Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments and Hedging Activities

v2.4.0.6
Derivative Financial Instruments and Hedging Activities
 12 Months Ended
Dec. 29, 2012
Derivative Financial Instruments and Hedging Activities

Note U — 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, some 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 December 2012 and December 2011 were $1.9 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 24 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		  
     December
2012		      December
2011		      December
2012		      December
2011		  
     In thousands  

Foreign exchange contracts designated as hedging instruments

    $ 15,847       $ 45,071       $ 27,267       $ 22,406   

Foreign exchange contracts dedesignated as hedging instruments

      15         1,245         2,160         930   

Foreign exchange contracts not designated as hedging instruments

      291         12         41         177   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 16,153       $ 46,328       $ 29,468       $ 23,513   
  

 

 

     

 

 

     

 

 

     

 

 

  

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

 

     December 2012     December 2011  
     In thousands  

Other current assets

    $ 13,629      $ 39,076   

Accrued liabilities (current)

      (22,013 )      (19,326 ) 

Other assets (noncurrent)

      2,524        7,252   

Other liabilities (noncurrent)

      (7,455 )      (4,187 ) 

Cash Flow Hedge Strategies and Accounting Policies

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs and intercompany royalties. As discussed below in Derivative Contracts Dedesignated as Hedges, some cash flow hedges of forecasted 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:

 

Cash Flow

Hedging

Relationships

    Gain (Loss) on
Derivatives
Recognized in OCI 		 
   2012     2011     2010  
     In thousands  

Foreign exchange

    $ (9,555 )    $ 6,707      $ 14,042   

Interest rate

      —        (48,266 )      —   
  

 

 

    

 

 

    

 

 

  

Total

    $ (9,555 )    $ (41,559 )    $ 14,042   
  

 

 

    

 

 

    

 

 

  
      

 

Location of

Gain (Loss)

Reclassified From

Accumulated

OCI into Income

    Gain (Loss) Reclassified
from Accumulated
OCI into Income 		 
   2012     2011     2010  
     In thousands  

Net sales

    $ (6,569 )    $ 6,525      $ (5,907 ) 

Cost of goods sold

      22,470        (16,958 )      10,328   

Other income (expense), net

      3,704        (8,441 )      2,186   

Interest expense

      (3,722 )      (2,424 )      116   
  

 

 

    

 

 

    

 

 

  

Total

    $ 15,883      $ (21,298 )    $ 6,723   
  

 

 

    

 

 

    

 

 

  

Fair Value Hedges

VF enters into derivative contracts to hedge intercompany balances between related parties having different functional currencies. Effective January 1, 2012, VF discontinued its historical practice of designating 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 2012. VF’s Consolidated Statements of Income included the following effects related to designated fair value hedging:

 

Fair Value

Hedging

Relationships

         Gain (Loss) on Derivatives and
Related Hedged Items
Recognized in Income		  
  

Location of Gain (Loss)

    2012      2011     2010  
          In thousands  

Foreign exchange

    Other income (expense), net    $ —       $ 2,413      $ 17,914   

Advances—intercompany

    Other income (expense), net      —         (3,329 )      (18,041 ) 

Derivative Contracts Dedesignated as Hedges

As previously noted, cash flow hedges of some forecasted sales to third parties are dedesignated as hedges when the sales are recognized. At that time, hedge accounting is discontinued and the amount of unrealized hedging gain or loss is recognized in net sales. These derivatives remain outstanding as an economic hedge of foreign currency exposures related to the ultimate collection of the trade receivables, during which time changes in the fair value of the derivative contracts are recognized directly in earnings. During 2012, 2011, and 2010, VF recorded net losses of $1.6 million, $1.7 million and $3.3 million, respectively, in other income (expense), net for derivatives dedesignated as hedging instruments.

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:

 

Derivatives Not

Designated

as Hedges

   

Location of

Gain (Loss)

on Derivatives

Recognized in Income

    Gain (Loss)
on Derivatives
Recognized in Income 		 
      2012      2011      2010  
          In thousands  

Foreign exchange

    Other income (expense), net    $ 1,443       $ 3,995       $ —   

 

 

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the years ended December 2012, 2011 and 2010.

At December 2012, accumulated OCI included $5.3 million of pretax net deferred losses for foreign 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.

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 pretax net deferred loss in accumulated OCI related to the contracts was $39.5 million at December 2012, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments.