Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

v3.7.0.1
Derivative Financial Instruments and Hedging Activities
 6 Months Ended
Jul. 01, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Hedging Activities
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 2017, $2.2 billion at December 2016 and $2.4 billion at June 2016, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Japanese yen, Swedish krona, Polish zloty and Turkish lira. 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 2017
 
December 2016
 
June 2016
 
June 2017
 
December 2016
 
June 2016
Foreign currency exchange contracts designated as hedging instruments
$
36,265

 
$
103,340

 
$
91,691

 
$
(52,447
)
 
$
(25,292
)
 
$
(33,171
)
Foreign currency exchange contracts not designated as hedging instruments
—

 
—

 
—

 
(187
)
 
(282
)
 
(280
)
Total derivatives
$
36,265

 
$
103,340

 
$
91,691

 
$
(52,634
)
 
$
(25,574
)
 
$
(33,451
)

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 2017
 
December 2016
 
June 2016
In thousands
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
Gross amounts presented in the Consolidated Balance Sheets
$
36,265

 
$
(52,634
)
 
$
103,340

 
$
(25,574
)
 
$
91,691

 
$
(33,451
)
Gross amounts not offset in the Consolidated Balance Sheets
(31,054
)
 
31,054

 
(22,341
)
 
22,341

 
(20,145
)
 
20,145

Net amounts
$
5,211

 
$
(21,580
)
 
$
80,999

 
$
(3,233
)
 
$
71,546

 
$
(13,306
)

Derivatives are classified as current or noncurrent based on maturity dates, as follows:
In thousands
June 2017
 
December 2016
 
June 2016
Other current assets
$
30,780

 
$
84,519

 
$
78,021

Accrued liabilities
(32,299
)
 
(18,574
)
 
(27,329
)
Other assets
5,485

 
18,821

 
13,670

Other liabilities
(20,335
)
 
(7,000
)
 
(6,122
)

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
2017
 
2016
 
2017
 
2016
Foreign currency exchange
$
(56,339
)
 
$
39,049

 
$
(66,433
)
 
$
23,266

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)
2017
 
2016
 
2017
 
2016
Net sales
$
7,047

 
$
2,284

 
$
13,460

 
$
(2,679
)
Cost of goods sold
5,653

 
20,772

 
16,927

 
64,609

Selling, general and administrative expenses
(243
)
 
(1,535
)
 
(330
)
 
(2,513
)
Other income (expense), net
37

 
624

 
86

 
2,127

Interest expense
(1,175
)
 
(1,121
)
 
(2,333
)
 
(2,225
)
Total
$
11,319

 
$
21,024

 
$
27,810

 
$
59,319


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
2017
 
2016
 
2017
 
2016
Foreign currency exchange
 
Cost of goods sold
 
$
359

 
$
(769
)
 
$
633

 
$
735

Foreign currency exchange
 
Other income (expense), net
 
(1,270
)
 
199

 
(1,739
)
 
(1,086
)
Total
 
 
 
$
(911
)
 
$
(570
)
 
$
(1,106
)
 
$
(351
)

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 2017 and June 2016.
At June 2017, accumulated OCI included $6.6 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 $20.3 million at June 2017, 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 for the three and six-month periods ended June 2017 and June 2016, respectively. VF expects to reclassify $4.8 million to interest expense during the next 12 months.
Net Investment Hedge
The Company has designated its €850.0 million of euro-denominated fixed-rate notes as a net investment hedge of VF’s investment in certain foreign operations. Because this debt qualified as a nonderivative hedging instrument, foreign currency transaction gains or losses of the debt are deferred in the foreign currency translation and other component of accumulated OCI as an offset to the foreign currency translation adjustments on the hedged investments. During the three and six-month periods ended June 2017, the Company recognized an after-tax loss of $37.3 million and $45.1 million, respectively, in OCI related to the net investment hedge. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated. The Company recorded no ineffectiveness from its net investment hedge during the three and six-month periods ended June 2017.