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

Annual report pursuant to Section 13 and 15(d)

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

12 Months Ended

Mar. 30, 2019

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:


•	Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities, or (iii) information derived from or corroborated by observable market data.


•	Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.

Recurring Fair Value Measurements

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:



	Total Fair Value		Fair Value Measurement Using ^(a)
(In thousands)			Level 1		Level 2		Level 3
March 2019
Financial assets:
Cash equivalents:
Money market funds	$	248,560	$	248,560	$	—	$	—
Time deposits	8,257		8,257		—		—
Derivative financial instruments	92,771		—		92,771		—
Investment securities	186,698		176,209		10,489		—
Financial liabilities:
Derivative financial instruments	22,337		—		22,337		—
Deferred compensation	199,336		—		199,336		—
	Total Fair Value		Fair Value Measurement Using ^(a)
(In thousands)			Level 1		Level 2		Level 3
March 2018
Financial assets:
Cash equivalents:
Money market funds	$	185,118	$	185,118	$	—	$	—
Time deposits	7,714		7,714		—		—
Derivative financial instruments	31,400		—		31,400		—
Investment securities	194,160		183,802		10,358		—
Financial liabilities:
Derivative financial instruments	106,174		—		106,174		—
Deferred compensation	227,808		—		227,808		—
	Total Fair Value		Fair Value Measurement Using ^(a)
(In thousands)			Level 1		Level 2		Level 3
December 2017
Financial assets:
Cash equivalents:
Money market funds	$	265,432	$	265,432	$	—	$	—
Time deposits	13,591		13,591		—		—
Derivative financial instruments	22,970		—		22,970		—
Investment securities	197,837		185,723		12,114		—
Financial liabilities:
Derivative financial instruments	100,038		—		100,038		—
Deferred compensation	235,359		—		235,359		—


^(a)	There were no transfers among the levels within the fair value hierarchy during the year ended March 2019, the three months ended March 2018 or the year ended December 2017.

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 foreign exchange forward 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 (Note 15). These investments 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 March 2019, March 2018 and December 2017, their carrying values approximated their fair values. Additionally, at March 2019, March 2018 and December 2017, the carrying values of VF’s long-term debt, including the current portion, were $2,121.1 million, $2,218.8 million and $2,194.0 million, respectively, compared with fair values of $2,318.6 million, $2,403.9 million and $2,422.0 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

In conjunction with the acquisitions of Williamson-Dickie, Icebreaker and Altra, the Company measured tangible and intangible assets acquired and liabilities assumed at fair value using valuation techniques including the replacement cost, market and income methods. Refer to Note 3 for additional details regarding the acquisitions and purchase price allocation.

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 fair value, using market-based assumptions.

The Company recorded $6.0 million, $17.2 million and $8.2 million of fixed asset impairments in the years ended March 2019, December 2017 and December 2016, respectively, related to retail store assets and other fixed assets. These impairments 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 three months ended March 2018.

Due to the change in VF's reportable segments during the first quarter of the year ended March 2019, the Timberland PRO^® and Wrangler^® RIGGS brands were identified as new reporting units. Accordingly, VF was required to evaluate whether there was impairment at the historical Timberland and Jeanswear North America reporting units, and allocate to Timberland PRO and Wrangler RIGGS a portion of the respective historical reporting unit goodwill. Management performed a quantitative impairment analysis and concluded the estimated fair value of the historical reporting units exceeded the carrying value by a substantial amount, and thus the goodwill was not impaired. Management allocated $51.5 million and $7.4 million to Timberland Pro and Wrangler RIGGS, respectively, based on estimated relative fair values. The fair values of the reporting units were estimated using valuation techniques described in the Critical Accounting Policies and Estimates included in the "Management’s Discussion and Analysis" section of this Form 10-K.

Management performed its annual impairment testing of goodwill and indefinite-lived intangible assets as of the beginning of the fourth quarter of Fiscal 2019. Management performed a qualitative analysis for all reporting units and trademark intangible assets. No impairment charges of goodwill or intangible assets were recorded in the year ended March 2019 or the three months ended March 2018. See Critical Accounting Policies and Estimates within Management's Discussion and Analysis for additional discussion regarding non-recurring fair value measurements during the year ended March 2019.

No impairment charges of goodwill or intangible assets were recorded in the year ended December 2017 except for a goodwill impairment charge of $104.7 million recorded in the the three months ended September 30, 2017 related to the Nautica^® brand business, which has since been reported as discontinued operations.

VF recognized impairment charges of $79.6 million in the year ended December 2016 Consolidated Statement of Income related to the lucy^®brand, of which $39.3 million related to the remaining goodwill and $40.3 million related to the remaining trademark intangible asset. No other impairment charges were recorded.

Our impairment testing of goodwill, trademarks, customer relationships and license intangible assets utilizes significant unobservable inputs (Level 3) to determine fair value.

The fair value of reporting units for goodwill impairment testing is determined using a combination of two valuation methods: an income approach and a market approach. The income approach is based on projected future (debt-free) cash flows that are discounted to present value. The appropriate discount rate is based on the reporting unit’s weighted average cost of capital (“WACC”) that takes market participant assumptions into consideration. For the market approach, management uses both the guideline company and similar transaction methods. The guideline company method analyzes 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 are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.

Management uses the income-based relief-from-royalty method to value trademark intangible assets. Under this method, revenues expected to be generated by the trademark are multiplied by a selected royalty rate. The royalty rate is selected based on consideration of (i) royalty rates included in active license agreements, if applicable, (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 is then discounted to present value using the reporting unit’s WACC plus a spread that factors in the risk of the intangible asset.

For the valuation of customer relationship intangible assets, management uses the multi-period excess earnings method which is a specific application of the discounted cash flows method. Under this method, VF calculates the present value of the after-tax cash flows expected to be generated by the customer relationship asset after deducting contributory asset charges.

Management’s revenue and profitability forecasts used in the reporting unit and intangible asset valuations were developed in conjunction with management’s strategic plan review performed each fourth quarter, and our resulting revised outlook for business performance, and considered recent performance and trends, strategic initiatives and industry trends. Assumptions used in the valuations are similar to those that would be used by market participants performing independent valuations of these businesses.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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