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
9 Months Ended
Sep. 27, 2014
Derivative Financial Instruments and Hedging Activities

Note N – Derivative Financial Instruments and Hedging Activities

Summary of Derivative Financial Instruments

All of VF’s outstanding derivative financial instruments are forward foreign currency exchange contracts. Although derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, 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 were $1.8 billion at September 2014, $1.9 billion at December 2013, and $2.1 billion at September 2013, consisting primarily 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 a gross basis by individual contract:

 

     Fair Value of Derivatives with
Unrealized Gains
     Fair Value of Derivatives with
Unrealized Losses
 
In thousands    September
2014
     December
2013
     September
2013
     September
2014
    December
2013
    September
2013
 

Foreign currency exchange contracts designated as hedging instruments

   $ 57,009       $ 15,964       $ 12,685       $ (29,419   $ (46,627   $ (37,376

Foreign currency exchange contracts not designated as hedging instruments

     204         124         47         (1,719     (164     (315
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivatives

   $ 57,213       $ 16,088       $ 12,732       $ (31,138   $ (46,791   $ (37,691
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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 2014, December 2013 and September 2013 would be adjusted from the current gross presentation to the net amounts as detailed in the following table:

 

     September 2014     December 2013     September 2013  
In thousands    Derivative
Asset
    Derivative
Liability
    Derivative
Asset
    Derivative
Liability
    Derivative
Asset
    Derivative
Liability
 

Gross amounts presented in the Consolidated Balance Sheets

   $ 57,213      $ (31,138   $ 16,088      $ (46,791   $ 12,732      $ (37,691

Gross amounts not offset in the Consolidated Balance Sheets

     (22,863     22,863        (11,641     11,641        (10,497     10,497   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts

   $ 34,350      $ (8,275   $ 4,447      $ (35,150   $ 2,235      $ (27,194
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

In thousands    September
2014
    December
2013
    September
2013
 

Other current assets

   $ 41,875      $ 12,699      $ 12,257   

Accrued liabilities (current)

     (25,177     (36,622     (28,743

Other assets (noncurrent)

     15,338        3,389        475   

Other liabilities (noncurrent)

     (5,961     (10,169     (8,948

Cash Flow Hedges

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

   2014     2013     2014     2013  

Foreign currency exchange

   $ 51,351      $ (54,432   $ 43,586      $ (2,032
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)

   2014     2013     2014     2013  

Net sales

   $ (7,657   $ 6,195      $ (7,539   $ 7,418   

Cost of goods sold

     (3,496     3,574        (13,199     11,115   

Other income (expense), net

     (730     (2,218     (1,945     83   

Interest expense

     (1,028     (980     (3,051     (2,909
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (12,911   $ 6,571      $ (25,734   $ 15,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 the balance sheet exposures. Accordingly, 2013 was the last year 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.

 

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 derivatives included in VF’s Consolidated Statements of Income:

 

   

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
 

In thousands

Derivatives Not Designated as Hedges

     2014      2013     2014     2013  

Foreign currency exchange

  Other income (expense), net    $ 35       $ (6,402   $ (4,835   $ (2,404

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 2014 and September 2013.

At September 2014, accumulated OCI included $8.5 million of pretax net 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 was $32.5 million at September 2014, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. Of the $32.5 million, approximately $4.2 million is expected to be reclassified to earnings during the next 12 months.