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

Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Summary of Derivative Financial Instruments

VF’s outstanding derivative financial instruments include foreign currency exchange forward contracts and interest rate swap 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 all outstanding foreign currency exchange forward contracts were $3.3 billion at December 2022, $2.9 billion at March 2022 and $2.8 billion at December 2021, consisting primarily of contracts hedging exposures to the euro,

British pound, Canadian dollar, Swiss franc, Mexican peso, South Korean won, Swedish krona, Polish zloty, Japanese yen and New Zealand dollar. These derivative contracts have maturities up to 20 months.

In the three months ended December 2022, VF entered into interest rate swap contracts to hedge the cash flow risk of interest payments on its variable-rate DDTL Agreement. The notional amount of VF's outstanding interest rate swap contracts was $500.0 million at December 2022. Refer to Note 9 for additional information on the debt agreement.

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)	December 2022		March 2022		December 2021		December 2022		March 2022		December 2021
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts	$	80,435	$	79,046	$	55,000	$	(58,455)	$	(27,678)	$	(32,660)
Interest rate contracts	422		—		—		—		—		—
Total derivatives designated as hedging instruments	80,857		79,046		55,000		(58,455)		(27,678)		(32,660)
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts	4,061		—		2,466		(321)		(45)		(327)
Total derivatives	$	84,918	$	79,046	$	57,466	$	(58,776)	$	(27,723)	$	(32,987)

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. If VF were to offset and record the asset and liability balances 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:


	December 2022				March 2022				December 2021

(In thousands)	Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability		Derivative Asset		Derivative Liability
Gross amounts presented in the Consolidated Balance Sheets	$	84,918	$	(58,776)	$	79,046	$	(27,723)	$	57,466	$	(32,987)
Gross amounts not offset in the Consolidated Balance Sheets	(24,024)		24,024		(18,721)		18,721		(22,964)		22,964
Net amounts	$	60,894	$	(34,752)	$	60,325	$	(9,002)	$	34,502	$	(10,023)

Derivatives are classified as current or noncurrent based on maturity dates, as follows:


(In thousands)		December 2022		March 2022		December 2021
Derivative Instruments	Balance Sheet Location
Foreign exchange contracts	Other current assets	$	79,862	$	71,910	$	50,298
Foreign exchange contracts	Accrued liabilities	(42,274)		(24,267)		(28,326)
Foreign exchange contracts	Other assets	4,634		7,136		7,168
Foreign exchange contracts	Other liabilities	(16,502)		(3,456)		(4,661)
Interest rate contracts	Other assets	422		—		—

Cash Flow Hedges

VF primarily uses foreign currency exchange forward contracts to hedge a portion of the exchange risk for its forecasted sales, inventory purchases, operating costs and intercompany royalties. The company also uses interest swap contracts to hedge against a portion of the exposure related to its variable-rate debt. The effects of cash flow hedging included in VF’s Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income are summarized as follows:


(In thousands)	Gain (Loss) on Derivatives Recognized in OCI Three Months Ended December				Gain (Loss) on Derivatives Recognized in OCI Nine Months Ended December

Cash Flow Hedging Relationships	2022		2021		2022		2021
Foreign exchange contracts	$	(120,057)	$	14,185	$	82,058	$	43,983
Interest rate contracts	422		—		422		—
Total	$	(119,635)	$	14,185	$	82,480	$	43,983


(In thousands)		Gain (Loss) Reclassified from Accumulated OCI into Income Three Months Ended December				Gain (Loss) Reclassified from Accumulated OCI into Income Nine Months Ended December

Cash Flow Hedging Relationships	Location of Gain (Loss)	2022		2021		2022		2021
Foreign exchange contracts	Net revenues	$	(2,759)	$	(9,284)	$	(18,243)	$	(16,045)
Foreign exchange contracts	Cost of goods sold	27,019		(3,974)		44,780		(26,644)
Foreign exchange contracts	Selling, general and administrative expenses	1,816		688		5,380		(418)
Foreign exchange contracts	Other income (expense), net	6,802		104		24,055		(2,958)
Interest rate contracts	Interest expense	27		27		81		81

Total		$	32,905	$	(12,439)	$	56,053	$	(45,984)

Derivative Contracts Not Designated as Hedges

VF uses foreign currency exchange 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 losses or gains on the related assets and liabilities. In the case of derivative contracts executed on foreign currency exposures that are no longer probable of occurring, VF de-designates these hedges and the fair value changes of these instruments are also recognized directly in earnings.

The impact of de-designated derivative contracts and changes in the fair value of derivative contracts not designated as hedges, recognized as gains or losses in VF's Consolidated Statements of Operations were not material for the three and nine months ended December 2022 and December 2021.

Other Derivative Information

At December 2022, accumulated OCI included $101.1 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.

Net Investment Hedge

The Company has designated its euro-denominated fixed-rate notes, which represent €1.850 billion in aggregate principal, 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 nine-month periods ended December 2022, the Company recognized an after-tax loss of $126.5 million and an after-tax gain of $45.2 million, respectively, in OCI related to the net investment hedge transaction, and an after-tax gain of $29.1 million and $51.7 million for the three and nine-month periods ended December 2021, respectively. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated.