Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 — 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. The Company's current fiscal year will run from April 1, 2018 through March 30, 2019 ("Fiscal 2019"). This document reflects the Company's first quarter of Fiscal 2019. For presentation purposes herein, all references to periods ended
June 2018
,
March 2018
and
June 2017
relate to the fiscal periods ended on
June 30, 2018
,
March 31, 2018
and
July 1, 2017
, respectively.
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 5 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. 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
June 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 30, 2017 (“2017 Form 10-K”).
NOTE 2 – RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 subsequently issued updates to the standard to provide additional clarification on specific topics. Collectively, the guidance is referred to as FASB Accounting Standards Codification ("ASC") 606. 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. The Company adopted this standard on April 1, 2018, utilizing the modified retrospective method and applying this approach to contracts not completed as of that date. The cumulative effect of initially applying the new standard has been recognized in retained earnings. Comparative prior period information has not been restated and continues to be reported under accounting standards in effect for those periods.
The adoption of ASC 606 resulted in a net increase
of
$2.0 million
in the retained earnings line item of the Consolidated Balance Sheet as of April 1, 2018. The cumulative effect adjustment relates primarily to i) 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, ii) discontinued capitalization of certain costs related to ongoing customer arrangements and iii) adjustments to the timing of recognition for certain royalty amounts.
Other effects of the adoption include
presentation of allowances for sales incentive programs, discounts, markdowns, chargebacks, and returns as refund liabilities rather than as a reduction to accounts receivable and presentation of the right of return asset within other current assets rather than as a component of inventory in the Consolidated Balance Sheets. Additionally, sourcing fees received from customers and advertising contributions from licensees that had previously been reported as an offset to costs or expenses are now reported as revenue in the Consolidated Statement of Income.
Refer to Note 3 for additional revenue disclosures.
VF Corporation Q1 2019 Form 10-Q
8
The following tables compare amounts reported in accordance with the requirements of ASC 606 to the amounts that would have been reported had the new standard not been applied:
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
June 2018
|
(In thousands)
|
As Reported
|
|
Impact of Adoption
|
|
Balances without Adoption of ASC 606
|
ASSETS
|
|
|
|
|
|
Cash and equivalents
|
$
|
467,917
|
|
|
$
|
—
|
|
|
$
|
467,917
|
|
Accounts receivable, net
|
1,428,535
|
|
|
(179,981
|
)
|
|
1,248,554
|
|
Inventories
|
1,993,825
|
|
|
54,368
|
|
|
2,048,193
|
|
Other current assets
|
439,870
|
|
|
(49,400
|
)
|
|
390,470
|
|
Total current assets
|
4,330,147
|
|
|
(175,013
|
)
|
|
4,155,134
|
|
Property, plant and equipment, net
|
1,018,164
|
|
|
—
|
|
|
1,018,164
|
|
Goodwill and intangible assets, net
|
4,000,438
|
|
|
—
|
|
|
4,000,438
|
|
Other assets
|
843,005
|
|
|
381
|
|
|
843,386
|
|
TOTAL ASSETS
|
$
|
10,191,754
|
|
|
$
|
(174,632
|
)
|
|
$
|
10,017,122
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
$
|
1,323,112
|
|
|
$
|
—
|
|
|
$
|
1,323,112
|
|
Accounts payable
|
675,581
|
|
|
—
|
|
|
675,581
|
|
Accrued liabilities
|
996,863
|
|
|
(167,292
|
)
|
|
829,571
|
|
Total current liabilities
|
2,995,556
|
|
|
(167,292
|
)
|
|
2,828,264
|
|
Long-term debt
|
2,156,627
|
|
|
—
|
|
|
2,156,627
|
|
Other liabilities
|
1,308,455
|
|
|
(1,545
|
)
|
|
1,306,910
|
|
Total liabilities
|
6,460,638
|
|
|
(168,837
|
)
|
|
6,291,801
|
|
Total stockholders' equity
|
3,731,116
|
|
|
(5,795
|
)
|
|
3,725,321
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
10,191,754
|
|
|
$
|
(174,632
|
)
|
|
$
|
10,017,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Income
|
|
|
|
|
|
|
Three Months Ended June 2018
|
(In thousands)
|
As Reported
|
|
Impact of Adoption
|
|
Balances without Adoption of ASC 606
|
Net revenues
|
$
|
2,788,146
|
|
|
$
|
(9,695
|
)
|
|
$
|
2,778,451
|
|
Cost of goods sold
|
1,384,977
|
|
|
(12,806
|
)
|
|
1,372,171
|
|
Selling, general and administrative expenses
|
1,172,287
|
|
|
3,576
|
|
|
1,175,863
|
|
Total costs and operating expenses
|
2,557,264
|
|
|
(9,230
|
)
|
|
2,548,034
|
|
Operating income
|
230,882
|
|
|
(465
|
)
|
|
230,417
|
|
Interest income (expense) and other income (expense), net
|
(44,550
|
)
|
|
—
|
|
|
(44,550
|
)
|
Income from continuing operations before income taxes
|
186,332
|
|
|
(465
|
)
|
|
185,867
|
|
Income taxes
|
26,379
|
|
|
(82
|
)
|
|
26,297
|
|
Income from continuing operations
|
159,953
|
|
|
(383
|
)
|
|
159,570
|
|
Income (loss) from discontinued operations, net of tax
|
405
|
|
|
(3,456
|
)
|
|
(3,051
|
)
|
Net income
|
$
|
160,358
|
|
|
$
|
(3,839
|
)
|
|
$
|
156,519
|
|
9
VF Corporation Q1 2019 Form 10-Q
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows - Operating Activities
|
|
Three Months Ended June 2018
|
(In thousands)
|
As Reported
|
|
Impact of Adoption
|
|
Activities without Adoption of ASC 606
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
$
|
160,358
|
|
|
$
|
(3,839
|
)
|
|
$
|
156,519
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
71,130
|
|
|
144
|
|
|
71,274
|
|
Other adjustments, net
|
37,640
|
|
|
3,456
|
|
|
41,096
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(25,482
|
)
|
|
169,972
|
|
|
144,490
|
|
Inventories
|
(140,751
|
)
|
|
(48,565
|
)
|
|
(189,316
|
)
|
Accounts payable
|
87,126
|
|
|
—
|
|
|
87,126
|
|
Income taxes
|
(78,688
|
)
|
|
(82
|
)
|
|
(78,770
|
)
|
Accrued liabilities
|
166,543
|
|
|
(166,013
|
)
|
|
530
|
|
Other assets and liabilities
|
(732
|
)
|
|
44,927
|
|
|
44,195
|
|
Cash provided by operating activities
|
$
|
277,144
|
|
|
$
|
—
|
|
|
$
|
277,144
|
|
There was no impact to investing or financing activities within the Consolidated Statement of Cash Flows as a result of the adoption of ASC 606.
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 Securities and Exchange Commission ("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 Cuts and Jobs Act (“Tax Act”). The Company recognized the estimated income tax effects of the Tax Act in its 2017 consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 118 ("SAB 118") and recorded revisions of our provisional estimate during the three months ended June 2018 and March 2018. Refer to Note 13 for more information regarding the amounts recorded.
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 became effective for VF in the first quarter of Fiscal 2019, but did not impact VF's consolidated financial statements. 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 subsequent guidance to have a material impact on VF’s consolidated financial statements.
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 financial liabilities related to prepaid stored-value products be subject to breakage accounting, consistent with ASC 606. This guidance became effective for VF in the first quarter of Fiscal 2019, but did not impact 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 became effective for VF in the first quarter of Fiscal 2019 but did not impact 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 became effective for VF in the first quarter of Fiscal 2019 and was applied when accounting for the acquisitions completed during the period, but did not impact our conclusions on whether they are a business. Refer to Note 4 for further information related to acquisitions.
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. 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. The presentation change in the Consolidated Statements of Income requires application on a retrospective basis. The ASU was adopted by the Company on April 1, 2018, and as a result, operating income increased and non-operating expense increased
$1.6 million
for the three months ended June 2017. VF applied the practical expedient permitted under the guidance which allows entities to use information previously disclosed in the pension and other post-retirement benefit plans footnote as the basis to apply the
VF Corporation Q1 2019 Form 10-Q
10
retrospective presentation requirements. Refer to pension disclosure in Note 10.
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 became effective for VF beginning in the first quarter of Fiscal 2019, but did not impact VF’s consolidated financial statements.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02,
"Leases (Topic 842)"
, a new accounting standard on leasing. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics, including permitted transition methods. 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 the year ended March 28, 2020 ("Fiscal 2020") utilizing the modified retrospective method and will recognize a cumulative-effect adjustment in retained earnings at the beginning of the period of adoption.
In June 2016, the FASB issued ASU 2016-13,
"Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
, which requires 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 the year ended April 3, 2021 ("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 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. The Company has considered the taxes resulting from GILTI as a current-period expense for the three months ended June 2018.
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.
In June 2018, the FASB issued ASU 2018-07,
"Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting"
, an update that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. 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.
In July 2018, the FASB issued ASU 2018-09,
"Codification Improvements"
, an update that provides technical corrections, clarifications and other improvements across a variety of accounting topics. The transition and effective date guidance is based on the facts and circumstances of each amendment included in the ASU; however, many will be effective for VF in the first quarter of Fiscal 2020. The Company is evaluating the impact that adopting this guidance will have on VF's consolidated financial statements.
11
VF Corporation Q1 2019 Form 10-Q
NOTE 3 - REVENUES
Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied based on the transfer of control of promised goods or services. The transfer of control typically occurs at a point in time based on consideration of when the customer has i) an obligation to pay for, ii) physical possession of, iii) legal title to, iv) risks and rewards of ownership of and v) accepted the goods or services. The timing of revenue recognition within the wholesale channel occurs either on shipment or delivery of goods based on contractual terms with the customer. The timing of revenue recognition in the direct-to-consumer channel generally occurs at the point of sale within VF-operated or concession retail stores and either on shipment or delivery of goods for e-commerce transactions based on contractual terms with the customer. For finished products shipped directly to customers from our suppliers, the Company's promise to the customer is a performance obligation to provide the specified goods, and thus the Company is the principal in the arrangement and revenue is recognized on a gross basis at the transaction price. For sourcing arrangements, the Company's promise to the customer is to arrange for certain goods, typically finished products, to be provided and thus the Company is acting as an agent and revenue is recognized on a net basis at the fee amount earned.
The duration of contractual arrangements with our customers in the wholesale and direct-to-consumer channels is typically less than one year. Payment terms with customers are generally between 30 and 60 days. The Company does not adjust the promised amount of consideration for the effects of a significant financing component as it is expected, at contract inception, that the period between the transfer of the promised good or service to the customer and the customer payment for the good or service will be one year or less.
The amount of revenue recognized in both wholesale and direct-to-consumer channels reflects the expected consideration to be received for providing the goods or services to the customer, which includes estimates for variable consideration. Variable consideration includes allowances for trade terms, sales incentive programs, discounts, markdowns, chargebacks and product returns. Estimates of variable consideration are determined at contract inception and reassessed at each reporting date, at a minimum, to reflect any changes in facts and circumstances. The Company utilizes the expected value method in determining its estimates of variable consideration, based on evaluations of specific product and customer circumstances, historical and anticipated trends, and current economic conditions.
Certain products sold by the Company include an assurance warranty. Product warranty costs are estimated based on historical and anticipated trends, and are recorded as cost of goods sold at the time revenue is recognized.
Revenue from the sale of gift cards is deferred and recorded as a contract liability until the gift card is redeemed by the customer, factoring in breakage as appropriate.
Various VF brands maintain customer loyalty programs where customers earn rewards from qualifying purchases or activities, which are redeemable for discounts on future purchases or other rewards. For its customer loyalty programs, the Company estimates the stand-alone selling price of the loyalty rewards and allocates a portion of the consideration for the sale of products to the loyalty points earned. The deferred amount is recorded as a
contract liability, and is recognized as revenue when the points are redeemed or when the likelihood of redemption is remote.
The Company has elected to treat all shipping and handling activities as fulfillment costs and recognize the costs as selling, general and administrative expenses at the time the related revenue is recognized. Shipping and handling costs billed to customers are included in net revenues. Sales taxes and value added taxes collected from customers and remitted directly to governmental authorities are excluded from the transaction price.
The Company has licensing agreements for its symbolic intellectual property, most of which include minimum guaranteed royalties. Royalty income is recognized as earned over the respective license term based on the greater of minimum guarantees or the licensees' sales of licensed products at rates specified in the licensing contracts
.
Royalty income related to the minimum guarantees is recognized using a measure of progress with variable amounts recognized only when the cumulative earned royalty exceeds the minimum guarantees.
As of June 2018, the Company expects to recognize
$119.3 million
of fixed consideration related to the future minimum guarantees in effect under its licensing agreements and expects such amounts to be recognized over time through December
2024
. The variable consideration is not disclosed as a remaining performance obligation as the licensing arrangements qualify for the sales-based royalty exemption.
The Company has applied the practical expedient to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less.
Performance Obligations
Disclosure is required for the aggregate transaction price allocated to performance obligations that are unsatisfied at the end of a reporting period, unless the optional practical expedients are applicable. VF is electing the practical expedients to not disclose the transaction price allocated to remaining performance obligations for i) variable consideration related to sales-based royalty arrangements and ii) contracts with an original expected duration of one year or less.
As of June 2018, there are no arrangements with transaction price allocated to remaining performance obligations other than contracts for which the Company has applied the practical expedients and fixed consideration related to future minimum guarantees discussed above.
For the three months ended June 2018, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not material.
Contract Balances
Accounts receivable represent the Company's unconditional right to receive consideration from a customer and are recorded at net invoiced amounts, less an estimated allowance for doubtful accounts.
Contract assets are rights to consideration in exchange for goods or services that have been transferred to a customer when that right is conditional on something other than the passage of time. Once the Company has an unconditional right to consideration
VF Corporation Q1 2019 Form 10-Q
12
under a contract, amounts are invoiced and contract assets are reclassified to accounts receivable. The Company's primary contract assets relate to sales-based royalty arrangements, which are discussed in more detail above.
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of
consideration that is unconditional, before the transfer of a good or service to the customer and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's primary contract liabilities relate to gift cards, loyalty programs and sales-based royalty arrangements, which are discussed in more detail above.
The following table provides information about accounts receivable, contract assets and contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2018
|
|
|
At Adoption - April 1, 2018
|
Accounts receivable, net
|
|
$
|
1,428,535
|
|
|
|
$
|
1,408,587
|
|
Contract assets
(a)
|
|
2,931
|
|
|
|
2,600
|
|
Contract liabilities
(b)
|
|
30,297
|
|
|
|
28,252
|
|
|
|
(a)
|
Included in the other current assets line item in the Consolidated Balance Sheets.
|
|
|
(b)
|
Included in the accrued liabilities line item in the Consolidated Balance Sheets.
|
For the three months ended June 2018, the Company recognized
$13.1 million
of revenue that was previously included in the contract liability balance. The change in the contract asset and contract liability balances primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment.
Disaggregation of Revenue
The following tables disaggregate our revenues by channel and geography, which provides a meaningful depiction of how the nature, timing and uncertainty of revenues are affected by economic factors. The wholesale channel includes fees generated from sourcing activities as the customers and point-in-time revenue recognition are similar to other wholesale arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2018
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Jeans
|
|
Other
|
|
Total
|
Channel revenues
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
$
|
309,776
|
|
|
$
|
654,848
|
|
|
$
|
399,673
|
|
|
$
|
525,455
|
|
|
$
|
10,137
|
|
|
$
|
1,899,889
|
|
Direct-to-consumer
|
255,964
|
|
|
475,536
|
|
|
37,838
|
|
|
70,365
|
|
|
26,103
|
|
|
865,806
|
|
Royalty
|
2,860
|
|
|
6,553
|
|
|
5,091
|
|
|
7,947
|
|
|
—
|
|
|
22,451
|
|
Total
|
$
|
568,600
|
|
|
$
|
1,136,937
|
|
|
$
|
442,602
|
|
|
$
|
603,767
|
|
|
$
|
36,240
|
|
|
$
|
2,788,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic revenues
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
262,856
|
|
|
$
|
644,105
|
|
|
$
|
350,136
|
|
|
$
|
440,312
|
|
|
$
|
36,240
|
|
|
$
|
1,733,649
|
|
International
|
305,744
|
|
|
492,832
|
|
|
92,466
|
|
|
163,455
|
|
|
—
|
|
|
1,054,497
|
|
Total
|
$
|
568,600
|
|
|
$
|
1,136,937
|
|
|
$
|
442,602
|
|
|
$
|
603,767
|
|
|
$
|
36,240
|
|
|
$
|
2,788,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2017
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Jeans
|
|
Other
|
|
Total
|
Channel revenues
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
$
|
290,237
|
|
|
$
|
541,476
|
|
|
$
|
205,010
|
|
|
$
|
509,851
|
|
|
$
|
—
|
|
|
$
|
1,546,574
|
|
Direct-to-consumer
|
242,904
|
|
|
362,280
|
|
|
1,847
|
|
|
70,665
|
|
|
28,320
|
|
|
706,016
|
|
Royalty
|
3,109
|
|
|
5,534
|
|
|
—
|
|
|
7,387
|
|
|
—
|
|
|
16,030
|
|
Total
|
$
|
536,250
|
|
|
$
|
909,290
|
|
|
$
|
206,857
|
|
|
$
|
587,903
|
|
|
$
|
28,320
|
|
|
$
|
2,268,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic revenues
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
272,591
|
|
|
$
|
505,099
|
|
|
$
|
202,248
|
|
|
$
|
430,385
|
|
|
$
|
28,320
|
|
|
$
|
1,438,643
|
|
International
|
263,659
|
|
|
404,191
|
|
|
4,609
|
|
|
157,518
|
|
|
—
|
|
|
829,977
|
|
Total
|
$
|
536,250
|
|
|
$
|
909,290
|
|
|
$
|
206,857
|
|
|
$
|
587,903
|
|
|
$
|
28,320
|
|
|
$
|
2,268,620
|
|
13
VF Corporation Q1 2019 Form 10-Q
NOTE 4 — 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 was 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 June 2018, Williamson-Dickie contributed revenues of
$219.1 million
and net income of
$14.8 million
, including restructuring charges.
The allocation of the purchase price is preliminary and subject to change 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.
The following table summarizes the estimated fair values of the Williamson-Dickie 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 Work segment and
$52.3 million
is expected to be deductible for tax purposes.
The
Dickies
®
,
Kodiak
®
,
Terra
®
and
Walls
®
trademarks, which management determined 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 30, 2017 in the selling, general and administrative expenses line item in VF's Consolidated Statements of Income.
VF Corporation Q1 2019 Form 10-Q
14
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
June 2017
(unaudited)
|
Total revenues
|
$
|
2,484,272
|
|
Income from continuing operations
|
113,919
|
|
Earnings per common share from continuing operations
|
|
Basic
|
$
|
0.29
|
|
Diluted
|
0.28
|
|
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.
Icebreaker
On April 3, 2018, VF acquired
100%
of the stock of Icebreaker Holdings Limited ("Icebreaker") for
NZ
$274.4 million
(
$198.5 million
) in cash. The purchase price decreased NZ
$1.0 million
(
$0.7 million
) during the first quarter of Fiscal 2019 related to a working capital adjustment, and remains subject to further working capital
and other adjustments. The purchase price was primarily funded with short-term borrowings.
Icebreaker was a privately held company based in Auckland, New Zealand.
Icebreaker
®
,
the primary brand, specializes 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.
For the three months ended June 2018, Icebreaker
contributed revenues of
$25.7 million
and a net loss of
$0.8 million
.
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 value of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the acquisition date.
The following table summarizes the estimated fair values of the Icebreaker assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
(In thousands)
|
|
April 3, 2018
|
|
Cash and equivalents
|
|
$
|
6,444
|
|
|
Accounts receivable
|
|
16,781
|
|
|
Inventories
|
|
31,728
|
|
|
Other current assets
|
|
3,931
|
|
|
Property, plant and equipment
|
|
3,858
|
|
|
Intangible assets
|
|
98,041
|
|
|
Other assets
|
|
4,758
|
|
|
Total assets acquired
|
|
165,541
|
|
|
|
|
|
|
Short-term borrowings
|
|
7,235
|
|
|
Accounts payable
|
|
2,075
|
|
|
Other current liabilities
|
|
21,919
|
|
|
Deferred income tax liabilities
|
|
22,802
|
|
|
Other non-current liabilities
|
|
433
|
|
|
Total liabilities assumed
|
|
54,464
|
|
|
|
|
|
|
Net assets acquired
|
|
111,077
|
|
|
Goodwill
|
|
86,760
|
|
|
Purchase price
|
|
$
|
197,837
|
|
|
15
VF Corporation Q1 2019 Form 10-Q
The goodwill is attributable to the acquired workforce of Icebreaker and the significant synergies expected to arise as a result of the acquisition. All of the goodwill has been assigned to the Outdoor segment and none is expected to be deductible for tax purposes.
The
Icebreaker
®
trademark, which management determined to have an indefinite life, has been valued at
$70.1 million
.
Amortizable intangible assets have been assigned values of
$27.8 million
for customer relationships and
$0.2 million
for distribution agreements. Customer relationships are being amortized using an accelerated method over
11.5
years. Distribution agreements are being amortized on a straight-line basis over
four
years.
Total transaction expenses for the Icebreaker acquisition of
$7.4 million
have been recognized in the selling, general and administrative expenses line item in the Consolidated Statements of Income, of which
$4.1 million
was recognized during the three months ended June 2018. In addition, the Company has recognized a
$9.9 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
$0.3 million
was recognized during the three months ended June 2018.
Pro forma results of operations of the Company would not be materially different as a result of the Icebreaker acquisition and therefore are not presented.
Altra
On June 1, 2018, VF acquired
100%
of the stock of Icon-Altra LLC, plus certain assets in Europe ("Altra"). The purchase price was
$131.7 million
in cash, subject to working capital and other adjustments and was primarily funded with short-term borrowings.
Altra
®
, the primary brand, is an athletic and performance-based lifestyle footwear brand, based in Logan, Utah. Altra provides VF with a unique and differentiated technical footwear brand and a capability that, when applied across VF's footwear, direct-to-consumer and international platforms, will serve as a catalyst for growth.
For the three months ended June 2018, Altra
contributed revenues of
$4.0 million
and net income of
$0.1 million
.
The Altra acquisition occurred late in the first quarter of Fiscal 2019, and VF is still in the process of valuing the assets acquired and liabilities assumed. Accordingly, the allocation of the purchase price is preliminary and subject to change, primarily for final adjustments to net working capital, income tax and limited other valuation matters. Adjustments may be made to the values of the acquired assets and liabilities as additional information is obtained about the facts and circumstances that existed at the valuation date.
The following table summarizes the estimated fair values of the Altra assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
(In thousands)
|
|
June 1, 2018
|
|
Accounts receivable
|
|
$
|
10,101
|
|
|
Inventories
|
|
9,434
|
|
|
Other current assets
|
|
575
|
|
|
Property, plant and equipment
|
|
1,214
|
|
|
Intangible assets
|
|
59,700
|
|
|
Total assets acquired
|
|
81,024
|
|
|
|
|
|
|
Accounts payable
|
|
5,068
|
|
|
Other current liabilities
|
|
7,415
|
|
|
Total liabilities assumed
|
|
12,483
|
|
|
|
|
|
|
Net assets acquired
|
|
68,541
|
|
|
Goodwill
|
|
63,122
|
|
|
Purchase price
|
|
$
|
131,663
|
|
|
The goodwill is attributable to the significant growth and synergies expected to arise as a result of the acquisition. All of the goodwill was assigned to the Outdoor segment and is expected to be deductible for tax purposes. The
Altra
®
trademark, which management determined to have an indefinite life, has been valued at
$46.4 million
.
Amortizable intangible assets have been assigned values of
$13.0 million
for customer relationships and
$0.3 million
for distribution agreements. Customer relationships are being amortized using an accelerated method over
15
years. Distribution agreements are being amortized on a straight-line basis over
four
years.
Total transaction expenses for the Altra acquisition of
$2.3 million
have been recognized in the selling, general and administrative expenses line item in the Consolidated Statements of Income during the three months ended June 2018.
Pro forma results of operations of the Company would not be materially different as a result of the Altra acquisition and therefore are not presented.
VF Corporation Q1 2019 Form 10-Q
16
NOTE 5 — 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
During the three months ended December 30, 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 has reported the results of the
Nautica
®
brand business as discontinued operations in the Consolidated Statements of Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented.
On April 30, 2018, VF completed the sale of the
Nautica
®
brand business for
$289.1 million
in cash. The estimated after-tax loss on sale is
$38.6 million
, which is subject to working capital and other adjustments.
The results of the
Nautica
®
brand's North America business were previously reported in the former Sportswear segment, and the results of the Asia business were previously reported in the former Outdoor & Action Sports segment. The results of the
Nautica
®
brand business recorded in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income were income of
$0.4 million
(including a
$5.0 million
decrease in the estimated loss on sale) for the three months ended June 2018 and income of
$7.8 million
for the three months ended June 2017.
Certain corporate overhead costs and segment 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. Revenue and expense items associated with the transition services are recorded in the other category included in the reconciliation of segment revenues and segment profit in Note 14.
Licensing Business
During the three months ended April 1, 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 has reported the results of the businesses as discontinued operations in the Consolidated Statements of Income and presented 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 the former Imagewear segment. 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, resulting in a final after-tax loss on sale of
$4.1 million
, of which
$3.0 million
is included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three months ended June 2017.
The LSG results recorded in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income were losses of
$4.6 million
(including a
$3.0 million
adjustment to the estimated loss on sale) for the three months ended June 2017.
During the three months ended December 30, 2017, VF completed the sale of the assets associated with the
JanSport
®
brand collegiate business, which was previously included within the former Outdoor & Action Sports segment. The Company received net proceeds of
$1.5 million
and recorded a final after-tax loss on sale of
$0.2 million
, of which a
$0.2 million
gain is included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three months ended June 2017.
The
JanSport
®
brand collegiate results recorded in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income were losses of
$0.4 million
(including a
$0.2 million
decrease to the estimated loss on sale) for the three months ended June
2017
.
Certain corporate overhead and other costs previously allocated to the Licensing 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 is providing certain support services for periods up to
24
months from the closing date of the transaction. Revenue and expense items associated with the transition services are primarily recorded in the Work segment.
17
VF Corporation Q1 2019 Form 10-Q
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 income from discontinued operations, net of tax line item in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
(In thousands)
|
|
2018
|
|
|
2017
|
Revenues
|
|
$
|
21,913
|
|
|
|
$
|
123,456
|
|
Cost of goods sold
|
|
14,706
|
|
|
|
70,906
|
|
Selling, general and administrative expenses
|
|
12,391
|
|
|
|
45,602
|
|
Interest expense, net
|
|
—
|
|
|
|
(7
|
)
|
Other income, net
|
|
272
|
|
|
|
5
|
|
Income (loss) from discontinued operations before income taxes
|
|
(4,912
|
)
|
|
|
6,946
|
|
Gain (loss) on the sale of discontinued operations before income taxes
|
|
4,206
|
|
|
|
(6,386
|
)
|
Total income (loss) from discontinued operations before income taxes
|
|
(706
|
)
|
|
|
560
|
|
Income tax benefit
|
|
1,111
|
|
|
|
2,237
|
|
Income from discontinued operations, net of tax
|
|
$
|
405
|
|
|
|
$
|
2,797
|
|
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)
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
Cash
|
|
$
|
—
|
|
|
|
$
|
2,330
|
|
|
$
|
497
|
|
Accounts receivable, net
|
|
—
|
|
|
|
26,298
|
|
|
12,101
|
|
Inventories
|
|
—
|
|
|
|
55,610
|
|
|
49,920
|
|
Other current assets
|
|
—
|
|
|
|
1,247
|
|
|
864
|
|
Property, plant and equipment, net
|
|
—
|
|
|
|
15,021
|
|
|
16,266
|
|
Intangible assets
|
|
—
|
|
|
|
262,202
|
|
|
264,348
|
|
Goodwill
|
|
—
|
|
|
|
49,005
|
|
|
153,656
|
|
Other assets
|
|
—
|
|
|
|
3,961
|
|
|
2,831
|
|
Allowance to reduce assets to estimated fair value, less costs to sell
|
|
—
|
|
|
|
(42,094
|
)
|
|
—
|
|
Total assets of discontinued operations
(a)
|
|
$
|
—
|
|
|
|
$
|
373,580
|
|
|
$
|
500,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
|
$
|
11,619
|
|
|
$
|
10,428
|
|
Accrued liabilities
|
|
—
|
|
|
|
10,658
|
|
|
15,293
|
|
Other liabilities
|
|
—
|
|
|
|
11,912
|
|
|
12,311
|
|
Deferred income tax liabilities
(b)
|
|
—
|
|
|
|
51,838
|
|
|
77,731
|
|
Total liabilities of discontinued operations
(a)
|
|
$
|
—
|
|
|
|
$
|
86,027
|
|
|
$
|
115,763
|
|
|
|
(a)
|
Amounts at June 2017 related to the
Nautica
®
brand business 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
$3.1 million
for the three months ended June 2017.
VF Corporation Q1 2019 Form 10-Q
18
NOTE 6 — 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
June 2018
and 2017, VF sold total accounts receivable of
$317.6 million
and
$299.7 million
, respectively. As of
June 2018
,
March 2018
and
June 2017
,
$212.8 million
,
$191.2 million
and
$199.3 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
$1.6 million
and
$1.0 million
for the three months ended
June 2018
and 2017, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
NOTE 7 — INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
Finished products
|
|
$
|
1,766,072
|
|
|
|
$
|
1,654,137
|
|
|
$
|
1,462,010
|
|
Work-in-process
|
|
116,935
|
|
|
|
103,757
|
|
|
101,728
|
|
Raw materials
|
|
110,818
|
|
|
|
103,547
|
|
|
99,314
|
|
Total inventories
|
|
$
|
1,993,825
|
|
|
|
$
|
1,861,441
|
|
|
$
|
1,663,052
|
|
NOTE 8 — INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2018
|
|
|
March 2018
|
(In thousands)
|
|
Weighted
Average
Amortization
Period
|
|
Amortization
Method
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
Net
Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
17 years
|
|
Accelerated
|
|
|
$
|
370,718
|
|
|
$
|
143,481
|
|
|
$
|
227,237
|
|
|
|
$
|
201,544
|
|
License agreements
|
|
20 years
|
|
Accelerated
|
|
|
19,798
|
|
|
13,894
|
|
|
5,904
|
|
|
|
6,256
|
|
Trademarks
|
|
16 years
|
|
Straight-line
|
|
|
58,932
|
|
|
9,283
|
|
|
49,649
|
|
|
|
50,623
|
|
Other
|
|
8 years
|
|
Straight-line
|
|
|
9,287
|
|
|
4,191
|
|
|
5,096
|
|
|
|
5,170
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
|
287,886
|
|
|
|
263,593
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
1,896,390
|
|
|
|
1,856,517
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
$
|
2,184,276
|
|
|
|
$
|
2,120,110
|
|
Intangible assets increased during the three months ended
June 2018
due to the addition of intangible assets from the Icebreaker
and Altra acquisitions, which was partially offset by the impact of foreign currency fluctuations.
Amortization expense for the three months ended
June 2018
was
$7.9 million
. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five years beginning in Fiscal 2019 is
$33.5 million
,
$32.8 million
,
$31.2 million
,
$29.2 million
and
$27.6 million
, respectively.
Rock & Republic
®
Impairment Analysis
The
Rock & Republic
®
brand has an exclusive wholesale distribution and licensing arrangement with Kohl's Corporation that covers all branded apparel, accessories and other merchandise. As of June 30, 2018, VF performed a quantitative impairment analysis of the
Rock & Republic
®
amortizing trademark intangible asset to determine if the carrying value was recoverable. We determined this testing was necessary based on the expectation that certain customer contract terms would be modified. Management used the income-based relief-from-royalty method and the contractual
4%
royalty rate to calculate the pre-tax undiscounted future cash flows. Based on the analysis performed, management concluded that the trademark intangible asset does not require further testing as the undiscounted cash flows exceeded the carrying value of
$49.0 million
.
It is possible that VF's conclusion regarding the recoverability of the intangible asset could change in future periods as there can be no assurance that the estimates and assumptions used in the analysis as of June 30, 2018 will prove to be accurate predictions of the future.
19
VF Corporation Q1 2019 Form 10-Q
NOTE 9 — GOODWILL
Changes in goodwill are summarized by reportable segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Jeans
|
|
Total
|
Balance, March 2018
|
$
|
844,726
|
|
|
$
|
463,187
|
|
|
$
|
172,472
|
|
|
$
|
212,834
|
|
|
$
|
1,693,219
|
|
Fiscal 2019 acquisitions
|
149,882
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
149,882
|
|
Currency translation
|
(8,820
|
)
|
|
(12,772
|
)
|
|
(1,193
|
)
|
|
(4,154
|
)
|
|
(26,939
|
)
|
Balance, June 2018
|
$
|
985,788
|
|
|
$
|
450,415
|
|
|
$
|
171,279
|
|
|
$
|
208,680
|
|
|
$
|
1,816,162
|
|
In connection with the realignment of the Company's segment reporting structure, the Company allocated goodwill to any newly identified reporting units using a relative fair value approach as of the first day of the first quarter of Fiscal 2019. Balances as of March 2018 have been retrospectively adjusted to reflect the reallocation.
Refer to Note 14 for additional information regarding the Company's reportable segments.
Accumulated impairment charges for the Active segment were
$31.1 million
as of
June 2018
and
March 2018
.
No
impairment charges were recorded during the three months ended
June 2018
.
NOTE 10 - PENSION PLANS
The components of pension cost for VF’s defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
(In thousands)
|
|
2018
|
|
|
2017
|
Service cost – benefits earned during the period
|
|
$
|
6,224
|
|
|
|
$
|
6,115
|
|
Interest cost on projected benefit obligations
|
|
16,013
|
|
|
|
14,709
|
|
Expected return on plan assets
|
|
(23,834
|
)
|
|
|
(23,797
|
)
|
Pension settlement charges
|
|
6,842
|
|
|
|
—
|
|
Pension curtailment losses
|
|
9,483
|
|
|
|
—
|
|
Amortization of deferred amounts:
|
|
|
|
|
|
Net deferred actuarial losses
|
|
8,822
|
|
|
|
10,002
|
|
Deferred prior service costs
|
|
669
|
|
|
|
645
|
|
Net periodic pension cost
|
|
$
|
24,219
|
|
|
|
$
|
7,674
|
|
The amounts reported in these disclosures have not been segregated between continuing and discontinued operations.
On April 1, 2018, VF adopted ASU 2017-07,
"Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost",
which requires the Company to disaggregate the service cost component from other components of net periodic pension cost. Accordingly, in the Consolidated Statements of Income, VF has reported the service cost component within operating income and the other components of net periodic pension cost (which include interest cost, expected return on plan assets, amortization of prior service costs or credits and actuarial gains and losses) in the other income (expense), net line item.
VF contributed
$21.7 million
to its defined benefit plans during the
three months
ended
June 2018
, and intends to make approximately
$20.1 million
of contributions during the remainder of Fiscal 2019.
In the first quarter of Fiscal 2019, VF approved a freeze of all future benefit accruals under the U.S. qualified defined benefit pension plan and the supplemental defined benefit pension plan, effective December 31, 2018. Accordingly, the Company recognized a
$9.5 million
pension curtailment loss in the other income (expense), net line item in the Consolidated Statement of Income for the three months ended June 2018. Actuarial valuations were obtained as of June 30, 2018.
Additionally, VF reported
$6.8 million
in settlement charges in the other income (expense), net line item in the Consolidated Statement of Income for the three months ended June 2018 related to the recognition of deferred actuarial losses resulting from lump sum payments of retirement benefits in the supplemental defined benefit pension plan. An actuarial valuation was obtained as of April 30, 2018 ("April 2018").
Actuarial assumptions used in the interim valuations were reviewed and revised as appropriate. The discount rates used to determine pension obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 2018
|
|
April 2018
|
|
U.S. qualified defined benefit pension plan
|
|
4.25
|
%
|
|
N/A
|
|
|
Supplemental defined benefit pension plan
|
|
4.24
|
%
|
|
4.22
|
%
|
|
VF Corporation Q1 2019 Form 10-Q
20
NOTE 11 — CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Stock
During the three months ended
June 2018
, the Company did
not
purchase shares of Common Stock in open market transactions under its share repurchase program authorized by VF’s Board of Directors.
Common Stock outstanding is net of shares held in treasury which are, in substance, retired. There were
no
shares held in treasury at the end of
June 2018
,
March 2018
or
June 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
June 2018
, the Company did
not
purchase shares of Common Stock in open market transactions related to its deferred compensation plans.
Balances related to shares held for deferred compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
Shares held for deferred compensation plans
|
|
210,124
|
|
|
|
284,785
|
|
|
343,975
|
|
Cost of shares held for deferred compensation plans
|
|
$
|
2,663
|
|
|
|
$
|
3,621
|
|
|
$
|
4,167
|
|
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)
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
Foreign currency translation and other
|
|
$
|
(651,739
|
)
|
|
|
$
|
(476,869
|
)
|
|
$
|
(633,209
|
)
|
Defined benefit pension plans
|
|
(230,517
|
)
|
|
|
(289,618
|
)
|
|
(275,089
|
)
|
Derivative financial instruments
|
|
178
|
|
|
|
(97,543
|
)
|
|
(22,299
|
)
|
Accumulated other comprehensive income (loss)
|
|
$
|
(882,078
|
)
|
|
|
$
|
(864,030
|
)
|
|
$
|
(930,597
|
)
|
The changes in accumulated OCI, net of related taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2018
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, March 2018
|
$
|
(476,869
|
)
|
|
$
|
(289,618
|
)
|
|
$
|
(97,543
|
)
|
|
$
|
(864,030
|
)
|
Other comprehensive income (loss) before reclassifications
|
(174,870
|
)
|
|
40,228
|
|
|
83,271
|
|
|
(51,371
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
18,873
|
|
|
14,450
|
|
|
33,323
|
|
Net other comprehensive income (loss)
|
(174,870
|
)
|
|
59,101
|
|
|
97,721
|
|
|
(18,048
|
)
|
Balance, June 2018
|
$
|
(651,739
|
)
|
|
$
|
(230,517
|
)
|
|
$
|
178
|
|
|
$
|
(882,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2017
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, March 2017
|
$
|
(742,281
|
)
|
|
$
|
(281,721
|
)
|
|
$
|
35,962
|
|
|
$
|
(988,040
|
)
|
Other comprehensive income (loss) before reclassifications
|
109,072
|
|
|
—
|
|
|
(48,476
|
)
|
|
60,596
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
6,632
|
|
|
(9,785
|
)
|
|
(3,153
|
)
|
Net other comprehensive income (loss)
|
109,072
|
|
|
6,632
|
|
|
(58,261
|
)
|
|
57,443
|
|
Balance, June 2017
|
$
|
(633,209
|
)
|
|
$
|
(275,089
|
)
|
|
$
|
(22,299
|
)
|
|
$
|
(930,597
|
)
|
21
VF Corporation Q1 2019 Form 10-Q
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 June
|
|
|
|
|
2018
|
|
|
2017
|
|
Amortization of defined benefit pension plans:
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
Other income (expense), net
|
|
|
$
|
(8,822
|
)
|
|
|
$
|
(10,002
|
)
|
|
Deferred prior service costs
|
Other income (expense), net
|
|
|
(669
|
)
|
|
|
(645
|
)
|
|
Pension curtailment losses and settlement charges
|
Other income (expense), net
|
|
|
(16,325
|
)
|
|
|
—
|
|
|
Total before tax
|
|
|
|
(25,816
|
)
|
|
|
(10,647
|
)
|
|
Tax benefit
|
|
|
|
6,943
|
|
|
|
4,015
|
|
|
Net of tax
|
|
|
|
(18,873
|
)
|
|
|
(6,632
|
)
|
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Net sales
|
|
|
945
|
|
|
|
7,047
|
|
|
Foreign exchange contracts
|
Cost of goods sold
|
|
|
(11,938
|
)
|
|
|
5,653
|
|
|
Foreign exchange contracts
|
Selling, general and administrative expenses
|
|
|
(2,698
|
)
|
|
|
(243
|
)
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
|
(1,393
|
)
|
|
|
37
|
|
|
Interest rate contracts
|
Interest expense
|
|
|
(1,233
|
)
|
|
|
(1,175
|
)
|
|
Total before tax
|
|
|
|
(16,317
|
)
|
|
|
11,319
|
|
|
Tax benefit (expense)
|
|
|
|
1,867
|
|
|
|
(1,534
|
)
|
|
Net of tax
|
|
|
|
(14,450
|
)
|
|
|
9,785
|
|
|
Total reclassifications for the period, net of tax
|
|
|
$
|
(33,323
|
)
|
|
|
$
|
3,153
|
|
VF Corporation Q1 2019 Form 10-Q
22
NOTE 12 — STOCK-BASED COMPENSATION
During the
three months
ended
June 2018
, VF granted stock options to employees to purchase
43,110
shares of its Common Stock at an exercise price of
$77.23
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
.
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 June 2018
|
|
Expected volatility
|
|
24% to 29%
|
|
Weighted average expected volatility
|
|
25%
|
|
Expected term (in years)
|
|
6.1 to 7.5
|
|
Weighted average dividend yield
|
|
2.7%
|
|
Risk-free interest rate
|
|
2.1% to 3.0%
|
|
Weighted average fair value at date of grant
|
|
$16.00
|
|
Also during the
three months
ended
June 2018
, VF granted
9,185
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
$77.23
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 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
41,666
nonperformance-based RSUs to certain key employees in international jurisdictions during the
three months
ended June
2018
. These units generally vest over periods of up to
three years
from the date of grant and each unit entitles the holder to
one
share of VF Common Stock. The weighted average fair market value of VF Common Stock at the dates the units were granted was
$76.82
per share.
In addition, VF granted
10,676
nonperformance-based RSUs to employees during the three months ended
June 2018
. These awards generally 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
$77.23
per share.
For all nonperformance-based RSUs granted during the three months ended
June 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
15,323
restricted shares of VF Common Stock to certain members of management during the
three months
ended
June 2018
. These shares vest over periods of up to
four years
from the date of grant. The weighted average fair market value of VF Common Stock at the dates the shares were granted was
$79.66
per share.
23
VF Corporation Q1 2019 Form 10-Q
NOTE 13 — INCOME TAXES
On December 22, 2017, the U.S. government enacted the Tax Act, which 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 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 short-term liquid assets of certain foreign subsidiaries. All other foreign earnings, including basis differences of certain foreign subsidiaries, continue to be considered indefinitely reinvested. 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. 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 for the three-month period ended June 2018. See Note 2 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 June
2018
was
14.2%
compared to
21.2%
in the
2017
period. The
three months
ended June
2018
included a net discrete tax benefit of
$6.6 million
, which included a
$6.4 million
tax benefit related to stock compensation,
$1.1 million
of net tax expense related to unrecognized tax benefits and interest, a
$2.9 million
net tax benefit related to adjustments to provisional amounts recorded in 2017 under the Tax Act and
$1.6 million
of tax expense related to adjustments to previously recognized state income tax credits. The
$6.6 million
net discrete tax benefit in the three months ended June 2018 reduced the effective income tax rate by
3.5%
. The
2017
period included a net discrete tax expense of
$1.1 million
, which included a
$2.0 million
tax benefit related to stock compensation,
$1.2
million
of net tax expense related to unrecognized tax benefits and interest, and
$1.9 million
of discrete tax expense related to the effects of tax rate changes. The
$1.1 million
net discrete tax expense in the
2017
period increased the effective income tax rate by
0.9%
. Without discrete items, the effective income tax rate for the
three months
ended June
2018
decreased by
2.6%
compared with the
2017
period primarily due to a lower U.S. corporate income tax rate that was effective beginning January 1, 2018.
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 June
2018
, the amount of net unrecognized tax benefits and associated interest increased by
$2.5 million
to
$171.5 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
$13.0 million
related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which
$12.0 million
would reduce income tax expense.
VF Corporation Q1 2019 Form 10-Q
24
NOTE 14 — REPORTABLE SEGMENT INFORMATION
In light of recently completed portfolio management actions and organizational realignments, the Company has realigned its internal reporting structure to reflect the organizational changes to better support and assess the operations of the business. The chief operating decision maker allocates resources and assesses performance based on a global brand view which represents VF's
operating segments. The operating segments have been evaluated and combined into reportable segments because they have met the similar economic characteristics and qualitative aggregation criteria set forth in the relevant accounting guidance. Based on this assessment, the Company's new reportable segments have been identified as: Outdoor, Active, Work and Jeans.
Below is a description of VF's reportable segments and the primary brands included within each:
|
|
|
|
REPORTABLE SEGMENT
|
|
PRIMARY BRANDS
|
Outdoor
- Outdoor apparel, footwear and equipment
|
|
The North Face
®
|
|
|
Timberland
®
(excluding
Timberland PRO
®
)
|
|
|
Smartwool
®
|
|
|
Icebreaker
®
|
|
|
Altra
®
|
|
|
|
Active
- Active apparel, footwear and accessories
|
|
Vans
®
|
|
|
Kipling
®
|
|
|
Napapijri
®
|
|
|
JanSport
®
|
|
|
Reef
®
|
|
|
Eastpak
®
|
|
|
Eagle Creek
®
|
|
|
|
Work
- Work and work-inspired lifestyle apparel, footwear and occupational apparel
|
|
Dickies
®
|
|
|
Bulwark
®
|
|
|
Red Kap
®
|
|
|
Timberland PRO
®
|
|
|
Wrangler
®
RIGGS
|
|
|
Walls
®
|
|
|
Terra
®
|
|
|
Kodiak
®
|
|
|
Horace Small
®
|
|
|
|
Jeans
- Denim and casual apparel
|
|
Wrangler
®
(excluding
Wrangler
®
RIGGS
)
|
|
|
Lee
®
|
|
|
Rock and Republic
®
|
Other
- included in the tables below for purposes of reconciliation of revenues and profit, but it is not considered a reportable segment. Includes sales of non-VF products at
VF Outlet
®
stores and results from transition services related to the sale of the
Nautica
®
brand business.
In the tables below, the Company has recast historical financial information to reflect the new reportable segments. The recast historical information has no impact on the Company's previously reported consolidated financial statements.
The results of Williamson-Dickie have been included in the Work segment since the October 2, 2017 acquisition date. The results of Kipling North America, which were previously included in the former Sportswear segment, have been included in the Active segment for all periods presented. The results of Icebreaker and
Altra have been included in the Outdoor segment since their acquisition dates of April 3, 2018 and June 1, 2018, respectively.
The primary financial measures used by management to evaluate the financial results of VF's reportable segments are segment revenues and segment profit. Segment profit comprises the operating income and other income (expense), net line items of each segment.
Accounting policies used for internal management reporting at the individual segments are consistent with those in Note A of the 2017
25
VF Corporation Q1 2019 Form 10-Q
Form 10-K, except as stated below. Corporate costs (other than common costs allocated to the segments), impairment charges and net interest expense are not controlled by segment management and therefore are excluded from the measurement of segment profit. Common costs such as information systems processing, retirement benefits and insurance are allocated from corporate costs to the segments based on appropriate metrics such as usage or employment. Corporate costs that are not allocated to the segments consist of corporate headquarters expenses (including compensation and benefits of corporate
management and staff, certain legal and professional fees and administrative and general costs) and other expenses which include a portion of defined benefit pension costs, development costs for management information systems, costs of registering, maintaining and enforcing certain of VF's trademarks and miscellaneous consolidated costs. Defined benefit pension plans in the U.S. are centrally managed. The current year service component of pension costs is allocated to the segments, while the remaining pension cost components are reported in corporate and other expenses.
Financial information for VF's reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
(In thousands)
|
|
2018
|
|
|
2017
|
Segment revenues:
|
|
|
|
|
|
Outdoor
|
|
$
|
568,600
|
|
|
|
$
|
536,250
|
|
Active
|
|
1,136,937
|
|
|
|
909,290
|
|
Work
|
|
442,602
|
|
|
|
206,857
|
|
Jeans
|
|
603,767
|
|
|
|
587,903
|
|
Other
|
|
36,240
|
|
|
|
28,320
|
|
Total segment revenues
|
|
$
|
2,788,146
|
|
|
|
$
|
2,268,620
|
|
Segment profit:
|
|
|
|
|
|
Outdoor
|
|
$
|
(83,495
|
)
|
|
|
$
|
(62,018
|
)
|
Active
|
|
269,197
|
|
|
|
184,628
|
|
Work
|
|
55,244
|
|
|
|
34,159
|
|
Jeans
|
|
87,049
|
|
|
|
81,258
|
|
Other
|
|
2,160
|
|
|
|
(322
|
)
|
Total segment profit
|
|
330,155
|
|
|
|
237,705
|
|
Corporate and other expenses
(a)
|
|
(119,939
|
)
|
|
|
(81,246
|
)
|
Interest expense, net
|
|
(23,884
|
)
|
|
|
(20,607
|
)
|
Income from continuing operations before income taxes
|
|
$
|
186,332
|
|
|
|
$
|
135,852
|
|
|
|
(a)
|
Certain corporate overhead and other costs of
$4.2 million
for the
three
-month period ended June 2017, previously allocated to the former Sportswear and Outdoor & Action Sports segments for segment reporting purposes, have been reallocated to continuing operations as discussed in Note 5.
|
NOTE 15 – EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
(In thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
Earnings per share – basic:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
159,953
|
|
|
|
$
|
107,092
|
|
Weighted average common shares outstanding
|
|
394,165
|
|
|
|
397,065
|
|
Earnings per share from continuing operations
|
|
$
|
0.41
|
|
|
|
$
|
0.27
|
|
Earnings per share – diluted:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
159,953
|
|
|
|
$
|
107,092
|
|
Weighted average common shares outstanding
|
|
394,165
|
|
|
|
397,065
|
|
Incremental shares from stock options and other dilutive securities
|
|
5,383
|
|
|
|
3,447
|
|
Adjusted weighted average common shares outstanding
|
|
399,548
|
|
|
|
400,512
|
|
Earnings per share from continuing operations
|
|
$
|
0.40
|
|
|
|
$
|
0.27
|
|
For the three months ended
June 2018
, all outstanding options to purchase shares were dilutive and included in the calculation of diluted earnings per share. Outstanding options to purchase
10.3 million
shares were excluded from the calculation of diluted earnings per share for the
three
-month period ended
June 2017
because the effect of their inclusion would have been antidilutive.
VF Corporation Q1 2019 Form 10-Q
26
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
June 2018
and
June 2017
, respectively, because these units were not considered to be contingent outstanding shares in those periods.
