Notes to Consolidated Financial Statements
(Unaudited)
Note A – Basis of Presentation
VF Corporation (together with its subsidiaries, collectively known as “VF” or “the Company”) uses a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to periods ended
March 2017
,
December 2016
and
March 2016
relate to the fiscal periods ended on
April 1, 2017
,
December 31, 2016
and
April 2, 2016
, respectively. During the first quarter of 2017, the Company approved a change in fiscal year end to the Saturday closest to March 31 from the Saturday closest to December 31. Accordingly, the Company’s 2017 fiscal year will end as planned on December 30, 2017, followed by a three-month transition period from December 31, 2017 through March 31, 2018. The Company’s next fiscal year will run from April 1, 2018 through March 30, 2019 (“fiscal 2019”).
During the first quarter of 2017, VF began to separately report the results of our Licensed Sports Group (“LSG”) and
JanSport
®
collegiate businesses (together the “Licensing Business”) as discontinued operations in our 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. In addition, VF completed the disposal of its Contemporary Brands coalition on August 26, 2016, and has reported the operating results for this business in the income (loss) from discontinued operations, net of tax line in the Consolidated Statement of Income for the three months ended March 2016. The related assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheet at March 2016. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note B for additional information on discontinued operations.
The accompanying unaudited 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 2016
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 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 2017
are not necessarily indicative of results that may be expected for any other interim period or for the year ending
December 30, 2017
. 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 2016
(“
2016
Form 10-K”).
Note B – Discontinued Operations
Divestiture of the Licensing Business
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. In the first quarter of 2016, the Company began exploring strategic options for our LSG business.
On April 3, 2017, VF signed a definitive agreement to sell LSG to Fanatics, Inc. for
$225.0 million
in cash, subject to working capital adjustments. The sale transaction was completed on April 28, 2017. LSG includes the
Majestic
®
brand, which supplies apparel and fanware through licensing agreements with U.S. and international professional sports leagues and teams, and was previously included within our Imagewear coalition. Under the terms of the transition services agreement, the Company will provide certain support services for periods ranging from
three
to
24
months from the closing date of the transaction.
In conjunction with the LSG divestiture, VF executed its plan to entirely exit all of its licensing businesses and hold the assets of the
JanSport
®
collegiate licensing business for sale. The
JanSport
®
collegiate business was previously included within our Outdoor & Action Sports coalition.
Management determined that the expected disposals met the criteria for presentation as discontinued operations in the first quarter of 2017. Accordingly, the results of the Licensing Business have been presented as discontinued operations in VF’s Consolidated Statements of Income beginning in the first quarter of 2017, and thus have been excluded from continuing operations and segment results for all periods presented. In addition, the related assets and liabilities of the Licensing Business have been classified as held-for-sale in VF’s Consolidated Balance Sheets for all periods presented. Certain corporate overhead and other costs previously allocated to this business for segment reporting purposes do not qualify for classification within discontinued operations and have been reallocated to continuing operations. In the first quarter of 2017, the Company recognized an after-tax estimated loss on the
sale of the Licensing Business of
$2.4 million
, which is included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Income.
Divestiture of the Contemporary Brands Coalition
On
August 26, 2016
, VF completed the sale of its Contemporary Brands coalition to Delta Galil Industries, Ltd. for
$116.9 million
. The Contemporary Brands coalition included the businesses of the
7 For All Mankind
®
,
Splendid
®
, and
Ella Moss
®
brands (the “Businesses”) and was previously disclosed as a separate reportable segment of VF.
The transaction resulted in an after-tax loss on sale of
$104.4 million
which was included in the loss from discontinued operations, net of tax line item in the 2016 Consolidated Statement of Income.
VF has reported the results of the Businesses in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Income for the quarter ended March 2016 and excluded them from continuing operations and segment results. The after-tax income included in income (loss) from discontinued operations for the
first
quarter of
2016
was
$3.4 million
. The assets and liabilities of the Businesses have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheet at March 2016.
Certain corporate overhead costs and interest expense previously allocated to the Contemporary Brands coalition for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations for the periods presented.
VF is providing certain support services under transition services agreements for a limited period of time. These support services did not have a material impact on VF’s Consolidation Statement of Income for the three months ended March 2017.
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items included in the income (loss) from discontinued operations for the divestitures of the Licensing Business and Contemporary Brands coalition:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
In thousands
|
2017
|
|
2016
|
Revenues
|
$
|
121,330
|
|
|
$
|
204,883
|
|
Cost of goods sold
|
88,221
|
|
|
121,306
|
|
Selling, general and administrative expenses
|
25,637
|
|
|
59,122
|
|
Interest expense, net
|
(18
|
)
|
|
(135
|
)
|
Other income (expense), net
|
—
|
|
|
(2
|
)
|
Income from discontinued operations before income taxes
|
7,454
|
|
|
24,318
|
|
Estimated loss on the disposal of discontinued operations before income taxes
|
(3,531
|
)
|
|
—
|
|
Total income from discontinued operations before income taxes
|
3,923
|
|
|
24,318
|
|
Income tax expense
(a)
|
(9,439
|
)
|
|
(5,984
|
)
|
Income (loss) from discontinued operations, net of tax
|
$
|
(5,516
|
)
|
|
$
|
18,334
|
|
|
|
(a)
|
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 2017
|
|
December 2016
|
|
March 2016
|
Accounts receivable, net
|
$
|
44,281
|
|
|
$
|
36,285
|
|
|
$
|
71,113
|
|
Inventories
|
94,718
|
|
|
98,025
|
|
|
148,812
|
|
Other current assets, including cash and equivalents
|
14,650
|
|
|
1,535
|
|
|
7,849
|
|
Property, plant and equipment
|
11,696
|
|
|
13,640
|
|
|
56,017
|
|
Intangible assets
|
40,164
|
|
|
42,427
|
|
|
212,852
|
|
Goodwill
|
28,636
|
|
|
28,636
|
|
|
28,636
|
|
Other assets
|
921
|
|
|
692
|
|
|
4,297
|
|
Total assets of discontinued operations
(a)
|
$
|
235,066
|
|
|
$
|
221,240
|
|
|
$
|
529,576
|
|
Accounts payable
|
$
|
21,789
|
|
|
$
|
21,674
|
|
|
$
|
21,538
|
|
Accrued liabilities
|
2,849
|
|
|
13,531
|
|
|
8,767
|
|
Other liabilities
|
763
|
|
|
791
|
|
|
11,504
|
|
Deferred income tax liabilities
(b)
|
(4,080
|
)
|
|
(4,081
|
)
|
|
(4,140
|
)
|
Total liabilities of discontinued operations
(a)
|
$
|
21,321
|
|
|
$
|
31,915
|
|
|
$
|
37,669
|
|
|
|
(a)
|
Amounts at December 2016 and
March 2016
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.
|
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
$3.0 million
and
$4.8 million
for the three months ended March 2017 and 2016, respectively.
Note C – 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 first quarter of
2017
, VF sold total accounts receivable of
$285.1 million
. As of
March 2017
,
December 2016
and
March 2016
,
$145.3 million
,
$209.5 million
and
$241.7 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
$0.9 million
and
$0.8 million
for the
first
quarter of
2017
and
2016
, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
Note D – Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
March 2017
|
|
December 2016
|
|
March 2016
|
Finished products
|
$
|
1,452,623
|
|
|
$
|
1,278,504
|
|
|
$
|
1,432,829
|
|
Work-in-process
|
96,903
|
|
|
97,725
|
|
|
88,848
|
|
Raw materials
|
95,958
|
|
|
95,071
|
|
|
92,079
|
|
Total inventories
|
$
|
1,645,484
|
|
|
$
|
1,471,300
|
|
|
$
|
1,613,756
|
|
Note E – Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2017
|
|
December 2016
|
In thousands
|
|
Weighted
Average
Amortization
Period
|
|
Amortization
Methods
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Net
Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
20 years
|
|
Accelerated
|
|
$
|
245,970
|
|
|
$
|
119,018
|
|
|
$
|
126,952
|
|
|
$
|
128,422
|
|
License agreements
|
|
28 years
|
|
Accelerated and straight-line
|
|
108,736
|
|
|
59,964
|
|
|
48,772
|
|
|
49,682
|
|
Trademark
|
|
16 years
|
|
Straight-line
|
|
58,132
|
|
|
4,541
|
|
|
53,591
|
|
|
54,499
|
|
Other
|
|
8 years
|
|
Straight-line
|
|
9,108
|
|
|
3,051
|
|
|
6,057
|
|
|
3,297
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
235,372
|
|
|
235,900
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
1,578,726
|
|
|
1,561,371
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
$
|
1,814,098
|
|
|
$
|
1,797,271
|
|
Amortization expense for the
first
quarter of
2017
was
$5.3 million
. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five 12-month periods beginning in
2017
is
$21.0 million
,
$20.5 million
,
$19.9 million
,
$19.0 million
and
$18.2 million
, respectively.
Note F – Goodwill
Changes in goodwill are summarized by business segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Outdoor &
Action Sports
|
|
Jeanswear
|
|
Imagewear
|
|
Sportswear
|
|
Total
|
Balance, December 2016
|
$
|
1,310,133
|
|
|
$
|
210,765
|
|
|
$
|
30,111
|
|
|
$
|
157,314
|
|
|
$
|
1,708,323
|
|
Currency translation
|
5,049
|
|
|
1,749
|
|
|
—
|
|
|
—
|
|
|
6,798
|
|
Balance, March 2017
|
$
|
1,315,182
|
|
|
$
|
212,514
|
|
|
$
|
30,111
|
|
|
$
|
157,314
|
|
|
$
|
1,715,121
|
|
Accumulated impairment charges were
$82.7 million
for the Outdoor & Action Sports coalition and
$58.5 million
for the Sportswear coalition as of the dates presented above.
No
impairment charges were recorded in the
first
quarter of
2017
.
Note G – Pension Plans
The components of pension cost for VF’s defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
In thousands
|
2017
|
|
2016
|
Service cost – benefits earned during the period
|
$
|
6,416
|
|
|
$
|
6,449
|
|
Interest cost on projected benefit obligations
|
14,815
|
|
|
17,034
|
|
Expected return on plan assets
|
(23,355
|
)
|
|
(24,919
|
)
|
Amortization of deferred amounts:
|
|
|
|
Net deferred actuarial losses
|
11,382
|
|
|
16,306
|
|
Deferred prior service costs
|
712
|
|
|
647
|
|
Net periodic pension cost
|
$
|
9,970
|
|
|
$
|
15,517
|
|
VF contributed
$2.2 million
to its defined benefit plans during the first
three months
of
2017
, and intends to make approximately
$8.5 million
of additional contributions during the remainder of
2017
.
In conjunction with the sale of the Licensing Business, the Company recognized a
$1.1 million
pension curtailment loss in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Income in the first quarter of 2017.
Note H – Capital and Accumulated Other Comprehensive Loss
During the first quarter of
2017
, the Company purchased
8.2 million
shares of Common Stock in open market transactions for
$438.2 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 first quarter of
2017
, VF restored
8.2 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 2017
,
December 2016
or
March 2016
. 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 first quarter of
2017
, the Company purchased
1,400
shares of Common Stock in open market transactions for
$0.1 million
. Balances related to shares held for deferred compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except share amounts
|
March 2017
|
|
December 2016
|
|
March 2016
|
Shares held for deferred compensation plans
|
427,567
|
|
|
439,667
|
|
|
550,149
|
|
Cost of shares held for deferred compensation plans
|
$
|
5,304
|
|
|
$
|
5,464
|
|
|
$
|
6,614
|
|
Accumulated Other Comprehensive 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 2017
|
|
December 2016
|
|
March 2016
|
Foreign currency translation and other
|
$
|
(742,281
|
)
|
|
$
|
(794,579
|
)
|
|
$
|
(602,890
|
)
|
Defined benefit pension plans
|
(281,721
|
)
|
|
(302,697
|
)
|
|
(361,311
|
)
|
Derivative financial instruments
|
35,962
|
|
|
55,813
|
|
|
13,916
|
|
Accumulated other comprehensive loss
|
$
|
(988,040
|
)
|
|
$
|
(1,041,463
|
)
|
|
$
|
(950,285
|
)
|
The changes in accumulated OCI, net of related taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 2016
|
In thousands
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, December 2015
|
$
|
(718,169
|
)
|
|
$
|
(372,195
|
)
|
|
$
|
47,142
|
|
|
$
|
(1,043,222
|
)
|
Other comprehensive income (loss) before reclassifications
|
115,279
|
|
|
—
|
|
|
(9,698
|
)
|
|
105,581
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
10,884
|
|
|
(23,528
|
)
|
|
(12,644
|
)
|
Net other comprehensive income (loss)
|
115,279
|
|
|
10,884
|
|
|
(33,226
|
)
|
|
92,937
|
|
Balance, March 2016
|
$
|
(602,890
|
)
|
|
$
|
(361,311
|
)
|
|
$
|
13,916
|
|
|
$
|
(950,285
|
)
|
Reclassifications out of accumulated OCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Affected Line Item in the Consolidated Statements of Income
|
|
Three Months Ended March
|
Details About Accumulated Other Comprehensive Income (Loss) Components
|
|
|
2017
|
|
2016
|
Amortization of defined benefit pension plans:
|
|
|
|
|
Net deferred actuarial losses
|
|
(a)
|
|
$
|
(11,382
|
)
|
|
$
|
(16,306
|
)
|
Deferred prior service costs
|
|
(a)
|
|
(712
|
)
|
|
(647
|
)
|
Pension curtailment loss
|
|
Income (loss) from discontinued operations, net of tax
|
|
(1,105
|
)
|
|
—
|
|
|
|
Total before tax
|
|
(13,199
|
)
|
|
(16,953
|
)
|
|
|
Tax benefit
|
|
4,476
|
|
|
6,069
|
|
|
|
Net of tax
|
|
(8,723
|
)
|
|
(10,884
|
)
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
Foreign exchange contracts
|
|
Net sales
|
|
6,413
|
|
|
(4,963
|
)
|
Foreign exchange contracts
|
|
Cost of goods sold
|
|
11,274
|
|
|
43,837
|
|
Foreign exchange contracts
|
|
Selling, general and administrative expenses
|
|
(87
|
)
|
|
(978
|
)
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
49
|
|
|
1,503
|
|
Interest rate contracts
|
|
Interest expense
|
|
(1,158
|
)
|
|
(1,104
|
)
|
|
|
Total before tax
|
|
16,491
|
|
|
38,295
|
|
|
|
Tax expense
|
|
(4,174
|
)
|
|
(14,767
|
)
|
|
|
Net of tax
|
|
12,317
|
|
|
23,528
|
|
Total reclassifications for the period
|
|
Net of tax
|
|
$
|
3,594
|
|
|
$
|
12,644
|
|
|
|
(a)
|
These accumulated OCI components are included in the computation of net periodic pension cost (refer to Note G for additional details).
|
Note I – Stock-based Compensation
During the first quarter of
2017
, VF granted stock options to employees and nonemployee members of VF’s Board of Directors to purchase
3,407,216
shares of its Common Stock at an exercise price of
$53.47
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:
|
|
|
|
Options Granted Three Months Ended March 2017
|
Expected volatility
|
23% to 29%
|
Weighted average expected volatility
|
24%
|
Expected term (in years)
|
6.3 to 7.7
|
Weighted average dividend yield
|
2.8%
|
Risk-free interest rate
|
0.7% to 2.4%
|
Weighted average fair value at date of grant
|
$9.88
|
Also, during the first quarter of
2017
, VF granted
597,121
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 period. 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 a
three
-year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. Shares are issued to participants in the year following the conclusion of each
three
-year performance period. The fair market value of VF Common Stock at the date the units were granted was
$53.47
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 Index. The grant date fair value of the TSR-based adjustment related to the
2017
performance-based RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was
$2.67
per share.
VF granted
17,964
nonperformance-based RSUs to nonemployee members of the Board of Directors during the first quarter of
2017
. 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
$53.47
per share.
VF granted
76,702
nonperformance-based RSUs to certain key employees in international jurisdictions during the first quarter of
2017
. These units vest
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
$53.47
.
VF granted
263,770
restricted shares of VF Common Stock to certain members of management during the first quarter of
2017
. These shares vest over periods of up to
five years
from the date of grant. The fair market value of VF Common Stock at the date the shares were granted was
$53.47
per share.
Note J – Income Taxes
The effective income tax rate for the first quarter of
2017
was
20.8%
compared to
17.4%
in the first quarter of
2016
. The first quarter of
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
2017
reduced the effective income tax rate by
0.4%
. The first quarter of
2016
included a net discrete tax benefit of
$19.5 million
, which included a
$15.7 million
tax benefit related to the early adoption of the accounting standards update on stock compensation and
$3.8 million
of net tax benefits related to the realization of previously unrecognized tax benefits and interest. The
$19.5 million
net discrete tax benefit in
2016
reduced the effective income tax rate by
6.7%
. Without discrete items, the effective income tax rate for the first quarter of
2017
decreased by
2.9%
compared with the
2016
period primarily due to a higher percentage of income in lower tax rate jurisdictions and the impact of early adopting the accounting standards update regarding
intra-entity asset transfers
.
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 Internal Revenue Service (“IRS”) examinations for tax years through 2012 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 the timing of cash tax payments 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. If this matter is adversely resolved, these amounts will not be collected by VF.
During the first quarter of
2017
, the amount of net unrecognized tax benefits and associated interest increased by
$4.5 million
to
$155.0 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
$28.3 million
related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which
$25.4 million
would reduce income tax expense.
Note K – 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
|
2017
|
|
2016
|
Coalition revenues:
|
|
|
|
Outdoor & Action Sports
|
$
|
1,678,810
|
|
|
$
|
1,639,085
|
|
Jeanswear
|
647,442
|
|
|
710,590
|
|
Imagewear
|
134,966
|
|
|
141,811
|
|
Sportswear
|
98,317
|
|
|
118,397
|
|
Other
|
22,142
|
|
|
24,534
|
|
Total coalition revenues
|
$
|
2,581,677
|
|
|
$
|
2,634,417
|
|
Coalition profit:
(a)
|
|
|
|
Outdoor & Action Sports
|
$
|
230,944
|
|
|
$
|
228,110
|
|
Jeanswear
|
118,019
|
|
|
137,294
|
|
Imagewear
|
24,400
|
|
|
26,139
|
|
Sportswear
|
(1,069
|
)
|
|
4,776
|
|
Other
|
(2,195
|
)
|
|
(2,608
|
)
|
Total coalition profit
|
370,099
|
|
|
393,711
|
|
Corporate and other expenses
(a)
|
(78,692
|
)
|
|
(80,622
|
)
|
Interest expense, net
(b)
|
(20,188
|
)
|
|
(20,020
|
)
|
Income from continuing operations before income taxes
|
$
|
271,219
|
|
|
$
|
293,069
|
|
|
|
(a)
|
Certain corporate overhead and other costs of
$8.5 million
for the three months ended March 2016, previously allocated to the Contemporary Brands, Imagewear and Outdoor & Action Sports coalitions for segment reporting purposes, have been reallocated to continuing operations as discussed in Note B.
|
|
|
(b)
|
Interest expense of
$0.5 million
for the three months ended March 2016, previously allocated to the Contemporary Brands coalition for segment reporting purposes, has been reallocated to continuing operations as discussed in Note B.
|
Note L – Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
In thousands, except per share amounts
|
2017
|
|
2016
|
Earnings per share – basic:
|
|
|
|
Income from continuing operations
|
$
|
214,679
|
|
|
$
|
241,935
|
|
Weighted average common shares outstanding
|
411,990
|
|
|
421,748
|
|
Earnings per share from continuing operations
|
$
|
0.52
|
|
|
$
|
0.57
|
|
Earnings per share – diluted:
|
|
|
|
Income from continuing operations
|
$
|
214,679
|
|
|
$
|
241,935
|
|
Weighted average common shares outstanding
|
411,990
|
|
|
421,748
|
|
Incremental shares from stock options and other dilutive securities
|
3,970
|
|
|
7,385
|
|
Adjusted weighted average common shares outstanding
|
415,960
|
|
|
429,133
|
|
Earnings per share from continuing operations
|
$
|
0.52
|
|
|
$
|
0.56
|
|
Outstanding options to purchase
10.6 million
and
5.5 million
shares of Common Stock were excluded from the calculations of diluted earnings per share for the
three
-month periods ended
March 2017
and
March 2016
, respectively, because the effect of their inclusion would have been antidilutive to those periods. In addition,
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 2017
and
March 2016
, respectively, because these units were not considered to be contingent outstanding shares in those periods.
Note M – 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.
|
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 2017
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
302,043
|
|
|
$
|
302,043
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
24,195
|
|
|
24,195
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
72,306
|
|
|
—
|
|
|
72,306
|
|
|
—
|
|
Investment securities
|
204,391
|
|
|
188,796
|
|
|
15,595
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
25,673
|
|
|
—
|
|
|
25,673
|
|
|
—
|
|
Deferred compensation
|
239,974
|
|
|
—
|
|
|
239,974
|
|
|
—
|
|
December 2016
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
840,842
|
|
|
$
|
840,842
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
14,774
|
|
|
14,774
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
103,340
|
|
|
—
|
|
|
103,340
|
|
|
—
|
|
Investment securities
|
196,738
|
|
|
179,673
|
|
|
17,065
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
25,574
|
|
|
—
|
|
|
25,574
|
|
|
—
|
|
Deferred compensation
|
232,214
|
|
|
—
|
|
|
232,214
|
|
|
—
|
|
|
|
(a)
|
There were
no
transfers among the levels within the fair value hierarchy during the first quarter of
2017
or the year ended
December 2016
.
|
VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of forward foreign currency exchange 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 2017
and
December 2016
, their carrying values approximated their fair values. Additionally, at
March 2017
and
December 2016
, the carrying values of VF’s long-term debt, including the current portion, were
$2,305.2 million
and
$2,292.9 million
, respectively, compared with fair values of
$2,490.7 million
and
$2,486.6 million
at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
Note N – Derivative Financial Instruments and Hedging Activities
Summary of Derivative Financial Instruments
All of VF’s outstanding derivative financial instruments are forward foreign currency exchange 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 outstanding derivative contracts were
$2.2 billion
at
March 2017
,
$2.2 billion
at
December 2016
and
$2.3 billion
at
March 2016
, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Japanese yen, Swedish krona and Polish zloty. Derivative contracts have maturities up to
24 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 2017
|
|
December 2016
|
|
March 2016
|
|
March 2017
|
|
December 2016
|
|
March 2016
|
Foreign currency exchange contracts designated as hedging instruments
|
$
|
72,306
|
|
|
$
|
103,340
|
|
|
$
|
71,007
|
|
|
$
|
(25,460
|
)
|
|
$
|
(25,292
|
)
|
|
$
|
(43,149
|
)
|
Foreign currency exchange contracts not designated as hedging instruments
|
—
|
|
|
—
|
|
|
609
|
|
|
(213
|
)
|
|
(282
|
)
|
|
(507
|
)
|
Total derivatives
|
$
|
72,306
|
|
|
$
|
103,340
|
|
|
$
|
71,616
|
|
|
$
|
(25,673
|
)
|
|
$
|
