Notes to Consolidated Financial Statements
(Unaudited)
NOTE A — BASIS OF PRESENTATION
VF Corporation (together with its subsidiaries, collectively known as “VF” or the “Company”) changed to a 52/53 week fiscal year ending on the Saturday closest to March 31 of each year. VF previously used a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. As a result of the change in fiscal year end, this document reflects the Company's Transition Report on Form 10-Q for the period from December 31, 2017 through March 31, 2018. For presentation purposes herein, all references to periods ended
March 2018
,
December 2017
and
March 2017
relate to the fiscal periods ended on
March 31, 2018
,
December 30, 2017
and
April 1, 2017
, respectively. The Company’s next fiscal year will run from April 1, 2018 through March 30, 2019 (“Fiscal 2019”).
The
Nautica
®
brand business and the Licensing Business (which comprised the Licensed Sports Group and
JanSport
®
brand collegiate businesses) have been reported as discontinued operations in our Consolidated Statements of Income, and the related assets and liabilities have been presented as held-for-sale in the Consolidated Balance Sheets, through their dates of disposal. These changes have been applied to all periods presented. Unless otherwise noted, discussion within these notes
to the consolidated financial statements relates to continuing operations. Refer to Note C for additional information on discontinued operations.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. Similarly, the
December 2017
condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations and cash flows of VF for the interim periods presented. Operating results for the
three
months ended
March 2018
are not necessarily indicative of results that may be expected for any other interim period or for Fiscal 2019. For further information, refer to the consolidated financial statements and notes included in VF’s Annual Report on Form 10-K for the year ended
December 2017
(“
2017
Form 10-K”).
NOTE B — ACQUISITIONS
Williamson-Dickie
On October 2, 2017, VF acquired
100%
of the outstanding shares of Williamson-Dickie Mfg. Co. (“Williamson-Dickie”) for
$800.7 million
in cash, subject to working capital and other adjustments. The purchase price was primarily funded with short-term borrowings. During the three months ended March 2018, the purchase consideration was reduced by
$2.3 million
associated with the final working capital adjustment, resulting in a revised purchase price of
$798.4 million
.
Williamson-Dickie was a privately held company based in Ft. Worth, Texas, and is one of the largest companies in the workwear sector with a portfolio of brands including
Dickies
®
,
Workrite
®
,
Kodiak
®
,
Terra
®
and
Walls
®
. The acquisition of Williamson-Dickie brings together complementary assets and capabilities, and creates a workwear business that will now serve an even broader set of consumers and industries around the world.
For the three months ended March 2018, Williamson-Dickie contributed revenues of
$233.1 million
and net income of
$10.7 million
, excluding restructuring charges.
The allocation of the purchase price is preliminary and subject to change, primarily for certain income tax matters. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the acquisition date. Goodwill decreased by
$10.0 million
during the three months ended March 2018,
$2.3 million
of which related to the final working capital adjustment and
$7.7 million
of which related to a measurement period adjustment of an acquired income tax balance.
VF Corporation March 2018 Form 10-QT
8
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
(In thousands)
|
|
October 2, 2017
|
|
Cash and equivalents
|
|
$
|
60,172
|
|
|
Accounts receivable
|
|
146,403
|
|
|
Inventories
|
|
251,778
|
|
|
Other current assets
|
|
8,447
|
|
|
Property, plant and equipment
|
|
105,119
|
|
|
Intangible assets
|
|
397,755
|
|
|
Other assets
|
|
9,665
|
|
|
Total assets acquired
|
|
979,339
|
|
|
|
|
|
|
Short-term borrowings
|
|
17,565
|
|
|
Accounts payable
|
|
88,052
|
|
|
Other current liabilities
|
|
109,964
|
|
|
Deferred income tax liabilities
|
|
15,160
|
|
|
Other non-current liabilities
|
|
33,066
|
|
|
Total liabilities assumed
|
|
263,807
|
|
|
|
|
|
|
Net assets acquired
|
|
715,532
|
|
|
Goodwill
|
|
82,863
|
|
|
Purchase price
|
|
$
|
798,395
|
|
|
The goodwill is attributable to the acquired workforce of Williamson-Dickie and the significant synergies expected to arise as a result of the acquisition. All of the goodwill was assigned to the Imagewear coalition and
$52.3 million
is expected to be deductible for tax purposes.
The
Dickies
®
,
Kodiak
®
,
Terra
®
and
Walls
®
trademarks, which management believes to have indefinite lives, have been valued at
$316.1 million
. The
Workrite
®
trademark, valued at
$0.8 million
, is being amortized over
three
years.
Amortizable intangible assets have been assigned values of
$78.6 million
for customer relationships and
$2.3 million
for distribution
agreements. Customer relationships are being amortized using an accelerated method over periods ranging from
10
-
13
years. Distribution agreements are being amortized on a straight-line basis over
four
years.
Total transaction expenses for the Williamson-Dickie acquisition were
$15.0 million
, all of which were recognized in the year ended December 2017 as selling, general and administrative expenses in VF's Consolidated Statements of Income.
The following unaudited pro forma summary presents consolidated information of VF as if the acquisition of Williamson-Dickie had occurred on January 3, 2016:
|
|
|
|
|
(In thousands)
|
Three Months Ended
April 1, 2017 (unaudited)
|
Total revenues
|
$
|
2,709,111
|
|
Income from continuing operations
|
219,469
|
|
Earnings per common share from continuing operations
|
|
Basic
|
$
|
0.53
|
|
Diluted
|
0.53
|
|
These pro forma amounts have been calculated after applying VF’s accounting policies and adjusting the results of Williamson-Dickie to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment and intangible assets had been applied from January 3, 2016, with related tax effects.
Pro forma financial information is not necessarily indicative of VF’s operating results if the acquisition had been effected at the date indicated, nor is it necessarily indicative of future operating results. Amounts do not include any marketing leverage, operating efficiencies or cost savings that VF believes are achievable.
9
VF Corporation March 2018 Form 10-QT
Icebreaker Holdings Limited
On November 1, 2017, VF entered into a definitive merger agreement to acquire
100%
of the stock of Icebreaker Holdings Limited, a privately held company based in Auckland, New Zealand. The acquisition was completed on April 3, 2018 for NZ
$274.4 million
(
$199.3 million
) of cash, which is subject to working capital and other adjustments. The purchase price was primarily funded with short-term borrowings.
Icebreaker
®
is an outdoor brand specializing in high-performance apparel based on natural fibers, including Merino wool, plant-based fibers and recycled fibers. It is an ideal complement to VF's
Smartwool
®
brand, which also features Merino wool in its clothing and accessories. Together, the
Smartwool
®
and
Icebreaker
®
brands will position VF as a global leader in the Merino wool and natural fiber categories. The Company is still in the process of aligning accounting policies and valuing the assets acquired and liabilities assumed, and as such, certain disclosures regarding this transaction have not been included herein.
Total transaction expenses for the
Icebreaker
®
acquisition of
$3.3 million
have been recognized in selling, general and administrative
expenses in the Consolidated Statements of Income, of which
$1.4 million
was recognized during the three months ended March 2018. In addition, the Company has recognized a
$9.6 million
gain on derivatives used to hedge the purchase price of
Icebreaker
®
in the other income (expense), net line item in the Consolidated Statements of Income, of which
$4.3 million
was recognized during the three months ended March 2018.
Altra
®
On March 10, 2018, VF entered into a definitive merger agreement to acquire
Altra
®
, an athletic and performance-based lifestyle footwear brand based in Logan, Utah. The purchase price is
$135.0 million
, subject to working capital and other adjustments. The acquisition is expected to close in the first quarter of Fiscal 2019, subject to satisfaction of customary closing conditions.
NOTE C — DISCONTINUED OPERATIONS
The Company continuously assesses the composition of our portfolio to ensure it is aligned with our strategic objectives and positioned to maximize growth and return to our shareholders.
Nautica
®
Brand Business
VF signed a definitive agreement for the sale of the
Nautica
®
brand business on March 17, 2018, and completed the transaction on April 30, 2018. VF received cash proceeds of
$289.1 million
, which are subject to working capital and other adjustments.
During the fourth quarter of 2017, the Company reached the strategic decision to exit the
Nautica
®
brand business, and determined that it met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company began to report the results of the
Nautica
®
brand business as discontinued operations in the Consolidated Statements of Income and present the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented.
The results of the
Nautica
®
brand's North America business were previously reported in the former Sportswear coalition, and the results of the Asia business were previously reported in the Outdoor & Action Sports coalition. The results of the
Nautica
®
brand business recorded in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income were losses of
$8.4 million
(including an
$18.1 million
increase in the estimated loss on sale) for the three months ended March 2018 and income of
$1.4 million
for the three months ended March 2017.
Certain corporate overhead costs and coalition costs previously allocated to the
Nautica
®
brand business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.
Under the terms of the transition services agreement, the Company will provide certain support services for periods up to
12
months from the closing date of the transaction.
Licensing Business
In the first quarter of 2017, the Company reached the strategic decision to exit its Licensing Business, which comprised the Licensed Sports Group ("LSG") and the
JanSport
®
brand collegiate businesses. Accordingly, the Company began to report the results of the businesses as discontinued operations in the Consolidated Statements of Income and present the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented.
LSG included the
Majestic
®
brand and was previously reported within our Imagewear coalition. On April 28, 2017, VF completed the sale of LSG to Fanatics, Inc. The Company received proceeds of
$213.5 million
, net of cash sold, and recorded an after-tax loss on sale of
$4.1 million
, of which
$1.4 million
is included in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three months ended March 2017.
The LSG results recorded in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income were losses of
$0.3 million
(including the estimated loss on sale of
$1.4 million
) for the three months ended March 2017.
In the fourth quarter of 2017, VF completed the sale of the assets associated with the
JanSport
®
brand collegiate business, which was previously included within our Outdoor & Action Sports coalition. The Company received net proceeds of
$1.5 million
and recorded an after-tax loss on sale of
$0.2 million
, of which
$1.0 million
is included in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three months ended March 2017.
The
JanSport
®
brand collegiate results recorded in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income were losses of
$5.2 million
(including the estimated loss on sale of
$1.0 million
) for the three months ended March
2017
.
Certain corporate overhead and other costs previously allocated to the Licensing Business for segment reporting purposes do not
VF Corporation March 2018 Form 10-QT
10
qualify for classification within discontinued operations and have been reallocated to continuing operations.
Under the terms of the transition services agreement, the Company is providing certain support services for periods ranging
from
three
to
24
months from the closing date of the transaction. Revenue and expense items associated with the transition services are primarily recorded in the Imagewear coalition.
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items for the
Nautica
®
brand business and the Licensing Business that are included in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
(In thousands)
|
|
2018
|
|
|
2017
|
Revenues
|
|
$
|
94,362
|
|
|
|
$
|
202,667
|
|
Cost of goods sold
|
|
48,946
|
|
|
|
131,301
|
|
Selling, general and administrative expenses
|
|
34,649
|
|
|
|
62,073
|
|
Interest expense, net
|
|
—
|
|
|
|
(17
|
)
|
Income from discontinued operations before income taxes
|
|
10,767
|
|
|
|
9,276
|
|
Loss on the sale of discontinued operations before income taxes
|
|
(18,065
|
)
|
|
|
(3,531
|
)
|
Total income (loss) from discontinued operations before income taxes
|
|
(7,298
|
)
|
|
|
5,745
|
|
Income tax expense
(a)
|
|
(1,073
|
)
|
|
|
(9,858
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(8,371
|
)
|
|
|
$
|
(4,113
|
)
|
|
|
(a)
|
The 2018 adjustment to the estimated loss on sale related to the
Nautica
®
brand business was nondeductible for income tax purposes. Income tax expense for the three months ended March 2017 includes
$7.5 million
of deferred tax expense related to GAAP and tax basis differences for LSG.
|
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 2018
|
|
|
December 2017
(c)
|
|
March 2017
(c)
|
Cash
|
|
$
|
2,330
|
|
|
|
$
|
2,592
|
|
|
$
|
1,182
|
|
Accounts receivable, net
|
|
26,298
|
|
|
|
27,941
|
|
|
56,208
|
|
Inventories
|
|
55,610
|
|
|
|
43,297
|
|
|
146,768
|
|
Other current assets
|
|
1,247
|
|
|
|
2,497
|
|
|
15,778
|
|
Property, plant and equipment, net
|
|
15,021
|
|
|
|
14,914
|
|
|
28,495
|
|
Intangible assets
|
|
262,202
|
|
|
|
262,352
|
|
|
305,509
|
|
Goodwill
|
|
49,005
|
|
|
|
49,005
|
|
|
182,292
|
|
Other assets
|
|
3,961
|
|
|
|
3,631
|
|
|
3,835
|
|
Allowance to reduce assets to estimated fair value, less costs to sell
|
|
(42,094
|
)
|
|
|
(25,529
|
)
|
|
—
|
|
Total assets of discontinued operations
(a)
|
|
$
|
373,580
|
|
|
|
$
|
380,700
|
|
|
$
|
740,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,619
|
|
|
|
$
|
16,993
|
|
|
$
|
34,197
|
|
Accrued liabilities
|
|
10,658
|
|
|
|
18,203
|
|
|
15,726
|
|
Other liabilities
|
|
11,912
|
|
|
|
12,011
|
|
|
13,184
|
|
Deferred income tax liabilities
(b)
|
|
51,838
|
|
|
|
53,812
|
|
|
73,651
|
|
Total liabilities of discontinued operations
(a)
|
|
$
|
86,027
|
|
|
|
$
|
101,019
|
|
|
$
|
136,758
|
|
|
|
(a)
|
Amounts at March 2017 have been classified as current and long-term in the Consolidated Balance Sheets.
|
|
|
(b)
|
Deferred income tax balances reflect VF’s consolidated netting by jurisdiction.
|
|
|
(c)
|
Certain assets and liabilities previously reported as discontinued operations will be retained by VF based on the terms of the definitive sale agreement, and thus have been removed from discontinued operations for all periods presented. The impact was not material to any periods presented.
|
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. There were no significant capital expenditures and operating noncash items for any periods presented. Depreciation and amortization expense was
$5.6 million
for the three months ended March 2017.
11
VF Corporation March 2018 Form 10-QT
NOTE D — SALE OF ACCOUNTS RECEIVABLE
VF has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis. Under the agreement, up to
$367.5 million
of VF’s accounts receivable may be sold to the financial institution and remain outstanding at any point in time. VF removes the accounts receivable from the Consolidated Balance Sheets at the time of sale. VF does not retain any interests in the sold accounts receivable but continues to service and collect outstanding accounts receivable on behalf of the financial institution. During the three months ended March
2018
and 2017, VF sold total accounts receivable of
$258.5 million
and
$285.1 million
,
respectively. As of
March 2018
,
December 2017
and
March 2017
,
$191.2 million
,
$219.1 million
and
$145.3 million
, respectively, of the sold accounts receivable had been removed from the Consolidated Balance Sheets but remained outstanding with the financial institution. The funding fee charged by the financial institution is included in the other income (expense), net line item in the Consolidated Statements of Income, and was
$1.1 million
and
$0.9 million
for the three months ended March 2018 and 2017, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
NOTE E — INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 2018
|
|
|
December 2017
|
|
March 2017
|
Finished products
|
|
$
|
1,654,137
|
|
|
|
$
|
1,490,788
|
|
|
$
|
1,400,708
|
|
Work-in-process
|
|
103,757
|
|
|
|
110,467
|
|
|
96,903
|
|
Raw materials
|
|
103,547
|
|
|
|
105,354
|
|
|
95,823
|
|
Total inventories
|
|
$
|
1,861,441
|
|
|
|
$
|
1,706,609
|
|
|
$
|
1,593,434
|
|
NOTE F — INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2018
|
|
|
December 2017
|
(In thousands)
|
|
Weighted
Average
Amortization
Period
|
|
Amortization
Method
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
Net
Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
18 years
|
|
Accelerated
|
|
|
$
|
344,613
|
|
|
$
|
143,069
|
|
|
$
|
201,544
|
|
|
|
$
|
204,215
|
|
License agreements
|
|
20 years
|
|
Accelerated
|
|
|
20,171
|
|
|
13,915
|
|
|
6,256
|
|
|
|
6,336
|
|
Trademarks
|
|
16 years
|
|
Straight-line
|
|
|
58,932
|
|
|
8,309
|
|
|
50,623
|
|
|
|
51,599
|
|
Other
|
|
9 years
|
|
Straight-line
|
|
|
9,194
|
|
|
4,024
|
|
|
5,170
|
|
|
|
5,353
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
|
263,593
|
|
|
|
267,503
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
1,856,517
|
|
|
|
1,822,278
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
$
|
2,120,110
|
|
|
|
$
|
2,089,781
|
|
Intangible assets increased during the three months ended March 2018 due to the impact of foreign currency fluctuations.
Amortization expense for the three months ended March
2018
was
$7.6 million
. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five fiscal years is
$29.4 million
,
$28.6 million
,
$27.1 million
,
$25.2 million
and
$23.8 million
, respectively.
VF Corporation March 2018 Form 10-QT
12
NOTE G — GOODWILL
Changes in goodwill are summarized by business segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Outdoor &
Action Sports
|
|
Jeanswear
|
|
Imagewear
|
|
Total
|
Balance, December 2017
|
$
|
1,350,548
|
|
|
$
|
219,288
|
|
|
$
|
122,808
|
|
|
$
|
1,692,644
|
|
Measurement period adjustment to 2017 acquisition (Note B)
|
—
|
|
|
—
|
|
|
(9,974
|
)
|
|
(9,974
|
)
|
Currency translation
|
8,865
|
|
|
946
|
|
|
738
|
|
|
10,549
|
|
Balance, March 2018
|
$
|
1,359,413
|
|
|
$
|
220,234
|
|
|
$
|
113,572
|
|
|
$
|
1,693,219
|
|
Accumulated impairment charges for the Outdoor & Action Sports coalition were
$31.1 million
as of March 2018 and December 2017.
No
impairment charges were recorded during the three months ended March 2018.
During the three months ended March 2018, we completed the previously announced wind down of the
lucy
®
brand operations. For
all periods presented in the above goodwill summary, VF has removed
$51.6 million
of goodwill and accumulated impairment charges related to the
lucy
®
brand reporting unit, which previously had been fully impaired.
NOTE H - PENSION PLANS
The components of pension cost for VF’s defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
(In thousands)
|
|
2018
|
|
|
2017
|
Service cost – benefits earned during the period
|
|
$
|
5,912
|
|
|
|
$
|
6,416
|
|
Interest cost on projected benefit obligations
|
|
14,825
|
|
|
|
14,815
|
|
Expected return on plan assets
|
|
(25,314
|
)
|
|
|
(23,355
|
)
|
Amortization of deferred amounts:
|
|
|
|
|
|
Net deferred actuarial losses
|
|
8,548
|
|
|
|
11,382
|
|
Deferred prior service costs
|
|
647
|
|
|
|
712
|
|
Net periodic pension cost
|
|
$
|
4,618
|
|
|
|
$
|
9,970
|
|
Actuarial valuations of VF's defined benefit plans were obtained as of March 31, 2018, due to the change in fiscal year end explained in Note A. Actuarial assumptions used in the March 31, 2018 valuations were reviewed and revised as appropriate, and were not materially different from the actuarial assumptions used in the December 31, 2017 valuations.
VF contributed
$3.2 million
to its defined benefit plans during the
three months
ended March
2018
, and intends to make approximately
$40.1 million
of contributions during Fiscal 2019.
In conjunction with the sale of the Licensing Business, the Company recognized a
$1.1 million
pension curtailment loss in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income for the
three months
ended March 2017.
13
VF Corporation March 2018 Form 10-QT
NOTE I — CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
During the three months ended March
2018
, the Company purchased
3.4 million
shares of Common Stock in open market transactions for
$250.0 million
under its share repurchase program authorized by VF’s Board of Directors. These transactions were treated as treasury stock transactions.
Common Stock outstanding is net of shares held in treasury which are, in substance, retired. During the three months ended March
2018
, VF restored
3.4 million
treasury shares to an unissued status, after which they were no longer recognized as shares held in treasury. There were
no
shares held in treasury at the end of
March
2018
,
December 2017
or
March 2017
. The excess of the cost of treasury shares acquired over the
$0.25
per share stated value of Common Stock is deducted from retained earnings.
VF Common Stock is also held by the Company’s deferred compensation plans and is treated as treasury shares for financial reporting purposes. During the
three months
ended March
2018
, the Company purchased
3,870
shares of Common Stock in open market transactions for
$0.3 million
.
Balances related to shares held for deferred compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
March 2018
|
|
|
December 2017
|
|
March 2017
|
Shares held for deferred compensation plans
|
|
284,785
|
|
|
|
317,515
|
|
|
427,567
|
|
Cost of shares held for deferred compensation plans
|
|
$
|
3,621
|
|
|
|
$
|
3,901
|
|
|
$
|
5,304
|
|
Accumulated Other Comprehensive Income (Loss)
Comprehensive income consists of net income and specified components of other comprehensive income (“OCI”), which relates to changes in assets and liabilities that are not included in net income under GAAP but are instead deferred and accumulated within a separate component of stockholders’ equity in the balance sheet. VF’s comprehensive income is presented in the Consolidated Statements of Comprehensive Income. The deferred components of OCI are reported, net of related income taxes, in accumulated OCI in stockholders’ equity, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 2018
|
|
|
December 2017
|
|
March 2017
|
Foreign currency translation and other
|
|
$
|
(476,869
|
)
|
|
|
$
|
(546,201
|
)
|
|
$
|
(742,281
|
)
|
Defined benefit pension plans
|
|
(289,618
|
)
|
|
|
(291,949
|
)
|
|
(281,721
|
)
|
Derivative financial instruments
|
|
(97,543
|
)
|
|
|
(87,990
|
)
|
|
35,962
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(864,030
|
)
|
|
|
$
|
(926,140
|
)
|
|
$
|
(988,040
|
)
|
The changes in accumulated OCI, net of related taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 2018
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, December 2017
|
$
|
(546,201
|
)
|
|
$
|
(291,949
|
)
|
|
$
|
(87,990
|
)
|
|
$
|
(926,140
|
)
|
Other comprehensive income (loss) before reclassifications
|
69,332
|
|
|
(4,852
|
)
|
|
(21,078
|
)
|
|
43,402
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
7,183
|
|
|
11,525
|
|
|
18,708
|
|
Net other comprehensive income (loss)
|
69,332
|
|
|
2,331
|
|
|
(9,553
|
)
|
|
62,110
|
|
Balance, March 2018
|
$
|
(476,869
|
)
|
|
$
|
(289,618
|
)
|
|
$
|
(97,543
|
)
|
|
$
|
(864,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 2017
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, December 2016
|
$
|
(794,579
|
)
|
|
$
|
(302,697
|
)
|
|
$
|
55,813
|
|
|
$
|
(1,041,463
|
)
|
Other comprehensive income (loss) before reclassifications
|
52,298
|
|
|
12,253
|
|
|
(7,534
|
)
|
|
57,017
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
8,723
|
|
|
(12,317
|
)
|
|
(3,594
|
)
|
Net other comprehensive income (loss)
|
52,298
|
|
|
20,976
|
|
|
(19,851
|
)
|
|
53,423
|
|
Balance, March 2017
|
$
|
(742,281
|
)
|
|
$
|
(281,721
|
)
|
|
$
|
35,962
|
|
|
$
|
(988,040
|
)
|
VF Corporation March 2018 Form 10-QT
14
Reclassifications out of accumulated OCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Details About Accumulated Other Comprehensive Income (Loss) Components
|
Affected Line Item in the Consolidated Statements of Income
|
|
|
Three Months Ended March
|
|
|
|
|
2018
|
|
|
2017
|
|
Amortization of defined benefit pension plans:
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
(a)
|
|
|
$
|
(8,548
|
)
|
|
|
$
|
(11,382
|
)
|
|
Deferred prior service costs
|
(a)
|
|
|
(647
|
)
|
|
|
(712
|
)
|
|
Pension curtailment loss
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
(1,105
|
)
|
|
|
Total before tax
|
|
|
(9,195
|
)
|
|
|
(13,199
|
)
|
|
|
Tax benefit
|
|
|
2,012
|
|
|
|
4,476
|
|
|
|
Net of tax
|
|
|
(7,183
|
)
|
|
|
(8,723
|
)
|
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Net sales
|
|
|
4,948
|
|
|
|
6,413
|
|
|
Foreign exchange contracts
|
Cost of goods sold
|
|
|
(13,286
|
)
|
|
|
11,274
|
|
|
Foreign exchange contracts
|
Selling, general and administrative expenses
|
|
|
(1,981
|
)
|
|
|
(87
|
)
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
|
(2,427
|
)
|
|
|
49
|
|
|
Interest rate contracts
|
Interest expense
|
|
|
(1,214
|
)
|
|
|
(1,158
|
)
|
|
|
Total before tax
|
|
|
(13,960
|
)
|
|
|
16,491
|
|
|
|
Tax benefit (expense)
|
|
|
2,435
|
|
|
|
(4,174
|
)
|
|
|
Net of tax
|
|
|
(11,525
|
)
|
|
|
12,317
|
|
|
Total reclassifications for the period
|
Net of tax
|
|
|
$
|
(18,708
|
)
|
|
|
$
|
3,594
|
|
|
|
(a)
|
These accumulated OCI components are included in the computation of net periodic pension cost (refer to Note H for additional details).
|
15
VF Corporation March 2018 Form 10-QT
NOTE J — STOCK-BASED COMPENSATION
During the
three months
ended March
2018
, VF granted stock options to employees and nonemployee members of VF’s Board of Directors to purchase
1,843,749
shares of its Common Stock at an exercise price of
$74.80
per share. The exercise price of each option granted was equal to the fair market value of VF Common Stock
on the date of grant. Employee stock options vest in equal annual installments over
three years
. Stock options granted to nonemployee members of VF’s Board of Directors become exercisable
one year
from the date of grant.
The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates a range of assumptions for inputs as follows:
|
|
|
|
Three Months Ended March 2018
|
Expected volatility
|
24% to 29%
|
Weighted average expected volatility
|
25%
|
Expected term (in years)
|
6.1 to 7.6
|
Weighted average dividend yield
|
2.9%
|
Risk-free interest rate
|
1.9% to 2.9%
|
Weighted average fair value at date of grant
|
$15.34
|
Also during the
three months
ended March
2018
, VF granted
351,490
performance-based restricted stock units (“RSU”) to employees that enable them to receive shares of VF Common Stock at the end of a
three
-year performance cycle. Each performance-based RSU has a potential final payout ranging from
zero
to
two
shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of three-year financial targets set by the Talent and Compensation Committee of the Board of Directors. Shares are issued to participants in the year following the conclusion of the
three
-year performance period. The fair market value of VF Common Stock at the date the units were granted was
$74.80
per share.
The actual number of performance-based RSUs earned may also be adjusted upward or downward by
25%
of the target award, based on how VF’s total shareholder return (“TSR”) over the
three
-year period compares to the TSR for companies included in the Standard & Poor’s 500 Consumer Discretionary Index. The grant date fair value of the TSR-based adjustment related to the
2018
performance-based RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was
$4.61
per share.
VF granted
18,205
nonperformance-based RSUs to nonemployee members of the Board of Directors during the three months ended March
2018
. These units vest upon grant and will be settled in shares of VF Common Stock
one year
from the date of grant. The fair market value of VF Common Stock at the date the units were granted was
$74.80
per share.
VF granted
16,000
nonperformance-based RSUs to certain key employees in international jurisdictions during the
three months
ended March
2018
. These units generally vest over periods of up to
four years
from the date of grant and each unit entitles the holder to
one
share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was
$74.80
per share.
In addition, VF began making nonperformance-based RSU grants to employees as part of its annual stock compensation program and granted
372,869
of these nonperformance-based RSUs during the three months ended March 2018. These awards vest
50%
over a
two
-year period and
50%
over a
four
-year period from the date of grant and entitle the holder to
one
share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was
$74.80
per share.
For all nonperformance-based RSUs granted during the three months ended March 2018, dividend equivalents accrue and are payable in additional shares of VF Common Stock at the vesting date. Dividend equivalents are subject to the same risk of forfeiture as the nonperformance-based RSUs.
VF granted
56,331
restricted shares of VF Common Stock to certain members of management during the
three months
ended March
2018
. These shares vest over periods of up to
five years
from the date of grant. The weighted average fair market value of VF Common Stock at the dates the shares were granted was
$74.70
per share.
VF Corporation March 2018 Form 10-QT
16
NOTE K — INCOME TAXES
Income taxes for the three-month period ended March 2018 are computed using the actual tax rate for the period, due to the change in fiscal year end explained in Note A. Income taxes for the three-month period ended March 2017 were computed using the effective tax rate estimated to be applicable for the fiscal year ended December 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act included a broad range of complex provisions impacting the taxation of multi-national companies. Generally, accounting for the impacts of newly enacted tax legislation is required to be completed in the period of enactment; however, in response to the complexities and ambiguity surrounding the Tax Act, the SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) to provide companies with relief around the initial accounting for the Tax Act. Pursuant to SAB 118, the SEC has provided a one-year measurement period for companies to analyze and finalize accounting for the Tax Act. During the one-year measurement period, SAB 118 allows companies to recognize provisional amounts when reasonable estimates can be made for the impacts resulting from the Tax Act.
During the fourth quarter of 2017, VF recognized a provisional charge of approximately
$465.5 million
to reflect the impacts resulting from the Tax Act, primarily comprised of approximately
$512.4 million
related to the transition tax and approximately
$89.5 million
of tax benefits related to revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%. Other provisional charges of
$42.6 million
were primarily related to U.S. federal and state tax on foreign income and dividends and establishing a deferred tax liability for foreign withholding taxes as the Company is not asserting indefinite reinvestment on its foreign earnings. All amounts recorded in 2017 related to the Tax Act remain provisional.
Under GAAP, companies are allowed to make an accounting policy election to either treat taxes resulting from global intangible low-tax income ("GILTI") as a current-period expense when they are incurred or factor such amounts into the measurement of deferred taxes as of March 2018. The Company has not completed its analysis related to this accounting policy election and has therefore considered the taxes resulting from GILTI as a current-period expense in computing tax for the three-month period ended March 2018. See Note P for additional discussion on GILTI policy election.
The Tax Act has significant complexity and our final tax liability may materially differ from provisional estimates due to additional guidance and regulations that may be issued by the U.S. Treasury Department, the Internal Revenue Service ("IRS") and state and local tax authorities, and for VF's finalization of the relevant calculations required by the new tax legislation. VF will finalize accounting for the Tax Act during the one-year measurement period, and any adjustments to the provisional amounts will be included in income tax expense or benefit in the appropriate periods, and disclosed if material, in accordance with guidance provided by SAB 118.
The effective income tax rate for the
three months
ended March
2018
was
11.2%
compared to
20.8%
in the three months ended March
2017
. The
three months
ended March
2018
included a net discrete tax benefit of
$16.1 million
, which included a
$12.1 million
tax benefit related to stock compensation, a
$7.3 million
net tax benefit related to the realization of previously unrecognized tax benefits and interest, an
$8.8 million
tax expense related to the
change of a prior estimate of taxes payable, and a
$5.1 million
net tax benefit related to adjustments to provisional amounts recorded in 2017 under the Tax Act. The
$16.1 million
net discrete tax benefit in the three months ended March 2018 reduced the effective income tax rate by
5.5%
. The three months ended March
2017
included a net discrete tax benefit of
$1.1 million
, which included a
$3.0 million
tax benefit related to stock compensation and a
$1.9 million
net tax expense related to unrecognized tax benefits and interest. The
$1.1 million
net discrete tax benefit in the three months ended March
2017
reduced the effective income tax rate by
0.4%
. Without discrete items, the effective income tax rate for the
three months
ended March
2018
decreased by
4.5%
compared with the estimated annual effective tax rate applied to the three months ended March
2017
primarily due to a higher percentage of income in lower tax rate jurisdictions, partially offset by an unfavorable impact from the Tax Act.
VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. In the U.S., the IRS examinations for tax years through 2014 have been effectively settled. The examination of Timberland’s 2011 tax return is ongoing. The IRS has proposed material adjustments to Timberland’s 2011 tax return that would significantly impact tax expense and assessment of interest charges. The Company has formally disagreed with the proposed adjustments. During 2015, VF filed a petition to the U.S. Tax Court to begin the process of resolving this matter, but it has not yet reached a resolution. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and has concluded that VF’s provision for income taxes is adequate. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these audits and negotiations will conclude during the next
12 months
.
VF was granted a ruling which lowered the effective income tax rate on taxable earnings for years 2010 through 2014 under Belgium’s excess profit tax regime. In February 2015, the European Union Commission (“EU”) opened a state aid investigation into Belgium’s rulings. On January 11, 2016, the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF. On March 22, 2016, the Belgium government filed an appeal seeking annulment of the EU decision. Additionally, on June 21, 2016, VF Europe BVBA filed its own application for annulment of the EU decision. Both of the listed requests for annulment remain open and unresolved.
