Note O — Derivative Financial Instruments and Hedging Activities

Summary of Derivative Instruments

All of VF’s outstanding derivative instruments are forward foreign currency 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. The notional amounts of outstanding derivative contracts at September 2013, December 2012 and September 2012 totaled $2.1 billion, $1.9 billion and $1.4 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:

 

		Fair Value of Derivatives with Unrealized Gains												Fair Value of Derivatives with Unrealized Losses
In thousands		September 2013				December 2012				September 2012				September 2013				December 2012				September 2012
Foreign exchange contracts designated as hedging instruments		$	12,685			$	15,847			$	26,664			$	(37,376	)		$	(27,267	)		$	(22,910	)
Foreign exchange contracts dedesignated as hedging instruments			—				15				64				—				(2,160	)			(4,976	)
Foreign exchange contracts not designated as hedging instruments			47				291				115				(315	)			(41	)			(569	)
Total derivatives		$	12,732			$	16,153			$	26,843			$	(37,691	)		$	(29,468	)		$	(28,455	)

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. However, if VF were to offset and record the asset and liability balances of all of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets as of September 2013, December 2012 and September 2012 would be adjusted from the current gross presentation as detailed in the following table:

 

		September 2013								December 2012								September 2012
In thousands		Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability
Gross amounts presented in the Consolidated Balance Sheets		$	12,732			$	(37,691	)		$	16,153			$	(29,468	)		$	26,843			$	(28,455	)
Gross amounts not offset in the Consolidated Balance Sheets			(10,497	)			10,497				(5,225	)			5,225				(4,760	)			4,760
Net amount		$	2,235			$	(27,194	)		$	10,928			$	(24,243	)		$	22,083			$	(23,695	)

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

 

In thousands		September 2013				December 2012				September 2012
Other current assets		$	12,257			$	13,629			$	23,648
Accrued liabilities (current)			(28,743	)			(22,013	)			(22,766	)
Other assets (noncurrent)			475				2,524				3,195
Other liabilities (noncurrent)			(8,948	)			(7,455	)			(5,689	)

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. 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 September								Gain (Loss) on Derivatives Recognized in OCI Nine Months Ended September
Cash Flow Hedging Relationships		2013				2012				2013				2012
Foreign exchange		$	(54,432	)		$	(15,829	)		$	(2,032	)		$	2,846

 

In thousands		Gain (Loss) Reclassified from Accumulated OCI into Income Three Months Ended September								Gain (Loss) Reclassified from Accumulated OCI into Income Nine Months Ended September
Location of Gain (Loss)		2013				2012				2013				2012
Net sales		$	6,195			$	(2,150	)		$	7,418			$	(3,931	)
Cost of goods sold			3,574				9,694				11,115				10,291
Other income (expense), net			(2,218	)			1,890				83				1,777
Interest expense			(980	)			(934	)			(2,909	)			(2,772	)
Total		$	6,571			$	8,500			$	15,707			$	5,365

Derivative Contracts Dedesignated as Hedges

Cash flow hedges of some forecasted sales to third parties have historically been dedesignated as hedges when the sales were recognized. At that time, hedge accounting was discontinued and the amount of unrealized hedging gain or loss was recognized in net sales. These derivatives remained 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 were recognized directly in earnings. As discussed below in Derivative Contracts Not Designated as Hedges, VF now utilizes separate derivative contracts to manage foreign currency risk related to balance sheet exposures. Accordingly, the third quarter of 2013 is the last period during which dedesignations were recognized related to these cash flow hedges.

For the three and nine month periods ended September 2013, VF recorded net gains of $0.2 million and $1.5 million, respectively, in other income (expense), net, for derivatives dedesignated as hedging instruments. For the three and nine month periods ended September 2012, VF recorded net losses of $0.6 million and $2.4 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		Location of Gain (Loss) on Derivatives Recognized in Income				Gain (Loss) on Derivatives Recognized in Income Three Months Ended September								Gain (Loss) on Derivatives Recognized in Income Nine Months Ended September
Derivatives Not Designated as Hedges						2013				2012				2013				2012
Foreign exchange			Other income (expense), net			$	(6,402	)		$	(2,253	)		$	(2,404	)		$	(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 month periods ended September 2013 and September 2012.

At September 2013, accumulated other comprehensive income (“OCI”) included $11.4 million of net pretax 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 was $36.6 million at September 2013, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments.