Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments And Hedging Activities

v2.4.0.6
Derivative Financial Instruments And Hedging Activities
 12 Months Ended
Dec. 31, 2011
Derivative Financial Instruments and Hedging Activities [Abstract]  
Derivative Financial Instruments And Hedging Activities

Note U — 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 intended to hedge assets and liabilities are not designated as hedges for accounting purposes. Additionally, derivative instruments that are cash flow hedges of forecasted third party sales 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 December 2011 and December 2010 totaled $1.5 billion and $1.1 billion, respectively, consisting of contracts hedging primarily exposures to the euro, British pound, Mexican peso, Polish zloty, Japanese yen 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		  
     December
2011		      December
2010		      December
2011		      December
2010		  
     In thousands  

Foreign exchange contracts designated as hedging instruments

    $ 45,071       $ 18,389       $ 22,406       $ 27,916   

Foreign exchange contracts dedesignated as hedging instruments

      1,245         179         930         899   

Foreign exchange contracts not designated as hedging instruments

      12         —         177         —   
    

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 46,328       $ 18,568       $ 23,513       $ 28,815   
    

 

 

     

 

 

     

 

 

     

 

 

  

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

 

                 
     December 2011     December 2010  
     In thousands  

Other current assets

    $ 39,076      $ 15,296   

Accrued current liabilities

      (19,326 )      (25,440 ) 

Other assets (noncurrent)

      7,252        3,272   

Other liabilities (noncurrent)

      (4,187 )      (3,375 ) 

 

Fair Value Hedge Strategies and Accounting Policies:    VF enters into derivative contracts to hedge intercompany loans between related parties having different functional currencies. VF's Consolidated Statements of Income include the following effects related to fair value hedging:

 

                     

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
          In thousands             

 In thousands

2011

                         
           

Foreign exchange

    Miscellaneous
income		    $2,413    Advances —

intercompany

    Miscellaneous

income

    $(3,329)
      (expense)              (expense)     
           

2010

                         
           

Foreign exchange

    Miscellaneous
income		    $17,914    Advances —

intercompany

    Miscellaneous income
(expense)		    $(18,041)
      (expense)                    

Cash Flow Hedge Strategies and Accounting Policies:    VF uses derivative contracts primarily 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 Dedesignated as Hedges", cash flow hedges of forecasted third party sales of inventory 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:

 

 

                                     

Cash Flow

Hedging

    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 		 

Relationships

    2011      2010         2011      2010  
     In thousands           In thousands  

Foreign exchange

    $ 6,707       $ 14,042       Net sales    $ 6,525       $ (5,907)   
                       Cost of goods sold      (16,958)         10,328   
                       Miscellaneous income (expense)      (8,441)         2,186   

Interest rate

      (48,266)         —       Interest expense      (2,424)         116   
    

 

 

     

 

 

          

 

 

     

 

 

  

Total

    $ (41,559)       $ 14,042            $ (21,298)       $ 6,723   
    

 

 

     

 

 

          

 

 

     

 

 

  

Derivative Contracts Dedesignated as Hedges and Accounting Policies:    As previously noted, cash flow hedges of certain forecasted third party sales 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 a 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 values of the derivative contracts are recognized directly in earnings. For the years ended December 2011 and December 2010, VF recorded net losses of $1.7 and $3.3 million, respectively, in Miscellaneous Income (Expense) for derivatives dedesignated as hedging instruments, effectively offsetting the net remeasurement gains on the related assets and liabilities.

Derivative Contracts Not Designated as Hedges and Accounting Policies:    VF uses derivative contracts to manage foreign currency exchange risk on intercompany accounts receivable and payable, and third-party accounts receivable and payable. These contracts, which are not designated as hedges, are recorded at fair value in the Consolidated Balance Sheets, with changes in the fair values of these instruments 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:

 

                     

Derivatives Not

Designated

as Hedges

   

Location of

Gain (Loss)

on Derivatives

Recognized in Income

    Gain (Loss)
on Derivatives
Recognized in Income 		 
      2011      2010  
     In thousands              

Foreign exchange

    Miscellaneous income (expense)    $ 3,995       $ —   

 

Net Investment Hedge Strategies and Accounting Policies:    In limited instances, VF may choose to hedge the risk of changes in its investments in foreign subsidiaries. Changes in the fair values of derivatives designated as net investment hedges are reported as a component of OCI and deferred in Accumulated OCI, along with the foreign currency translation adjustments on those investments. Upon settlement of the 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 during the last three years.

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the last three years.

At December 2011, Accumulated OCI included $15.4 million of net deferred pretax gains for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. Actual amounts to be reclassified to earnings will depend on exchange rates in effect when currently 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 (Note K). 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 net pretax deferred loss in Accumulated OCI related to these contracts was $43.2 million at December 2011, which will be reclassified into the Consolidated Statement of Income over the remaining terms of the associated debt instruments.