(25,574
|
)
|
|
$
|
(43,656
|
)
|
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. However, if VF were to offset and record the asset and liability balances of its forward foreign currency exchange 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 2017
|
|
December 2016
|
|
March 2016
|
In thousands
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
$
|
72,306
|
|
|
$
|
(25,673
|
)
|
|
$
|
103,340
|
|
|
$
|
(25,574
|
)
|
|
$
|
71,616
|
|
|
$
|
(43,656
|
)
|
Gross amounts not offset in the Consolidated Balance Sheets
|
(25,316
|
)
|
|
25,316
|
|
|
(22,341
|
)
|
|
22,341
|
|
|
(36,554
|
)
|
|
36,554
|
|
Net amounts
|
$
|
46,990
|
|
|
$
|
(357
|
)
|
|
$
|
80,999
|
|
|
$
|
(3,233
|
)
|
|
$
|
35,062
|
|
|
$
|
(7,102
|
)
|
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
March 2017
|
|
December 2016
|
|
March 2016
|
Other current assets
|
$
|
63,986
|
|
|
$
|
84,519
|
|
|
$
|
64,429
|
|
Accrued liabilities
|
(19,630
|
)
|
|
(18,574
|
)
|
|
(31,369
|
)
|
Other assets
|
8,320
|
|
|
18,821
|
|
|
7,187
|
|
Other liabilities
|
(6,043
|
)
|
|
(7,000
|
)
|
|
(12,287
|
)
|
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
|
2017
|
|
2016
|
Foreign currency exchange
|
$
|
(10,094
|
)
|
|
$
|
(15,783
|
)
|
|
|
|
|
|
|
|
|
|
In thousands
|
Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended March
|
Location of Gain (Loss)
|
2017
|
|
2016
|
Net sales
|
$
|
6,413
|
|
|
$
|
(4,963
|
)
|
Cost of goods sold
|
11,274
|
|
|
43,837
|
|
Selling, general and administrative expenses
|
(87
|
)
|
|
(978
|
)
|
Other income (expense), net
|
49
|
|
|
1,503
|
|
Interest expense
|
(1,158
|
)
|
|
(1,104
|
)
|
Total
|
$
|
16,491
|
|
|
$
|
38,295
|
|
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. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
Derivatives Not Designated as Hedges
|
|
Location of Gain (Loss)
on Derivatives
Recognized in Income
|
|
Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended March
|
2017
|
|
2016
|
Foreign currency exchange
|
|
Cost of goods sold
|
|
$
|
274
|
|
|
$
|
1,504
|
|
Foreign currency exchange
|
|
Other income (expense), net
|
|
(469
|
)
|
|
(1,285
|
)
|
Total
|
|
|
|
$
|
(195
|
)
|
|
$
|
219
|
|
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 2017
and
March 2016
.
At
March 2017
, accumulated OCI included
$47.3 million
of pre-tax net deferred gains 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
$21.5 million
at
March 2017
, 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
and
$1.1 million
of net deferred losses from accumulated OCI into interest expense for the
three
-month periods ended
March 2017
and
March 2016
, respectively. VF expects to reclassify
$4.8 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 first quarter of
2017
, the Company recognized a
$12.7 million
pre-tax loss in OCI related to the net investment hedge. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated. The Company recorded
no
ineffectiveness from its net investment hedge in the first quarter of
2017
.
Note O – Recently Adopted and Issued Accounting Standards
Recently Adopted Accounting Standards
In July 2015, the FASB issued an update to their accounting guidance related to inventory that changes the measurement principle from lower of cost or market to lower of cost or net realizable value. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on equity method accounting. The guidance eliminates the requirement to retroactively apply the equity method when an entity obtains significant influence over a previously held investment. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on derivative financial instruments when there is a change in the counterparty to a derivative contract (novation). The new guidance clarifies that the novation of a derivative contract that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on derivative financial instruments that clarifies the steps required to determine bifurcation of an embedded derivative. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In October 2016, the FASB issued 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 requires 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
.
In October 2016, the FASB issued an update to their accounting guidance that changes how a single decision maker will consider its indirect interests when performing the primary beneficiary analysis under the variable interest entity model. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In November 2016, the FASB issued an update that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The Company early adopted this guidance in the first quarter of 2017 on a retrospective basis and the Statement of Cash Flows included herein reflects
$3.8 million
and
$0.8 million
of restricted cash for March 2017 and March 2016, respectively. The Company’s restricted cash is generally held as collateral for certain transactions.
Recently Issued Accounting Standards
In May 2014, the FASB issued 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. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company has established a cross-functional implementation team to address the standard and has completed VF’s initial impact analysis. The new guidance is not expected to have a material impact on VF’s significant revenue streams within the wholesale, direct-to-consumer and royalty channels. VF is continuing to evaluate the impact on less significant revenue streams within those channels. The Company expects to adopt the new standard utilizing the modified retrospective method in the first quarter of fiscal 2019.
In January 2016, the FASB issued 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 with early adoption permitted. The Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In February 2016, the FASB issued a new accounting standard on leasing. This new standard will require companies to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. This guidance will be effective for VF in the first quarter of fiscal 2020 with early adoption permitted. The standard requires use of the modified retrospective transition approach. Given the Company’s significant number of leases, VF expects this standard will have a material impact on VF’s Consolidated Balance Sheets but does not expect it to have a material impact on the Consolidated Statements of Income. The Company is still assessing the expected timing of adoption.
In March 2016, the FASB issued 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 with early adoption permitted. The Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In June 2016, the FASB issued an update to their accounting guidance on the 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 an update to their accounting guidance addressing 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 with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on VF’s consolidated financial statements.
In January 2017, the FASB issued 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 with early adoption permitted. The Company will apply this guidance to any transactions after adoption but does not expect it to have a significant impact on VF’s consolidated financial statements.
In January 2017, the FASB issued an update that simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. The single quantitative step test requires companies to compare the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. VF will continue to have the option of first performing a qualitative assessment to determine whether it is necessary to complete the quantitative goodwill impairment test. This guidance will be effective for VF in the first quarter of fiscal 2021 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will apply this guidance on any impairment analyses after adoption, which may have a significant impact on the calculated impairment charges, if any are required.
In March 2017, the FASB issued 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 cost or credits and actuarial gains and losses) separately and outside of operating income. The amendments in this update specify that only the service cost component is eligible for capitalization, which is consistent with VF’s current practice. The presentation change in the Consolidated Statements of Income will be applied on a retrospective basis. This guidance will be effective for VF beginning in the first quarter of fiscal 2019 with early adoption permitted. Upon adoption, VF will reclassify the other components of net periodic benefit costs from the selling, general and administrative expenses line item in the Consolidated Statements of Income. Except for the reclassification within the Consolidated Statements of Income noted above, the Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
Note P — Restructuring
In the fourth quarter of 2016, VF leadership approved restructuring charges related to cost alignment initiatives, and recognized
$58.1 million
of restructuring charges. The Company did not recognize additional costs associated with these actions in the first quarter of 2017 and does not expect to recognize material additional costs relating to these actions in 2017. The Company expects a substantial amount of the restructuring activities to be completed by the end of 2017.
The activity in the restructuring accrual for the three months ended March 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Severance
|
|
Other
|
|
Total
|
Amounts recorded in accrued liabilities at December 2016
|
$
|
52,720
|
|
|
$
|
878
|
|
|
$
|
53,598
|
|
Cash payments
|
(5,762
|
)
|
|
—
|
|
|
(5,762
|
)
|
Adjustments to accruals
|
90
|
|
|
—
|
|
|
90
|
|
Currency translation
|
(115
|
)
|
|
—
|
|
|
(115
|
)
|
Amounts recorded in accrued liabilities at March 2017
|
$
|
46,933
|
|
|
$
|
878
|
|
|
$
|
47,811
|
|
Note Q – Subsequent Events
On
April 25, 2017
, VF’s Board of Directors declared a quarterly cash dividend of
$0.42
per share, payable on
June 19, 2017
to stockholders of record on
June 9, 2017
.
On April 28, 2017, VF completed the sale of LSG to Fanatics, Inc. for
$225.0 million
, subject to working capital adjustments.