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
 9 Months Ended
Sep. 29, 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, certain 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 September 2012, December 2011 and September 2011 totaled $1.4 billion, $1.5 billion and $1.4 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
Unrealized Gains		 Fair Value of Derivatives with
Unrealized Losses
In thousands September
2012		 December
2011		 September
2011		 September
2012		 December
2011		 September
2011

Foreign exchange contracts designated as hedging instruments

 $ 26,664 $ 45,071 $ 29,073 $ 22,910 $ 22,406 $ 24,231

Foreign exchange contracts dedesignated as hedging instruments

 64 1,245 2,220 4,976 930 201

Foreign exchange contracts not dedesignated as hedging instruments

 115 12 81 569 177 177

Total derivatives

 $ 26,843 $ 46,328 $ 31,374 $ 28,455 $ 23,513 $ 24,609

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 September
2012		 December
2011		 September
2011

Other current assets

 $ 23,648 $ 39,076 $ 26,100

Accrued current liabilities

 (22,766 ) (19,326 ) (18,260 )

Other assets (noncurrent)

 3,195 7,252 5,274

Other liabilities (noncurrent)

 (5,689 ) (4,187 ) (6,349 )

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 sales of inventory. In addition, VF hedges the exchange risk of forecasted intercompany royalties. As discussed below in “Derivative Contracts Dedesignated as Hedges”, certain 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:

Gain (Loss) on Derivatives Recognized in OCI
In thousands Three Months ended
September		 Nine Months ended
September

Cash Flow Hedging Relationships

 2012 2011 2012 2011

Foreign exchange

 $ (15,829 ) $ 23,048 $ 2,846 $ (11,504 )

Interest rate

 — (48,266 ) — (48,266 )

Total

 $ (15,829 ) $ (25,218 ) $ 2,846 $ (59,770 )

Gain (Loss) Reclassified from Accumulated OCI
into Income
In thousands Three Months ended
September		 Nine Months ended
September

Location of Gain (Loss) Reclassified From Accumulated OCI into Income

 2012 2011 2012 2011

Net sales

 $ (2,150 ) $ 3,034 $ (3,931 ) $ 4,265

Cost of goods sold

 9,694 (10,293 ) 10,291 (5,489 )

Other income (expense), net

 1,890 (3,484 ) 1,777 (7,020 )

Interest expense

 (934 ) (1,578 ) (2,772 ) (1,520 )

Total

 $ 8,500 $ (12,321 ) $ 5,365 $ (9,764 )

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 nine months of 2012. VF’s Consolidated Statements of Income include the following effects related to designated fair value hedging:

Gain (Loss) on Derivative and Related
Hedged Items Recognized in Income
In thousands Three Months ended
September 		Nine Months ended
September

Fair Value Hedging Relationships

Location of Gain (Loss)

 2012 2011 2012 2011

Foreign exchange (expense), net

Other income

 $ — $ 6,716 $ — $ 1,669

Advances - intercompany

Other income (expense), net

 $ — $ (6,606 ) $ — $ (2,807 )

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 nine months ended September 2012, VF recorded net losses of $0.6 million and $2.4 million in Other income (expense), net for derivatives dedesignated as hedging instruments, effectively offsetting the net remeasurement gains on the related assets and liabilities. For the three and nine months ended September 2011, VF recorded net losses of less than $1.0 million in Other income (expense), net 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:

Gain (Loss) on Derivatives
Recognized in Income
Three months ended
September 		Nine months ended
September

Derivatives Not Designated as Hedges

Location of Gain (Loss) on Derivatives Recognized
in Income

 2012 2011 2012 2011

Foreign exchange contracts

 Other income (expense), net $ (2,253 ) $ — $ (877 ) $ —

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

At September 2012, Accumulated OCI included $15.8 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 $40.4 million at September 2012, which will be reclassified into Interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments.