VF Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

LEASES

LEASES

3 Months Ended

Jun. 29, 2019

VF determines if an arrangement is or contains a lease at contract inception and determines its classification as an operating or finance lease at lease commencement. The Company leases certain retail locations, office space, distribution facilities, machinery and equipment, and vehicles. While the substantial majority of these leases are operating leases, certain distribution centers and office spaces are finance leases.

Leases for real estate typically have initial terms ranging from 3 to 15 years, generally with renewal options. Leases for equipment typically have initial terms ranging from 2 to 5 years and vehicle leases typically have initial terms ranging from 1 to 8 years. In determining the lease term used in the lease right-of-use asset and lease liability calculations, the Company considers various factors such as market conditions and the terms of any renewal or termination options that may exist. When deemed reasonably certain, the renewal and termination options are included in the determination of the lease term and calculation of the lease right-of-use asset and lease liability.

Most leases have fixed rental payments. Many of the real estate leases also require additional variable payments for occupancy-related costs, real estate taxes and insurance, as well as other payments (e.g., contingent rent) owed when sales at individual retail store locations exceed a stated base amount. Variable lease payments are excluded from the measurement of the lease liability and are recognized in profit and loss in the period in which the event or conditions that triggers those payments occur.

VF estimates the amount it expects to pay to the lessor under a residual value guarantee and includes it in lease payments used to measure the lease liability only for amounts probable of being owed by VF at the commencement date.

VF calculates lease right-of-use assets and lease liabilities as the present value of lease payments over the lease term at

commencement date. When readily determinable, the Company uses the implicit rate to determine the present value of lease payments, which generally does not happen in practice. As the rate implicit in the majority of the Company's leases is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the lease term, currency, country specific risk premium and adjustments for collateralized debt.

Operating lease expense is recorded as a single lease cost on a straight-line basis over the lease term. For finance leases, right-of-use asset amortization and interest on lease liabilities are presented separately in the Consolidated Statement of Income.

The Company assesses whether a sale leaseback transaction qualifies as a sale when the transaction occurs. For transactions qualifying as a sale, VF derecognizes the underlying asset and recognizes the entire gain or loss at the time of the sale. The corresponding lease entered into with the buyer-lessor is accounted for as an operating lease. During the three months ended June 2019, the Company entered into a sale leaseback transaction for certain office real estate and related assets. The transaction qualified as a sale, and thus the Company recognized a gain of $11.3 million resulting from the transaction during the three months ended June 2019.

As of June 2019, the Company has signed certain distribution center leases that have not yet commenced but will create significant rights and obligations. The leases will commence in Fiscal 2020 and Fiscal 2021 and have lease terms of 15 years. Other leases signed that have not yet commenced are not individually significant. The Company does not have material subleases.

The assets and liabilities related to operating and finance leases were as follows:



(In thousands)	Location in Consolidated Balance Sheet	June 2019
Assets:
Operating lease assets	Operating lease right-of-use assets	$	1,281,106
Finance lease assets	Property, plant and equipment	24,437
Total lease assets		$	1,305,543

Liabilities:
Current
Operating lease liabilities	Accrued liabilities	$	326,874
Finance lease liabilities	Current portion of long-term debt	5,068
Noncurrent
Operating lease liabilities	Operating lease liabilities	1,043,664
Finance lease liabilities	Long-term debt	27,586
Total lease liabilities		$	1,403,192

The components of lease costs were as follows:



(In thousands)	Three Months Ended June 2019
Operating lease cost ^(a)	$	101,459
Finance lease cost – amortization of right-of-use asset	969
Finance lease cost – interest on lease liability	284
Short-term lease cost	569
Variable lease cost	1,690
Gain recognized from sale-leaseback transactions	(11,329		)
Total lease cost	$	93,642


^(a)	Includes sublease income, which is not material.

Supplemental cash flow information related to leases was as follows:



(In thousands)	Three Months Ended June 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – operating leases	$	104,539
Operating cash flows – finance leases	284
Financing cash flows – finance leases	1,223
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases ^(a)	1,374,872
Finance leases	—


^(a)	Includes amounts recorded upon adoption of ASC 842.

Lease terms and discount rates were as follows:



	June 2019
Weighted average remaining lease term:
Operating leases	5.58 years
Finance leases	13.41 years

Weighted average discount rate:
Operating leases	2.50	%
Finance leases	3.22	%

Maturities of operating and finance lease liabilities for the next five fiscal years (including the remainder of Fiscal 2020) and thereafter as of June 2019 were as follows:



(In thousands)	Operating Leases		Finance Leases		Total
Remainder of 2020	$	269,262	$	4,522	$	273,784
2021	366,243		6,532		372,775
2022	254,351		1,911		256,262
2023	186,670		1,626		188,296
2024	118,016		1,550		119,566
Thereafter	281,021		23,495		304,516
Total lease payments	1,475,563		39,636		1,515,199
Less: present value adjustment	105,025		6,982		112,007
Present value of lease liabilities	$	1,370,538	$	32,654	$	1,403,192

The Company excluded approximately $286.5 million of leases (undiscounted basis) that have not yet commenced. These leases will commence in Fiscal 2020 with lease terms of 2 to 15 years.

Future minimum lease payments under operating leases with noncancelable lease terms in excess of one year from continuing operations as of March 2019, prior to the adoption of ASC 842, were as follows:



(In thousands)	Operating Leases
2020	$	320,224
2021	287,829
2022	212,918
2023	154,920
2024	100,789
Thereafter	251,228
Total lease payments	$	1,327,908