Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments And Hedging Activities

v2.3.0.15
Derivative Financial Instruments And Hedging Activities
 9 Months Ended
Oct. 01, 2011
Derivative Financial Instruments And Hedging Activities [Abstract]  
Derivative Financial Instruments And Hedging Activities

Note N — Derivative Financial Instruments and Hedging Activities

Summary of derivative instruments — All of VF's outstanding derivative instruments are forward exchange contracts. Most derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, but a limited number of derivative contracts are undesignated economic hedges of assets and liabilities. Additionally, derivative instruments that are cash flow hedges of forecasted cash receipts 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 September 2011, December 2010 and September 2010 totaled $1.4 billion, $1.1 billion and $1.5 billion, respectively, consisting of contracts hedging primarily exposures to the euro, British pound, Mexican peso, Polish zloty and Canadian dollar. Derivative contracts have maturities up to 20 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
2011		      December
2010		      September
2010		      September
2011		      December
2010		      September
2010		  

Foreign exchange contracts designated as hedging instruments

    $ 29,073       $ 18,389       $ 18,738       $ 24,231       $ 27,916       $ 54,264   

Foreign exchange contracts dedesignated as hedging instruments

      2,220         179         1,211         201         899         575   

Foreign exchange contracts not designated as hedging instruments

      81         —           —           177         —           —     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 31,374       $ 18,568       $ 19,949       $ 24,609       $ 28,815       $ 54,839   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Outstanding derivatives have been included in the Consolidated Balance Sheets and classified as current or noncurrent based on the derivatives' maturity dates, as follows:

 

In thousands    September     December     September  
   2011     2010     2010  

Other current assets

    $ 26,100      $ 15,296      $ 15,786   

Accrued current liabilities

      (18,260 )      (25,440 )      (45,431 ) 

Other assets (noncurrent)

      5,274        3,272        4,163   

Other liabilities (noncurrent)

      (6,349 )      (3,375 )      (9,408 ) 

 

Fair value hedges — VF enters into derivative contracts to hedge intercompany loans between a domestic company and a foreign subsidiary or between two foreign subsidiaries having different functional currencies. VF's Consolidated Statements of Income include the following effects related to fair value hedging:

 

In thousands

Fair Value Hedging
Relationships

    Location of Gain
(Loss) on
Derivatives
Recognized in
Income		   Gain (Loss) on Derivatives
Recognized in Income		      Hedged Items
in Fair Value
Hedge
Relationships		    Location of Gain
(Loss)
Recognized on
Related Hedged
Items		   Gain (Loss) on Related
Hedged Items Recognized in
Income		  
     Three Months     Nine Months           Three Months     Nine Months  

Periods ended September 2011

              

Foreign exchange

    Miscellaneous
income
(expense)		   $ 6,716      $ 1,669       Advances –
intercompany		    Miscellaneous
income

(expense)

   $ (6,606 )    $ (2,807 ) 

Periods ended September 2010

              

Foreign exchange

    Miscellaneous
income
(expense)		   $ (2,222 )    $ 20,862       Advances –
intercompany		    Miscellaneous
income

(expense)

   $ 1,755      $ (21,246 ) 
Cash flow hedges — VF uses derivative contracts to hedge a portion of the exchange risk for its forecasted inventory purchases and production costs and for its forecasted cash receipts arising from sales of inventory. In addition, VF's domestic companies hedge the receipt of forecasted intercompany royalties from foreign subsidiaries. As discussed below in "derivative contracts not designated as hedges", cash flow hedges of forecasted cash receipts 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

Cash Flow

Hedging

Relationships

    Gain (Loss) on Derivatives
Recognized in OCI 		   

Location of

Gain (Loss)

Reclassified from

Accumulated

OCI into Income

    Gain (Loss) Reclassified
from Accumulated
OCI into Income 		 
       
       
       
       
   Three Months     Nine Months        Three Months     Nine Months  

Periods ended September 2011

 

         

Foreign exchange

    $ 23,048      $ (11,504 )    Net sales    $ 3,034      $ 4,265   
       Cost of goods sold      (10,293 )      (5,489 ) 
       Miscellaneous income (expense)      (3,484 )      (7,020 ) 

Interest rate

      (48,266 )      (48,266 )    Interest expense      (1,578 )      (1,520 ) 
  

 

 

    

 

 

       

 

 

    

 

 

  

Total

    $ (25,218 )    $ (59,770 )       $ (12,321 )    $ (9,764 ) 
  

 

 

    

 

 

       

 

 

    

 

 

  

Periods ended September 2010

 

         

Foreign exchange

    $ (36,261 )    $ 254      Net sales    $ 432      $ (832 ) 
       Cost of goods sold      8,186        2,473   
       Miscellaneous income (expense)      (406 )      (1,210 ) 

Interest rate

      —          —        Interest expense      29        87   
  

 

 

    

 

 

       

 

 

    

 

 

  

Total

    $ (36,261 )    $ 254         $ 8,241      $ 518   
  

 

 

    

 

 

       

 

 

    

 

 

  

Net investment hedges — In limited instances, VF may choose to hedge the risk of changes in its investment in foreign subsidiaries. Changes in the fair value of derivatives designated as net investment hedges, except for any ineffective portion, are reported as a component of OCI and deferred in Accumulated OCI, along with the foreign currency translation adjustments on that investment. Upon settlement of net investment hedges, cash flows are classified in investing activities in the Consolidated Statements of Cash Flows. The effects of net investment hedging included in VF's Consolidated Statements of Income and Consolidated Statements of Comprehensive Income were not material for the three and nine month periods ended September 2011 or September 2010.

There were no significant amounts recognized in earnings related to ineffective hedging during the three or nine month periods ended September 2011 or September 2010.

At September 2011, Accumulated OCI included $10.4 million of net deferred pretax losses for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts reclassified to earnings will depend on exchange rates when the outstanding derivative contracts are settled.

In addition, 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 deferred net loss in Accumulated OCI was $44.1 million at September 2011, which will be reclassified into the statement of income over the remaining terms of the associated debt instruments.

Derivative contracts not designated as hedges — As previously noted, cash flow hedges of certain forecasted cash receipts are dedesignated as hedges when the sales are recognized. At that time, hedge accounting is no longer applied and the amount of unrealized hedging gain or loss is recognized in net sales. These derivatives remain outstanding and serve as an economic hedge of foreign currency exposures related to the ultimate collection of the trade receivables. During the period that hedge accounting is not applied, changes in the fair value of the derivative contracts are recognized directly in earnings.

In addition, forward contracts are used as undesignated economic hedges of assets and liabilities. Those contracts are recorded at fair value in the balance sheet, with changes in fair value recognized in earnings immediately. The gains or losses related to the derivative contracts largely offset the remeasurement of those assets and liabilities.

For the three and nine months ended September 2011 and September 2010, VF recorded net losses of less than $1 million in Miscellaneous Income (Expense) for derivatives not designated as hedging instruments, effectively offsetting the net remeasurement gains on the related assets and liabilities.