NOTE 16 – 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.
|
Recurring Fair Value Measurements
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
|
June 2018
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
237,797
|
|
|
$
|
237,797
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
4,266
|
|
|
4,266
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
53,417
|
|
|
—
|
|
|
53,417
|
|
|
—
|
|
Investment securities
|
192,065
|
|
|
182,063
|
|
|
10,002
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
34,189
|
|
|
—
|
|
|
34,189
|
|
|
—
|
|
Deferred compensation
|
216,263
|
|
|
—
|
|
|
216,263
|
|
|
—
|
|
|
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
|
|
|
—
|
|
|
|
(a)
|
There were
no
transfers among the levels within the fair value hierarchy during the three months ended
June 2018
or
March 2018
.
|
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-
27
VF Corporation Q1 2019 Form 10-Q
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
June 2018
and
March 2018
, their carrying values approximated their fair values. Additionally, at
June 2018
and
March 2018
, the carrying values of VF’s long-term debt, including the current portion, were
$2,162.8 million
and
$2,218.8 million
, respectively, compared with fair values of
$2,325.2 million
and
$2,403.9 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.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant and equipment, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event an impairment is required, the asset is adjusted to estimated fair value, using market-based assumptions.
See Critical Accounting Policies and Estimates within Management's Discussion and Analysis for additional discussion regarding non-recurring fair value measurements during the three months ended June 2018.
NOTE 17 – 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
June 2018
and
March 2018
and
$2.4 billion
at
June 2017
, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Swiss franc, Swedish krona, South Korean won, Japanese yen, Polish zloty and New Zealand dollar. Derivative contracts have maturities up to
20 months
.
The following table presents outstanding derivatives on an individual contract basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivatives
with Unrealized Gains
|
|
|
Fair Value of Derivatives
with Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
Foreign currency exchange contracts designated as hedging instruments
|
|
$
|
53,417
|
|
|
|
$
|
21,496
|
|
|
$
|
36,265
|
|
|
|
$
|
(33,984
|
)
|
|
|
$
|
(105,795
|
)
|
|
$
|
(52,447
|
)
|
Foreign currency exchange contracts not designated as hedging instruments
|
|
—
|
|
|
|
9,904
|
|
|
—
|
|
|
|
(205
|
)
|
|
|
(379
|
)
|
|
(187
|
)
|
Total derivatives
|
|
$
|
53,417
|
|
|
|
$
|
31,400
|
|
|
$
|
36,265
|
|
|
|
$
|
(34,189
|
)
|
|
|
$
|
(106,174
|
)
|
|
$
|
(52,634
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
|
$
|
53,417
|
|
|
$
|
(34,189
|
)
|
|
|
$
|
31,400
|
|
|
$
|
(106,174
|
)
|
|
$
|
36,265
|
|
|
$
|
(52,634
|
)
|
Gross amounts not offset in the Consolidated Balance Sheets
|
|
(30,304
|
)
|
|
30,304
|
|
|
|
(20,918
|
)
|
|
20,918
|
|
|
(31,054
|
)
|
|
31,054
|
|
Net amounts
|
|
$
|
23,113
|
|
|
$
|
(3,885
|
)
|
|
|
$
|
10,482
|
|
|
$
|
(85,256
|
)
|
|
$
|
5,211
|
|
|
$
|
(21,580
|
)
|
VF Corporation Q1 2019 Form 10-Q
28
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2018
|
|
|
March 2018
|
|
June 2017
|
Other current assets
|
|
$
|
32,144
|
|
|
|
$
|
26,741
|
|
|
$
|
30,780
|
|
Accrued liabilities
|
|
(32,508
|
)
|
|
|
(96,087
|
)
|
|
(32,299
|
)
|
Other assets
|
|
21,273
|
|
|
|
4,659
|
|
|
5,485
|
|
Other liabilities
|
|
(1,681
|
)
|
|
|
(10,087
|
)
|
|
(20,335
|
)
|
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 June
|
|
|
|
|
|
|
Cash Flow Hedging Relationships
|
|
2018
|
|
|
2017
|
Foreign currency exchange
|
|
$
|
94,629
|
|
|
|
$
|
(56,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gain (Loss) Reclassified from Accumulated OCI into Income
Three Months Ended June
|
|
|
|
|
|
|
Location of Gain (Loss)
|
|
2018
|
|
|
2017
|
Net sales
|
|
$
|
945
|
|
|
|
$
|
7,047
|
|
Cost of goods sold
|
|
(11,938
|
)
|
|
|
5,653
|
|
Selling, general and administrative expenses
|
|
(2,698
|
)
|
|
|
(243
|
)
|
Other income (expense), net
|
|
(1,393
|
)
|
|
|
37
|
|
Interest expense
|
|
(1,233
|
)
|
|
|
(1,175
|
)
|
Total
|
|
$
|
(16,317
|
)
|
|
|
$
|
11,319
|
|
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 losses or gains on the related assets and liabilities.
In addition, VF entered into foreign exchange forward contracts to hedge the purchase price of the Icebreaker acquisition. These contracts were not designated as hedges, and were recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments were recognized directly in earnings. All contracts were settled in conjunction with the acquisition.
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 June
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges
|
|
|
2018
|
|
|
2017
|
Foreign currency exchange
|
|
Cost of goods sold
|
|
|
$
|
(1,841
|
)
|
|
|
$
|
359
|
|
Foreign currency exchange
|
|
Other income (expense), net
|
|
|
1,096
|
|
|
|
(1,270
|
)
|
Total
|
|
|
|
|
$
|
(745
|
)
|
|
|
$
|
(911
|
)
|
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
June 2018
and
June 2017
.
At
June 2018
, accumulated OCI included
$14.3 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
$15.5 million
at
June 2018
, which will be reclassified into interest
29
VF Corporation Q1 2019 Form 10-Q
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
June 2018
and
June 2017
. VF expects to reclassify
$5.1 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
June 2018
and
June 2017
, the Company recognized an after-tax gain of
$41.0 million
and an after-tax loss of
$37.3 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 liquidated. The Company recorded
no
ineffectiveness from its net investment hedge during the
three
-month periods ended
June 2018
and
June 2017
.
NOTE 18 — RESTRUCTURING
The Company typically incurs restructuring charges related to the cost optimization of business activities. During the three months ended
June 2018
, VF leadership approved
$10.7 million
of restructuring charges related to cost optimization activities, of which
$7.9 million
was recognized in selling, general and administrative expenses and
$2.8 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
$48.7 million
total restructuring accrual at
June 2018
,
$41.3 million
is expected to be paid out within the next 12 months and is classified within accrued liabilities. The remaining
$7.4 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
June 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
|
|
Other
|
|
Total
|
Accrual at March 2018
|
$
|
43,145
|
|
|
$
|
444
|
|
|
$
|
43,589
|
|
Charges
|
9,915
|
|
|
748
|
|
|
10,663
|
|
Cash payments
|
(5,404
|
)
|
|
(444
|
)
|
|
(5,848
|
)
|
Adjustments to accruals
|
490
|
|
|
—
|
|
|
490
|
|
Currency translation
|
(157
|
)
|
|
—
|
|
|
(157
|
)
|
Accrual at June 2018
|
$
|
47,989
|
|
|
$
|
748
|
|
|
$
|
48,737
|
|
Restructuring charges were incurred as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended June 2018
|
|
Outdoor
|
|
$
|
2,898
|
|
|
Active
|
|
2,559
|
|
|
Work
|
|
2,828
|
|
|
Jeans
|
|
872
|
|
|
Corporate and other
|
|
1,506
|
|
|
Total
|
|
$
|
10,663
|
|
|
NOTE 19 – SUBSEQUENT EVENTS
On
July 17, 2018
, VF’s Board of Directors declared a quarterly cash dividend of
$0.46
per share, payable on
September 20, 2018
to stockholders of record on
September 10, 2018
.
VF Corporation Q1 2019 Form 10-Q
30