan assets relative to plan liabilities, and to ensure plan assets are sufficient to pay the benefit obligations. Investment strategies focus on diversification among multiple asset classes, a balance of long-term investment return at an acceptable level of risk and liquidity to meet benefit payments. The primary objective of the investment strategies is to more closely align plan assets with plan liabilities by utilizing dynamic asset allocation targets dependent upon changes in the plan’s funded ratio, capital market expectations and risk tolerance.

Plan assets are primarily composed of common collective trust funds that invest in liquid securities diversified across equity, fixed-income, real estate and other asset classes. Fund assets are allocated among independent investment managers who have full discretion to manage their portion of the fund’s assets, subject to strategy and risk guidelines established with each manager. The overall strategy, the resulting allocations of plan assets and the performance of funds and individual investment managers are continually monitored. Derivative financial instruments may be used by investment managers for hedging purposes to gain exposure to alternative asset classes through the futures markets. There are no investments in VF debt or equity securities and no significant concentrations of security risk.

The expected long-term rate of return on plan assets was based on an evaluation of the weighted average expected returns for the major asset classes in which the plans have invested. Expected returns by asset class were developed through analysis of historical market returns, current market conditions, inflation expectations and equity and credit risks. Inputs from various investment advisors on long-term capital market returns and other variables were also considered where appropriate.

The fair value of investments held by VF’s defined benefit plans at December 2016 and 2015, by asset class, is summarized below. Refer to Note T for a description of the three levels of the fair value measurement hierarchy.



	Total Plan Assets		Fair Value Measurements
			Level 1		Level 2		Level 3
	In thousands
December 2016
Plan assets
Cash equivalents	$	2,896	$	2,896	$	—	$	—
Fixed income securities:
U.S. Treasury and government agencies	10		—		10		—
Insurance contracts	63,013		—		63,013		—
Commodities	506		506		—		—
Total plan assets in the fair value hierarchy	66,425		$	3,402	$	63,023	$	—
Plan assets measured at net asset value
Cash equivalents	27,486
Equity securities:
Domestic	134,254
International	142,772
Fixed income securities:
Corporate and international bonds	1,140,894
Alternative investments	161,466
Total plan assets measured at net asset value	1,606,872
Total plan assets	$	1,673,297



	Total Plan Assets			Fair Value Measurements
				Level 1			Level 2		Level 3
	In thousands
December 2015
Plan assets
Cash equivalents	$	2,790		$	2,790		$	—	$	—
Fixed income securities:
U.S. Treasury and government agencies	11			—			11		—
Insurance contracts	50,856			—			50,856		—
Commodities	(439		)	(439		)	—		—
Total plan assets in the fair value hierarchy	53,218			$	2,351		$	50,867	$	—
Plan assets measured at net asset value
Cash equivalents	23,538
Equity securities:
Domestic	107,190
International	179,256
Fixed income securities:
Corporate and international bonds	1,232,691
Alternative investments	159,481
Total plan assets measured at net asset value	1,702,156
Total plan assets	$	1,755,374

Cash equivalents include cash held by individual investment managers of other asset classes for liquidity purposes (Level 1), and an institutional fund that invests primarily in short-term U.S. government securities measured at their daily net asset value. The fair values of insurance contracts are provided by the insurance companies and are primarily based on accumulated contributions plus returns guaranteed by the insurers. Commodities consist of derivative commodity futures contracts (Level 1). Equity and fixed-income securities generally represent institutional funds measured at their daily net asset value derived from quoted prices of the underlying investments. Alternative investments are primarily in funds of hedge funds (“FoHFs”), which are comprised of different and independent hedge funds with various investment strategies. The administrators of the FoHFs utilize unobservable inputs to calculate the net asset value of the FoHFs on a monthly basis.

VF makes contributions to its defined benefit plans sufficient to meet minimum funding requirements under applicable laws, plus discretionary amounts as determined by management. VF made a discretionary contribution of $250.0 million to the U.S. qualified plan during 2015. VF does not currently plan to make any contributions to the U.S. qualified plan during 2017, and intends to make approximately $17.0 million of contributions to its other defined benefit plans during 2017. The estimated future benefit payments for all of VF’s defined benefit plans are approximately $89.7 million in 2017, $93.0 million in 2018, $96.4 million in 2019, $100.5 million in 2020, $103.1 million in 2021 and $543.0 million for the years 2022 through 2026.

Other Retirement and Savings Plans

VF sponsors a nonqualified retirement savings plan for employees whose contributions to a 401(k) plan would be limited by provisions of the Internal Revenue Code. This plan allows participants to defer a portion of their compensation and to receive matching contributions for a portion of the deferred amounts. Participants earn a return on their deferred compensation based on their selection of a hypothetical portfolio of publicly traded mutual funds, a separately managed fixed-income fund and VF Common Stock. Changes in the fair value of the participants’ hypothetical investments are recorded as an adjustment to deferred compensation liabilities and compensation expense. Expense under this plan was $1.8 million in 2016, $2.5 million in 2015 and $5.7 million in 2014. Deferred compensation, including accumulated earnings, is distributable in cash at participant-specified dates upon retirement, death, disability or termination of employment. VF sponsors a similar nonqualified plan that permits nonemployee members of the Board of Directors to defer their Board compensation and invest in hypothetical shares of VF Common Stock. VF also has remaining obligations under other deferred compensation plans, primarily related to acquired companies. At December 2016, VF’s liability to participants under all deferred compensation plans was $232.8 million, of which $34.5 million was recorded in accrued liabilities (Note J) and $198.3 million was recorded in other liabilities (Note L).

VF has purchased (i) publicly traded mutual funds, a separately managed fixed-income fund and VF Common Stock in the same amounts as most of the participant-directed hypothetical investments underlying the deferred compensation liabilities and (ii) variable life insurance contracts that invest in institutional funds that are substantially the same as the participant-directed hypothetical investments. These investment securities and earnings thereon (other than VF Common Stock) are intended to provide a source of funds to meet the deferred compensation obligations, and serve as an economic hedge of the financial impact of changes in deferred compensation liabilities. They are held in an irrevocable trust but are subject to claims of creditors in the event of VF’s insolvency. VF also has assets related to deferred compensation plans of acquired companies, which are primarily invested in life insurance contracts. At December 2016, the fair value of investments held for all deferred compensation plans was $225.4 million, of which $31.0 million was recorded in other current assets and $194.4 million was recorded in other assets (Note H). The VF Common Stock purchased to match participant-directed hypothetical investments is treated as treasury stock for financial reporting purposes (Note N), which is the primary reason for the difference in carrying value of the deferred compensation assets and liabilities. Realized and unrealized gains and losses on these deferred compensation assets (other than VF Common Stock) are recorded in compensation expense in the Consolidated Statements of Income and substantially offset losses and gains resulting from changes in deferred compensation liabilities to participants.

VF sponsors 401(k) plans as well as other domestic and foreign retirement and savings plans. Expense for these plans totaled $45.2 million in 2016, $47.0 million in 2015 and $31.6 million in 2014.