On December 22, 2016, Belgium adopted a law which entitled the Belgium tax authorities to issue tax assessments, and demand timely payments from companies which benefited from the excess profits regime. On January 10, 2017, VF Europe BVBA received an assessment for
€31.9 million
tax and interest related to excess profits benefits received in prior years. VF Europe BVBA remitted
€31.9 million
(
$33.9 million
) on January 13, 2017, which was recorded as an income tax receivable based on the expected success of the aforementioned requests for annulment. An additional assessment of
€3.1 million
(
$3.8 million
) was received and paid in January 2018. If this matter is adversely resolved, these amounts will not be collected by VF.
During the
three months
ended March
2018
, the amount of net unrecognized tax benefits and associated interest decreased by
17
VF Corporation March 2018 Form 10-QT
$9.8 million
to
$169.0 million
. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits and interest may decrease during the next
12 months
by approximately
$14.7 million
related to the completion of
examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which
$12.2 million
would reduce income tax expense.
NOTE L — BUSINESS SEGMENT INFORMATION
VF’s businesses are grouped into product categories, and by brands within those product categories, for internal financial reporting used by management. These groupings of businesses within VF are referred to as “coalitions” and are the basis for VF’s reportable segments. Financial information for VF’s reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
(In thousands)
|
|
2018
|
|
|
2017
|
Coalition revenues:
|
|
|
|
|
|
Outdoor & Action Sports
|
|
$
|
2,014,574
|
|
|
|
$
|
1,695,790
|
|
Jeanswear
|
|
639,547
|
|
|
|
647,442
|
|
Imagewear
|
|
371,040
|
|
|
|
134,966
|
|
Other
|
|
20,285
|
|
|
|
22,142
|
|
Total coalition revenues
|
|
$
|
3,045,446
|
|
|
|
$
|
2,500,340
|
|
Coalition profit:
|
|
|
|
|
|
Outdoor & Action Sports
|
|
$
|
292,295
|
|
|
|
$
|
232,452
|
|
Jeanswear
|
|
109,206
|
|
|
|
118,019
|
|
Imagewear
|
|
24,570
|
|
|
|
24,400
|
|
Other
|
|
(3,023
|
)
|
|
|
(2,195
|
)
|
Total coalition profit
|
|
423,048
|
|
|
|
372,676
|
|
Corporate and other expenses
(a)
|
|
(107,750
|
)
|
|
|
(83,091
|
)
|
Interest expense, net
|
|
(21,165
|
)
|
|
|
(20,188
|
)
|
Income from continuing operations before income taxes
|
|
$
|
294,133
|
|
|
|
$
|
269,397
|
|
|
|
(a)
|
Certain corporate overhead and other costs of
$4.1 million
for the
three
-month period ended March 2017, previously allocated to the former Sportswear coalition for segment reporting purposes, have been reallocated to continuing operations as discussed in Note C.
|
The results of Williamson-Dickie have been included in the Imagewear coalition since the October 2, 2017 acquisition date. The results of Kipling North America, which were previously included in the former Sportswear coalition, have been included in the Outdoor & Action Sports coalition for all periods presented.
In light of completed and pending transactions resulting from our active portfolio management strategy, along with recently effected organizational realignments, we are evaluating whether changes need to be made to our internal reporting structure to better support and assess the operations of our business going forward. We expect to finalize our assessment early in Fiscal 2019. If changes are made to our reporting structure, we will assess the resulting effect, if any, on our reporting segments, operating segments and reporting units.
VF Corporation March 2018 Form 10-QT
18
NOTE M – EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
(In thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
Earnings per share – basic:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
261,164
|
|
|
|
$
|
213,276
|
|
Weighted average common shares outstanding
|
|
395,253
|
|
|
|
411,990
|
|
Earnings per share from continuing operations
|
|
$
|
0.66
|
|
|
|
$
|
0.52
|
|
Earnings per share – diluted:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
261,164
|
|
|
|
$
|
213,276
|
|
Weighted average common shares outstanding
|
|
395,253
|
|
|
|
411,990
|
|
Incremental shares from stock options and other dilutive securities
|
|
6,023
|
|
|
|
3,970
|
|
Adjusted weighted average common shares outstanding
|
|
401,276
|
|
|
|
415,960
|
|
Earnings per share from continuing operations
|
|
$
|
0.65
|
|
|
|
$
|
0.51
|
|
For the three months ended March 2018, all outstanding options to purchase shares were dilutive and included in the calculation of diluted earnings per share. Outstanding options to purchase
10.6 million
shares were excluded from the calculation of diluted earnings per share for the
three
-month period ended
March 2017
because the effect of their inclusion would have been antidilutive.
In addition,
0.9 million
and
1.1 million
shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for the
three
-month periods ended
March 2018
and
March 2017
, respectively, because these units were not considered to be contingent outstanding shares in those periods.
NOTE N – 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.
|
19
VF Corporation March 2018 Form 10-QT
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
Fair Value Measurement Using
(a)
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
March 2018
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
185,118
|
|
|
$
|
185,118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
7,714
|
|
|
7,714
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
31,400
|
|
|
—
|
|
|
31,400
|
|
|
—
|
|
Investment securities
|
194,160
|
|
|
183,802
|
|
|
10,358
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
106,174
|
|
|
—
|
|
|
106,174
|
|
|
—
|
|
Deferred compensation
|
227,808
|
|
|
—
|
|
|
227,808
|
|
|
—
|
|
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
|
|
|
—
|
|
|
|
(a)
|
There were
no
transfers among the levels within the fair value hierarchy during the three months ended March
2018
or the year ended
December 2017
.
|
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. 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
March 2018
and
December 2017
, their carrying values approximated their fair values. Additionally, at
March 2018
and
December 2017
, the carrying values of VF’s long-term debt, including the current portion, were
$2,218.8 million
and
$2,194.0 million
, respectively, compared with fair values of
$2,403.9 million
and
$2,422.0 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.
VF Corporation March 2018 Form 10-QT
20
NOTE O – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Summary of Derivative Financial Instruments
All of VF’s outstanding derivative financial instruments are foreign exchange forward 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 all outstanding derivative contracts were
$2.9 billion
at both
March 2018
and
December 2017
and
$2.2 billion
at
March 2017
, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, New Zealand dollar, Swiss franc, Swedish krona, Japanese yen, Korean won and Polish zloty. 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 2018
|
|
|
December 2017
|
|
March 2017
|
|
|
March 2018
|
|
|
December 2017
|
|
March 2017
|
Foreign currency exchange contracts designated as hedging instruments
|
|
$
|
21,496
|
|
|
|
$
|
17,639
|
|
|
$
|
72,306
|
|
|
|
$
|
(105,795
|
)
|
|
|
$
|
(99,606
|
)
|
|
$
|
(25,460
|
)
|
Foreign currency exchange contracts not designated as hedging instruments
|
|
9,904
|
|
|
|
5,331
|
|
|
—
|
|
|
|
(379
|
)
|
|
|
(432
|
)
|
|
(213
|
)
|
Total derivatives
|
|
$
|
31,400
|
|
|
|
$
|
22,970
|
|
|
$
|
72,306
|
|
|
|
$
|
(106,174
|
)
|
|
|
$
|
(100,038
|
)
|
|
$
|
(25,673
|
)
|
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. If VF were to offset and record the asset and liability balances of its foreign exchange forward 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2018
|
|
|
December 2017
|
|
March 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
|
$
|
31,400
|
|
|
$
|
(106,174
|
)
|
|
|
$
|
22,970
|
|
|
$
|
(100,038
|
)
|
|
$
|
72,306
|
|
|
$
|
(25,673
|
)
|
Gross amounts not offset in the Consolidated Balance Sheets
|
|
(20,918
|
)
|
|
20,918
|
|
|
|
(18,313
|
)
|
|
18,313
|
|
|
(25,316
|
)
|
|
25,316
|
|
Net amounts
|
|
$
|
10,482
|
|
|
$
|
(85,256
|
)
|
|
|
$
|
4,657
|
|
|
$
|
(81,725
|
)
|
|
$
|
46,990
|
|
|
$
|
(357
|
)
|
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 2018
|
|
|
December 2017
|
|
March 2017
|
Other current assets
|
|
$
|
26,741
|
|
|
|
$
|
20,771
|
|
|
$
|
63,986
|
|
Accrued liabilities
|
|
(96,087
|
)
|
|
|
(87,205
|
)
|
|
(19,630
|
)
|
Other assets
|
|
4,659
|
|
|
|
2,199
|
|
|
8,320
|
|
Other liabilities
|
|
(10,087
|
)
|
|
|
(12,833
|
)
|
|
(6,043
|
)
|
21
VF Corporation March 2018 Form 10-QT
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 March
|
|
|
|
|
|
|
Cash Flow Hedging Relationships
|
|
2018
|
|
|
2017
|
Foreign currency exchange
|
|
$
|
(25,530
|
)
|
|
|
$
|
(10,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gain (Loss) Reclassified from Accumulated OCI into Income
Three Months Ended March
|
|
|
|
|
|
|
Location of Gain (Loss)
|
|
2018
|
|
|
2017
|
Net sales
|
|
$
|
4,948
|
|
|
|
$
|
6,413
|
|
Cost of goods sold
|
|
(13,286
|
)
|
|
|
11,274
|
|
Selling, general and administrative expenses
|
|
(1,981
|
)
|
|
|
(87
|
)
|
Other income (expense), net
|
|
(2,427
|
)
|
|
|
49
|
|
Interest expense
|
|
(1,214
|
)
|
|
|
(1,158
|
)
|
Total
|
|
$
|
(13,960
|
)
|
|
|
$
|
16,491
|
|
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.
In addition, VF has entered into foreign exchange forward contracts to hedge the purchase price of the Icebreaker Holdings Limited acquisition. 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.
Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Location of Gain (Loss)
on Derivatives
Recognized in Income
|
|
|
Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended March
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges
|
|
|
2018
|
|
|
2017
|
Foreign currency exchange
|
|
Cost of goods sold
|
|
|
$
|
1,810
|
|
|
|
$
|
274
|
|
Foreign currency exchange
|
|
Other income (expense), net
|
|
|
2,737
|
|
|
|
(469
|
)
|
Total
|
|
|
|
|
$
|
4,547
|
|
|
|
$
|
(195
|
)
|
Other Derivative Information
There were
no
significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the
three
-month periods ended
March 2018
and
March 2017
.
At
March 2018
, accumulated OCI included
$86.8 million
of pre-tax net deferred losses 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
$16.7 million
at
March 2018
, which will be reclassified into interest expense in the Consolidated Statements of Income over the
remaining terms of the associated debt instruments. VF reclassified
$1.2 million
of net deferred losses from accumulated OCI into interest expense in each of the
three
-month periods ended
March 2018
and March 2017, and expects to reclassify
$5.0 million
to interest expense during the next
12 months
.
Net Investment Hedge
The Company has designated its
€850.0 million
of euro-denominated fixed-rate notes 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 deferred in the foreign currency translation and other component of accumulated OCI as an offset to the foreign currency translation adjustments on the hedged investments. During the
three
-month periods ended
March 2018
and March 2017, the Company recognized an after-tax loss of
$19.2 million
and
$7.8 million
, respectively, in OCI related to the net investment hedge. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially
VF Corporation March 2018 Form 10-QT
22
liquidated. The Company recorded
no
ineffectiveness from its net investment hedge during the
three
-month periods ended
March 2018
and March 2017.
NOTE P – RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-16,
"Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory"
("ASU 2016-16"), an update to their accounting guidance on the recognition of current and deferred income taxes for intra-entity asset transfers. The new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company early adopted this guidance in the first quarter of 2017 using the modified retrospective method, which resulted in a cumulative adjustment to retained earnings as of the beginning of the period of adoption. The cumulative adjustment to the January 1, 2017 Consolidated Balance Sheet was a reduction in both the other assets and retained earnings line items of
$237.8 million
.
During the three months ended March 2018, the Company identified an error in the amounts originally recorded when adopting ASU 2016-16 due to the use of an inaccurate tax rate when establishing the deferred tax asset in a certain jurisdiction. The Company recorded the out-of-period correction of
$15.5 million
to retained earnings in the Consolidated Statements of Stockholders' Equity for the three months ended March 2018. The adjustment had no impact on the Consolidated Statements of Income and did not have a material impact on the Consolidated Balance Sheets or Consolidated Statements of Stockholders’ Equity for any period presented.
In March 2018, the FASB issued ASU 2018-05,
"Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118",
which allowed SEC registrants to record provisional amounts in earnings for the year ended December 30, 2017 due to the complexities involved in accounting for the enactment of the Tax Act. The Company recognized the estimated income tax effects of the Tax Act in its 2017 consolidated financial statements in accordance with SAB 118 and recorded a revision of our provisional estimate during the three months ended March 2018. Refer to Note K for more information regarding the amounts recorded.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
"Revenue from Contracts with Customers (Topic 606)"
, a new accounting standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. The standard prescribes a five-step approach to revenue recognition: (1) identify the contracts with the customer; (2) identify the separate performance obligations in the contracts; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when, or as, each performance obligation is satisfied. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers.
A cross-functional implementation team has completed VF’s impact analysis and has concluded that the new guidance is not expected to have a material impact on VF’s significant revenue streams. Expected changes will include recognition of revenues for certain wholesale and e-commerce transactions at shipment rather than upon delivery to the customer based on our evaluation of the transfer of control of the goods, and discontinued capitalization of certain costs related to ongoing customer arrangements. Additionally, expected changes to VF's Consolidated Balance Sheets will include presentation of allowances for sales incentive programs, discounts, markdowns, chargebacks, and returns as accrued liabilities rather than as a reduction to accounts receivable, and presentation of the estimated cost of inventory associated with the allowance for sales returns within other current assets rather than as a component of inventory. Additionally, the Company expects to have enhanced disclosures regarding its accounting policies and disaggregation of revenue. The Company will adopt the new standard utilizing the modified retrospective method in the first quarter of Fiscal 2019 and will recognize in retained earnings the immaterial cumulative effect of initially applying the new standard.
In January 2016, the FASB issued ASU 2016-01,
"Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"
, an update to their accounting guidance related to the recognition and measurement of certain financial instruments. This guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This guidance will be effective for VF in the first quarter of Fiscal 2019. The FASB has subsequently issued an update to clarify the previous guidance. The amendments in this updated guidance will be effective for VF in the second quarter of Fiscal 2019. The Company does not expect the adoption of this guidance to have a material impact on VF’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
"Leases (Topic 842)"
, a new accounting standard on leasing. This new standard will require companies to record most leased assets and related liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. VF's cross-functional implementation team has completed the design phase of the project, which involved reviewing the standard's provisions, evaluating real estate and non-real estate lease arrangements and identifying arrangements that may contain embedded leases. This project is now in the implementation phase and the team is collecting information from lease contracts, assessing potential embedded leases and evaluating accounting policy elections. VF is also evaluating the impact of the new accounting standard on the Company's systems, processes and controls. Based on the efforts to date, VF expects this standard will have a material impact on the Consolidated Balance Sheets but does not expect it to have a material impact on the Consolidated Statements of Income. The Company will adopt the new standard in the first quarter of Fiscal 2020.
23
VF Corporation March 2018 Form 10-QT
In March 2016, the FASB issued ASU 2016-04,
"Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products"
, an update to their accounting guidance on extinguishments of financial liabilities that exempts prepaid stored-value products, or gift cards, from the existing guidance. The updated guidance requires that gift card liabilities be subject to breakage accounting, consistent with the new revenue recognition standard discussed above. This guidance will be effective for VF in the first quarter of Fiscal 2019. The Company does not expect the adoption of this guidance to have a material impact on VF’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
"Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This guidance will be effective for VF in the first quarter of Fiscal 2021 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments"
, an update to their accounting guidance that addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance will be effective for VF in the first quarter of Fiscal 2019. The Company does not expect the adoption of this guidance to have a material impact on VF’s Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU 2017-01,
"Business Combinations (Topic 805): Clarifying the Definition of a Business"
, an update that provides a more narrow framework to be used in evaluating whether a set of assets and activities constitutes a business. This guidance will be effective for VF in the first quarter of Fiscal 2019. The Company will apply this guidance to any transactions after adoption but does not expect it to have a material impact on VF’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
"Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"
, an update which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest cost, expected return on plan assets, amortization of prior service costs or credits and actuarial gains and losses) separately and outside of operating income. The update specifies that only the service cost component is eligible for capitalization, which is consistent with VF’s current practice (refer to Note H for components of net periodic benefit costs). The presentation change in the Consolidated Statements of Income will be applied on a retrospective basis when VF adopts this guidance in the first quarter of Fiscal 2019. Other than the presentation changes noted above, the Company does not expect the adoption of this guidance to have a material impact on VF’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, "
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting"
, an update that amends the scope of modification accounting for share-based payment arrangements. This update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. This guidance will be effective for VF beginning in the first quarter of Fiscal 2019 and is required to be applied prospectively to an award modified on or after the adoption date. The Company will apply this guidance to any future changes made to the terms or conditions of share-based payment awards after adoption but does not expect it to have a material impact on VF’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12,
"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"
, an update that amends and simplifies certain aspects of hedge accounting rules to better portray the economic results of risk management activities in the financial statements. This guidance will be effective for VF in the first quarter of Fiscal 2020 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that companies must make a policy decision to either record deferred taxes related to GILTI inclusions or treat any taxes on GILTI inclusions as period costs. The Company is continuing to evaluate these options and will make its decision regarding the accounting policy election within the measurement period as provided under SAB 118.
In February 2018, the FASB issued ASU 2018-02,
"Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income"
, an update that addresses the effect of the change in the U.S. federal corporate income tax rate due to the enactment of the Tax Act on items within accumulated other comprehensive income (loss). The guidance will be effective for VF in the first quarter of Fiscal 2020 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.
VF Corporation March 2018 Form 10-QT
24
NOTE Q — RESTRUCTURING
The Company typically incurs restructuring charges related to the cost optimization of business activities. During the three months ended March 2018, VF leadership approved
$14.9 million
of restructuring charges related to cost optimization activities, of which
$10.8 million
was recognized in selling, general and administrative expenses and
$4.1 million
in cost of goods sold. The Company has not recognized significant incremental costs related to the 2016 and 2017 initiatives. Management expects to recognize
additional expense for cost optimization activities during Fiscal 2019.
Of the
$43.6 million
total restructuring accrual at March 2018,
$36.4 million
is expected to be paid out within the next 12 months and is classified within accrued liabilities. The remaining
$7.2 million
will be paid out beyond the next 12 months and thus is classified within other liabilities.
The activity in the restructuring accrual for the three-month period ended March 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
|
|
Other
|
|
Total
|
Accrual at December 2017
|
$
|
33,808
|
|
|
$
|
4,436
|
|
|
$
|
38,244
|
|
Charges
|
14,927
|
|
|
—
|
|
|
14,927
|
|
Cash payments
|
(4,658
|
)
|
|
(3,992
|
)
|
|
(8,650
|
)
|
Adjustments to accruals
|
(1,033
|
)
|
|
—
|
|
|
(1,033
|
)
|
Currency translation
|
101
|
|
|
—
|
|
|
101
|
|
Accrual at March 2018
|
$
|
43,145
|
|
|
$
|
444
|
|
|
$
|
43,589
|
|
Restructuring costs by business segment are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2018 Charges
|
|
Outdoor & Action Sports
|
|
$
|
4,550
|
|
|
Jeanswear
|
|
2,575
|
|
|
Imagewear
|
|
7,802
|
|
|
Total
|
|
$
|
14,927
|
|
|
NOTE R – SUBSEQUENT EVENTS
On April 3, 2018, VF completed the acquisition of Icebreaker Holdings Limited. Refer to Note B for additional information.
On
April 24, 2018
, VF’s Board of Directors declared a quarterly cash dividend of
$0.46
per share, payable on
June 18, 2018
to stockholders of record on
June 8, 2018
.
On April 30, 2018, VF completed the sale of the
Nautica
®
brand business. Refer to Note C for additional information.
25
VF Corporation March 2018 Form 10-QT