Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

v2.4.0.8
Derivative Financial Instruments and Hedging Activities
 6 Months Ended
Jun. 29, 2013
Derivative Financial Instruments and Hedging Activities

Note O — 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 June 2013, December 2012 and June 2012 totaled $2.1 billion, $1.9 billion and $1.6 billion, respectively, primarily consisting of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Japanese yen and Polish zloty. Derivative contracts have maturities up to 24 months.

 

The following table presents outstanding derivatives on an individual contract basis at their gross amounts:

 

     Fair Value of Derivatives with
Unrealized Gains		      Fair Value of Derivatives with
Unrealized Losses		  
In thousands    June
2013		      December
2012		      June
2012		      June
2013		      December
2012		      June
2012		  

Foreign exchange contracts designated as hedging instruments

    $ 41,472       $ 15,847       $ 56,894       $ 10,629       $ 27,267       $ 18,977   

Foreign exchange contracts dedesignated as hedging instruments

      355         15         170         133         2,160         2,427   

Foreign exchange contracts not designated as hedging instruments

      416         291         71         91         41         214   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 42,243       $ 16,153       $ 57,135       $ 10,853       $ 29,468       $ 21,618   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Derivative instruments have not been offset in the Consolidated Balance Sheets and therefore are reported on a gross basis. Derivatives are classified as current or noncurrent based on their maturity dates, as follows:

 

In thousands    June
2013		     December
2012		     June
2012		  

Other current assets

    $ 33,463      $ 13,629      $ 50,313   

Accrued liabilities (current)

      (8,685 )      (22,013 )      (18,739 ) 

Other assets (noncurrent)

      8,780        2,524        6,822   

Other liabilities (noncurrent)

      (2,168 )      (7,455 )      (2,879 ) 

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, primarily related to our international businesses, 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  Derivatives
Recognized in OCI
Three Months Ended June 		    Gain (Loss) on  Derivatives
Recognized in OCI
Six Months Ended June 		 

Cash Flow Hedging Relationships

    2013     2012     2013     2012  

Foreign exchange

    $ (3,093 )    $ 26,386      $ 52,400      $ 18,675   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ (3,093 )    $ 26,386      $ 52,400      $ 18,675   
  

 

 

    

 

 

    

 

 

    

 

 

  
In thousands    Gain (Loss) Reclassified from
Accumulated OCI into Income
Three  Months Ended June		     Gain (Loss) Reclassified from
Accumulated OCI into Income
Six  Months Ended June		  

Location of Gain (Loss)

        2013             2012             2013             2012      

Net sales

    $ 1,378      $ (2,484 )    $ 1,223      $ (1,780 ) 

Cost of goods sold

      3,683        283        7,541        597   

Other income (expense), net

      1,209        553        2,301        (114 ) 

Interest expense

      (972 )      (927 )      (1,929 )      (1,838 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 5,298      $ (2,575 )    $ 9,136      $ (3,135 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

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 associated with the ultimate collection of the related accounts receivable, during which time changes in the fair value of the derivative contracts are recognized directly in earnings. For the three and six month periods ended June 2013, VF recorded net gains of $0.8 million and $1.3 million, respectively, in other income (expense), net for derivatives dedesignated as hedging instruments, effectively offsetting the net remeasurement losses on the related assets and liabilities. For the three and six month periods ended June 2012, VF recorded net losses of $1.1 million and $1.9 million, respectively, 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, as well as intercompany and third party accounts receivable and payable. 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 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:

 

In thousands

         Gain (Loss) on Derivatives      Gain (Loss) on Derivatives  
     Location of Gain (Loss)    Recognized in Income      Recognized in Income  
     on Derivatives    Three Months Ended June      Six Months Ended June  

Derivatives Not Designated as Hedges

   

Recognized in Income

    2013      2012      2013      2012  

Foreign exchange

   

Other income (expense), net

    $ 2,729       $ 421       $ 3,998       $ 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 2013 and June 2012.

At June 2013, accumulated OCI included $21.9 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 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 $37.5 million at June 2013, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments.