Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments And Hedging Activities

v2.4.0.6
Derivative Financial Instruments And Hedging Activities
 3 Months Ended
Mar. 31, 2012
Derivative Financial Instruments And Hedging Activities [Abstract]  
Derivative Financial Instruments And Hedging Activities

Note M — Derivative Financial Instruments and Hedging Activities

Summary of Derivative Instruments: All of VF's outstanding derivative instruments are forward foreign 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 March 2012, December 2011 and March 2011 totaled $1.4 billion, $1.5 billion and $1.4 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 		 
In thousands    March
2012 		     December
2011 		     March
2011 		     March
2012 		     December
2011 		     March
2011 		 

Foreign exchange contracts designated as hedging instruments

    $ 25,568       $ 45,071       $ 17,974       $ 13,598       $ 22,406       $ 55,116   

Foreign exchange contracts dedesignated as hedging instruments

      335         1,245        
 797
   
      1,070         930        
 353
   

Foreign exchange contracts not designated as hedging instruments

      132         12         —           265         177         —     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 26,035       $ 46,328       $ 18,771       $ 14,933       $ 23,513       $ 55,469   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

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    March
2012 		    December
2011 		    March
2011 		 

Other current assets

    $ 23,874      $ 39,076      $ 16,936   

Accrued current liabilities

      (13,315 )      (19,326 )      (50,265 ) 

Other assets (noncurrent)

      2,161        7,252        1,835   

Other liabilities (noncurrent)

      (1,618 )      (4,187 )      (5,204 ) 

Fair Value Hedges: VF enters into derivative contracts to hedge intercompany balances between related parties having different functional currencies, and has historically designated these as fair value hedge relationships. Effective January 1, 2012, VF no longer designates these types of derivative contracts as hedge relationships. Accordingly, gains (losses) related to these derivatives are included in the disclosure of "Derivative Contracts Not Designated as Hedges" as of the first quarter of 2012. VF's Consolidated Statements of Income include the following effects related to fair value hedging:

 

In thousands  

Location of

Gain (Loss)

on Derivatives

Recognized

in Income

   Gain (Loss)
on  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 		 

Fair Value Hedging Relationships

          

Three months ended March 2012

          

Foreign exchange

   Miscellaneous income (expense)   $ —        Advances – intercompany   Miscellaneous income (expense)   $ —     

Three months ended March 2011

          

Foreign exchange

   Miscellaneous income (expense)   $ (1,230)      Advances – intercompany   Miscellaneous income (expense)   $ 970   

Cash Flow Hedges: 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:

 

$(26,182) $(26,182) $(26,182) $(26,182) $(26,182)
In thousands                              

Cash Flow Hedging Relationships

    Gain (Loss) on  Derivatives
Recognized in OCI
Three months ended March 		   

Location of Gain (Loss)

Reclassification From

    Gain (Loss) Reclassified  from
Accumulated OCI into Income
Three months ended March 		 
   2012     2011    

Accumulated OCI into Income

    2012     2011  

Foreign exchange

    $ (7,711 )    $ (26,182 )   

Net sales

    $ 704      $ (396 ) 
      

Cost of goods sold

      314        5,142   
      

Miscellaneous income (expense)

      (667 )      (1,945 ) 
      

Interest expense

      (911 )      29   
  

 

 

    

 

 

       

 

 

    

 

 

  

Total

    $ (7,711 )    $ (26,182 )    Total    $ (560 )    $ 2,830   
  

 

 

    

 

 

       

 

 

    

 

 

  

Derivative Contracts Dedesignated as Hedges: 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 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. For the three months ended March 2012 and March 2011, VF recorded net losses of less than $1 million 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: VF uses derivative contracts to manage foreign currency exchange risk on intercompany loans, 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:

 

 

$955 $955 $955

Derivatives Not Designated as Hedges

    Location of Gain
(Loss)  on Derivatives
Recognized in Income 		   Gain (Loss)
on  Derivatives
Recognized in Income 		 
      2012      2011  

Foreign exchange

    Miscellaneous income (expense)    $ 955       $ —     

Other Derivative Information: There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three months ended March 2012 and March 2011.

At March 2012, Accumulated OCI included $9.5 million of net pretax deferred gains 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 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. 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 the contracts was $42.3 million at March 2012, which will be reclassified into the Consolidated Statement of Income over the remaining terms of the associated debt instruments.