Fair Value Measurements |
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Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements |
Fair Value Measurements
Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:
VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of forward foreign currency exchange contracts, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies, and considers the credit risk of the Company and its counterparties. Investment securities are held in VF’s deferred compensation plans as an economic hedge of the related deferred compensation liabilities. These investments are classified as trading securities and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or quoted prices in inactive markets for identical assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments.
All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At September 2017 and December 2016, their carrying values approximated their fair values. Additionally, at September 2017 and December 2016, the carrying values of VF’s long-term debt, including the current portion, were $2,398.1 million and $2,292.9 million, respectively, compared with fair values of $2,614.6 million and $2,486.6 million at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant and equipment, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event an impairment is required, the asset is adjusted to estimated fair value, using market-based assumptions.
The Company recorded $8.6 million of fixed asset impairments in the third quarter and first nine months of 2017, and the charges are recorded in the selling, general and administrative expenses line item in the Consolidated Statements of Income. There were no significant impairment charges related to property, plant and equipment in the third quarter and first nine months of 2016.
Subsequent to our annual impairment testing completed in the fourth quarter of 2016, the Company continued to monitor the actual performance of the Nautica® brand reporting unit and determined that there were no triggering events in the first and second quarters of fiscal 2017. On August 26, 2017, management commenced a strategic assessment of the Nautica® brand which was considered a triggering event for the reporting unit and trademark intangible asset.
The Nautica® brand was acquired in 2003 and sells sportswear in the U.S. through department stores, specialty stores, VF-operated stores and online. It also has significant global licensing arrangements. The Nautica® brand is part of the Sportswear coalition and represents substantially all of the coalition’s goodwill value. As part of the 2009 annual impairment analysis,VF recorded an impairment charge of $58.5 million to write the goodwill down to its estimated fair value. The remaining book values of the goodwill and trademark intangible asset at the 2017 testing date were $153.7 million and $217.4 million, respectively.
The impairment testing of goodwill and the trademark intangible asset utilized significant unobservable inputs (Level 3) to determine the estimated fair value. As a result of the interim impairment testing performed, VF recognized a goodwill impairment charge of $104.7 million in the Consolidated Statements of Income for the three and nine months ended September 2017. VF early adopted the recently issued accounting guidance that simplifies the subsequent measurement of goodwill and calculated the impairment charge as the difference between the carrying value of the reporting unit and the estimated fair value. The estimated fair value of the trademark intangible asset exceeded its carrying value by a substantial amount and thus the asset was not impaired.
The estimated fair value of the Nautica® reporting unit for goodwill impairment testing was determined using a combination of two valuation methods: an income approach and a market approach. The income approach was based on projected future (debt-free) cash flows that were discounted to present value and assumed a terminal growth value. The discount rate was based on the reporting unit’s weighted average cost of capital (“WACC”) that takes market participant assumptions into consideration. For the market approach, management used both the guideline company and similar transaction methods. The guideline company method analyzed market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation were based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples were calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.
Management used the income-based relief-from-royalty method to value the Nautica® trademark intangible asset. Under this method, revenues expected to be generated by the trademark were multiplied by a selected royalty rate. The royalty rate was selected based on consideration of i) royalty rates included in active license agreements, ii) royalty rates received by market participants in the apparel industry, and iii) the current performance of the reporting unit. The estimated after-tax royalty revenue stream was then discounted to present value using the reporting unit’s WACC plus a spread that factors in the risk of the intangible asset.
Management’s revenue and profitability forecasts used in the Nautica® reporting unit and intangible asset valuations considered recent and historical Nautica® performance, strategic initiatives for the Nautica® reporting unit and industry trends. Assumptions used in the valuations were similar to those that would be used by market participants performing independent valuations of these businesses.
Key assumptions developed by VF management and used in the quantitative analysis include:
It is possible VF’s conclusions regarding impairment of the Nautica® reporting unit goodwill or trademark intangible asset could change in future periods. There can be no assurance the estimates and assumptions used in our goodwill and intangible asset impairment testing performed in the third quarter of 2017 will prove to be accurate predictions of the future. For example, variations in our assumptions related to discount rates, comparable company market approach inputs, business performance and execution of planned growth strategies could impact future conclusions. A future impairment charge for goodwill or intangible assets could have a material effect on VF’s consolidated financial position and results of operations.
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