Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

v2.4.0.6
Derivative Financial Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2012
Derivative Financial Instruments and Hedging Activities

Note M — Derivative Financial Instruments and Hedging Activities

Summary of Derivative Instruments: All of VF’s outstanding derivative instruments are forward foreign exchange contracts. Most derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, but a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. Additionally, derivative instruments that are cash flow hedges of forecasted third party sales are dedesignated as hedges near the end of their term and do not qualify for hedge accounting after the date of dedesignation. The notional amounts of outstanding derivative contracts at June 2012, December 2011 and June 2011 totaled $1.6 billion, $1.5 billion and $1.5 billion, respectively, consisting of contracts hedging primarily exposures to the euro, British pound, Canadian dollar, Mexican peso, Polish zloty, and Japanese yen. Derivative contracts have maturities up to 20 months. The following table presents outstanding derivatives on an individual contract basis:

 

     Fair Value of Derivatives with      Fair Value of Derivatives with  
     Unrealized Gains      Unrealized Losses  
     June      December      June      June      December      June  
In thousands    2012      2011      2011      2012      2011      2011  

Foreign exchange contracts designated as hedging instruments

    $ 56,894       $ 45,071       $ 22,141       $ 18,977       $ 22,406       $ 63,722   

Foreign exchange contracts dedesignated as hedging instruments

      170         1,245         1,698         2,427         930         184   

Foreign exchange contracts not designated as hedging instruments

      71         12         —           214         177         —     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 57,135       $ 46,328       $ 23,839       $ 21,618       $ 23,513       $ 63,906   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Outstanding derivatives have been included in the Consolidated Balance Sheets and classified as current or noncurrent based on the derivatives’ maturity dates, as follows:

 

In thousands    June
2012 		    December
2011 		    June
2011 		 

Other current assets

    $ 50,313      $ 39,076      $ 21,421   

Accrued current liabilities

      (18,739 )      (19,326 )      (58,040 ) 

Other assets (noncurrent)

      6,822        7,252        2,418   

Other liabilities (noncurrent)

      (2,879 )      (4,187 )      (5,866 ) 

Fair Value Hedges: VF enters into derivative contracts to hedge intercompany balances between related parties having different functional currencies, and has historically designated these as fair value hedge relationships. Effective January 1, 2012, VF no longer designates these types of derivative contracts as hedge relationships. Accordingly, gains (losses) related to these derivatives are included in the disclosure of “Derivative Contracts Not Designated as Hedges” during the first six months of 2012. VF’s Consolidated Statements of Income include the following effects related to fair value hedging:

 

      Location of
Gain  (Loss)
on Derivatives
Recognized
in  Income 		              Hedged Items
in Fair  Value
Hedge
Relationships 		   Location of
Gain  (Loss)
Recognized
on Related
Hedged  Items 		            
In thousands                       Gain (Loss) on  
       Gain (Loss) on Derivatives          Related Hedged Items  

Fair Value Hedging

Relationships

      Recognized in Income          Recognized in Income  
     Three
Months		     Six
Months		          Three
Months		      Six
Months		  

Periods ended June 2012

                 
Foreign exchange    Miscellaneous
income
(expense)		   $ —        $ —        Advances –
intercompany		    Miscellaneous
income
(expense)		   $ —         $ —     

Periods ended June 2011

                 

Foreign exchange

    Miscellaneous
income
(expense)		   $ (3,817 )    $ (5,047 )    Advances –
intercompany		    Miscellaneous
income
(expense)		   $ 2,829       $ 3,799   

 

Cash Flow Hedges: VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted inventory purchases and production costs and for its forecasted cash receipts arising from sales of inventory. In addition, VF hedges the exchange risk of forecasted intercompany royalties. As discussed below in “Derivative Contracts Dedesignated as Hedges”, cash flow hedges of forecasted inventory sales to third parties are dedesignated as hedges when the sale is recorded, and hedge accounting is not applied after that date. 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         Gain (Loss) Reclassified  
     Derivatives         from Accumulated  
Cash Flow Hedging    Recognized in OCI     Location of Gain (Loss)   OCI into Income  
   Three     Six     Reclassification From   Three     Six  

Relationships

    Months     Months     Accumulated OCI into Income   Months     Months  

Periods ended June 2012

           

Foreign exchange

    $ 26,386      $ 18,675      Net sales   $ (2,484 )    $ (1,780 ) 
       Cost of goods sold     283        597   
       Miscellaneous income (expense)     553        (114 ) 
       Interest expense     (927 )      (1,838 ) 
  

 

 

    

 

 

      

 

 

    

 

 

  

Total

    $ 26,386      $ 18,675      Total   $ (2,575 )    $ (3,135 ) 
  

 

 

    

 

 

      

 

 

    

 

 

  

Periods ended June 2011

           

Foreign exchange

    $ (8,370 )    $ (34,552 )    Net sales   $ 1,627      $ 1,231   
       Cost of goods sold     (338 )      4,804   
       Miscellaneous income (expense)     (1,591 )      (3,536 ) 
       Interest expense     29        58   
  

 

 

    

 

 

      

 

 

    

 

 

  

Total

    $ (8,370 )    $ (34,552 )    Total   $ (273 )    $ 2,557   
  

 

 

    

 

 

      

 

 

    

 

 

  

Derivative Contracts Dedesignated as Hedges: As previously noted, cash flow hedges of certain forecasted inventory sales to third parties are dedesignated as hedges when the sales are recognized. At that time, hedge accounting is no longer applied and the amount of unrealized hedging gain or loss is recognized in net sales. These derivatives remain outstanding and serve as an economic hedge of foreign currency exposures related to the ultimate collection of the trade receivables. During the period that hedge accounting is not applied, changes in the fair value of the derivative contracts are recognized directly in earnings. For the three and six months ended June 2012, VF recorded net losses of $1.1 million and $1.9 million in Miscellaneous Income (Expense) for derivatives dedesignated as hedging instruments, effectively offsetting the net remeasurement gains on the related assets and liabilities. For the three and six months ended June 2011, VF recorded net losses of less than $1.0 million in Miscellaneous Income (Expense) for dedesignated derivatives.

Derivative Contracts Not Designated as Hedges: VF uses derivative contracts to manage foreign currency exchange risk on intercompany loans, accounts receivable and payable, and third-party accounts receivable and payable. These contracts, which are not designated as hedges, are recorded at fair value in the Consolidated Balance Sheets, with changes in the fair values of these instruments recognized directly in earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities. Following is a summary of these hedges included in VF’s Consolidated Statements of Income:

 

     Location of Gain (Loss)   Gain
(Loss) on Derivatives		  
Derivatives Not    on Derivatives   Recognized in Income  

Designated as Hedges

    Recognized in Income   2012      2011  

Foreign exchange

    Miscellaneous income (expense)   $ 1,376       $ —     

Other Derivative Information: There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and six months ended June 2012 and June 2011.

At June 2012, Accumulated OCI included $32.9 million of net pretax deferred gains for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts reclassified to earnings will depend on exchange rates in effect when currently 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 net pretax deferred loss in Accumulated OCI related to the contracts was $41.4 million at June 2012, which will be reclassified into the Consolidated Statement of Income over the remaining terms of the associated debt instruments.