Note P – 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 $2.2 billion at September 2016, $2.4 billion at December 2015 and $2.4 billion at September 2015, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Swedish krona, 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 2016				December 2015				September 2015				September 2016				December 2015				September 2015
Foreign currency exchange contracts designated as hedging instruments		$	75,497			$	105,536			$	94,113			$	(31,996	)		$	(27,896	)		$	(46,808	)
Foreign currency exchange contracts not designated as hedging instruments			—				255				112				(185	)			(136	)			(373	)
Total derivatives		$	75,497			$	105,791			$	94,225			$	(32,181	)		$	(28,032	)		$	(47,181	)

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 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 would be adjusted from the current gross presentation to the net amounts as detailed in the following table:

 

		September 2016								December 2015								September 2015
In thousands		Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability
Gross amounts presented in the
Consolidated Balance Sheets		$	75,497			$	(32,181	)		$	105,791			$	(28,032	)		$	94,225			$	(47,181	)
Gross amounts not offset in the
Consolidated Balance Sheets			(19,328	)			19,328				(22,213	)			22,213				(36,597	)			36,597
Net amounts		$	56,169			$	(12,853	)		$	83,578			$	(5,819	)		$	57,628			$	(10,584	)

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

 

In thousands		September 2016				December 2015				September 2015
Other current assets		$	66,231			$	92,796			$	85,405
Accrued liabilities			(28,852	)			(25,776	)			(40,969	)
Other assets			9,266				12,995				8,820
Other liabilities			(3,329	)			(2,256	)			(6,212	)

 

Cash Flow Hedges

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating 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		2016				2015				2016				2015
Foreign currency exchange		$	9,571			$	5,634			$	32,837			$	52,068
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)		2016				2015				2016				2015
Net sales		$	14,676			$	(22,434	)		$	11,997			$	(51,279	)
Cost of goods sold			15,485				39,142				80,094				80,633
Selling, general and administrative expenses			(1,098	)			—				(3,611	)			—
Other income (expense), net			526				7,541				2,653				20,515
Interest expense			(1,131	)			(1,078	)			(3,356	)			(3,200	)
Total		$	28,458			$	23,171			$	87,777			$	46,669

Derivative Contracts Not Designated as Hedges

VF uses derivative contracts to manage foreign currency exchange risk on third-party accounts receivable and payable, as well as intercompany borrowings. 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 transaction gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:

 

In thousands Derivatives Not Designated as Hedges		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
						2016				2015				2016				2015
Foreign currency exchange			Cost of goods sold			$	(510	)		$	—			$	225			$	—
Foreign currency exchange			Other income (expense), net				(110	)			836				(1,196	)			(1,625	)
Total						$	(620	)		$	836			$	(971	)		$	(1,625	)

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 2016 and September 2015.

 

At September 2016, accumulated OCI included $42.8 million of pre-tax net deferred gains for foreign currency 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 pre-tax net deferred loss in accumulated OCI was $23.8 million at September 2016, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. VF reclassified $1.1 million and $3.4 million of net deferred losses from accumulated OCI into interest expense for the three and nine-month periods ended September 2016, respectively, and $1.1 million and $3.2 million for the three and nine-month periods ended September 2015, respectively. VF expects to reclassify $4.7 million to interest expense during the next 12 months.

Net Investment Hedge

The Company has designated its €850 million of euro-denominated bonds as a net investment hedge of VF’s investment in certain foreign operations. Because this debt qualified as a nonderivative hedging instrument, foreign currency transaction gains or losses of the debt are recorded in the cumulative translation adjustment component of accumulated OCI as an offset to the foreign currency translation adjustments on the hedged investments. During the third quarter of 2016, the Company recognized $1.7 million of gains in accumulated OCI related to the net investment hedge transaction. The amount will remain in OCI until the hedged investment is sold or substantially liquidated. The Company recorded no ineffectiveness from its net investment hedge in the third quarter of 2016.