Annual report pursuant to Section 13 and 15(d)

FAIR VALUE MEASUREMENTS

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FAIR VALUE MEASUREMENTS
 12 Months Ended
Dec. 30, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
•
Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:
 
 
 
Fair Value Measurement Using (a)
(In thousands)
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
December 2017
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
265,432

 
$
265,432

 
$
—

 
$
—

Time deposits
13,591

 
13,591

 
—

 
—

Derivative financial instruments
22,970

 
—

 
22,970

 
—

Investment securities
197,837

 
185,723

 
12,114

 
—

Financial liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
100,038

 
—

 
100,038

 
—

Deferred compensation
235,359

 
—

 
235,359

 
—

December 2016
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
840,842

 
$
840,842

 
$
—

 
$
—

Time deposits
14,774

 
14,774

 
—

 
—

Derivative financial instruments
103,340

 
—

 
103,340

 
—

Investment securities
194,853

 
177,788

 
17,065

 
—

Financial liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
25,574

 
—

 
25,574

 
—

Deferred compensation
230,900

 
—

 
230,900

 
—

(a) 
There were no transfers among the levels within the fair value hierarchy during 2017 or 2016.

VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of foreign exchange forward contracts, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies, and considers the credit risk of the Company and its counterparties. Investment securities are held in VF’s deferred compensation plans as an economic hedge of the related deferred compensation liabilities (Note N). These investments are classified as trading securities and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or quoted prices in inactive markets for identical assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments.
All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At December 2017 and 2016, their carrying values approximated their fair values. Additionally, at December 2017 and 2016, the carrying values of VF’s long-term debt, including the current portion, were $2,194.0 million and $2,292.9 million, respectively, compared with fair values of $2,422.0 million and $2,486.6 million at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
Nonrecurring Fair Value Measurements
In conjunction with the acquisition of Williamson-Dickie, the Company measured tangible and intangible assets acquired and liabilities assumed at fair value using valuation techniques including the replacement cost, market and income methods. Refer to Note B for additional details regarding the acquisition and purchase price allocation.
Certain non-financial assets, primarily property, plant and equipment, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event an impairment is required, the asset is adjusted to fair value, using market-based assumptions.
The Company recorded $17.2 million and $8.2 million of fixed asset impairments in 2017 and 2016, respectively, related to retail store assets and other fixed assets. These impairments are recorded in the selling, general and administrative expenses line item in the Consolidated Statements of Income. There were no significant impairment charges related to property, plant and equipment in 2015.
Management performed its annual impairment testing of goodwill and indefinite-lived intangible assets as of the beginning of the fourth quarter of 2017. Management performed a qualitative analysis for all reporting units and trademark intangible assets. No impairment charges of goodwill or intangible assets were recorded in 2017 except for a goodwill impairment charge of $104.7 million recorded in the third quarter of 2017 related to the Nautica® brand business, which has since been reported as discontinued operations for 2017.
VF recognized impairment charges of $79.6 million in the 2016 Consolidated Statement of Income related to the lucy® brand, of which $39.3 million related to the remaining goodwill and $40.3 million related to the remaining trademark intangible asset. No other impairment charges were recorded as a result of the 2016 quantitative analyses. No impairment charges were recorded in 2015.
Our impairment testing of goodwill, trademarks, customer relationships and license intangible assets utilizes significant unobservable inputs (Level 3) to determine fair value.
The fair value of reporting units for goodwill impairment testing is determined using a combination of two valuation methods: an income approach and a market approach. The income approach is based on projected future (debt-free) cash flows that are discounted to present value. The appropriate discount rate is based on the reporting unit’s weighted average cost of capital (“WACC”) that takes market participant assumptions into consideration. For the market approach, management uses both the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.
Management uses the income-based relief-from-royalty method to value trademark intangible assets. Under this method, revenues expected to be generated by the trademark are multiplied by a selected royalty rate. The royalty rate is selected based on consideration of i) royalty rates included in active license agreements, if applicable, ii) royalty rates received by market participants in the apparel industry, and iii) the current performance of the reporting unit. The estimated after-tax royalty revenue stream is then discounted to present value using the reporting unit’s WACC plus a spread that factors in the risk of the intangible asset.
For the valuation of customer relationship intangible assets, management uses the multi-period excess earnings method which is a specific application of the discounted cash flows method. Under this method, VF calculates the present value of the after-tax cash flows expected to be generated by the customer relationship asset after deducting contributory asset charges.
Management’s revenue and profitability forecasts used in the reporting unit and intangible asset valuations were developed in conjunction with management’s strategic plan review performed each fourth quarter, and our resulting revised outlook for business performance, and considered recent performance and trends, strategic initiatives and industry trends. Assumptions used in the valuations are similar to those that would be used by market participants performing independent valuations of these businesses.