Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
VF Corporation (together with its subsidiaries, collectively known as “VF” or the “Company”) uses a 52/53 week fiscal year ending on the Saturday closest to March 31 of each year. The Company's current fiscal year runs from March 31, 2019 through March 28, 2020 ("Fiscal 2020"). Accordingly, this Form 10-Q presents our first quarter of
Fiscal 2020
. For presentation purposes herein, all references to periods ended
June 2019
and
June 2018
relate to the fiscal periods ended on
June 29, 2019
and
June 30, 2018
, respectively. References to
March 2019
relate to information as of
March 30, 2019
.
On May 22, 2019, VF completed the spin-off of its Jeans business, which included the
Wrangler
®
,
Lee
®
and
Rock & Republic
®
brands, as well as the
VF Outlet
TM
business, into an independent, publicly traded company. As a result, VF reported the operating results for the Jeans business in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for all periods presented. In addition, the related assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, through the date the spin-off was completed.
Additionally, the
Nautica
®
brand business has been reported as discontinued operations in our Consolidated Statements of Income, and the related held-for-sale assets and liabilities have been presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, through the date of sale. 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.
Certain prior year amounts have been reclassified to conform to the Fiscal 2020 presentation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. Similarly, the March 2019 condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations and cash flows of VF for the interim periods presented. Operating results for the
three
months ended
June 2019
are not necessarily indicative of results that may be expected for any other interim period or for
Fiscal 2020
. 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 March 30, 2019 (“Fiscal 2019 Form 10-K”).
NOTE 2 — RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02,
“Leases (Topic 842)”
, a new accounting standard on leasing. The FASB subsequently issued updates to the standard to provide additional clarification on specific topics, including permitted transition methods. Collectively, the guidance is referred to as FASB Accounting Standards Codification ("ASC") 842. This standard requires companies to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The Company adopted this standard on March 31, 2019, utilizing the modified retrospective method and has recognized the cumulative effect of initially applying the new standard in retained earnings. The effective date of the adoption has been used as the date of initial application, and thus comparative prior period financial information has not been restated and continues to be reported under accounting standards in effect for those periods.
The standard provides certain optional practical expedients for transition. The Company elected the transition relief package of practical expedients by applying previous accounting conclusions under ASC Topic 840,
Leases
("ASC 840"), to all leases that existed prior to the transition date. As a result, VF did not reassess (i) whether existing or expired contracts contain leases, (ii) lease classification for any existing or expired leases, or (iii) whether lease origination costs qualified as initial direct costs. The
Company also elected the land easement practical expedient, which allows the Company to apply ASC 842 prospectively to land easements after the adoption date if they were not previously accounted for under ASC 840. Certain leases contain both lease and non-lease components. For leases associated with specific asset classes, including certain real estate, vehicles, manufacturing machinery and IT equipment, VF has elected the practical expedient which permits entities to account for separate lease and non-lease components as a single component. For all other lease contracts, the Company has elected to account for each lease component separately from the non-lease components of the contract. When applicable, VF will measure the consideration to be paid pursuant to the agreement and allocate this consideration to the lease and non-lease components based on relative stand-alone prices. Further, the Company made an accounting policy election to not recognize right-of-use assets and lease liabilities for leases with terms of 12 months or less.
The adoption of ASC 842 resulted in a net decrease of
$2.5 million
in the retained earnings line item of the Consolidated Balance Sheet as of March 31, 2019. The adoption of ASC 842 also resulted in the recognition of operating lease right-of-use assets and operating lease liabilities within the Consolidated Balance Sheet. Refer to Note 10 for additional lease disclosures.
In August 2017, the FASB issued ASU No. 2017-12,
"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"
, an update that amends and simplifies certain
9
VF Corporation Q1 FY20 Form 10-Q
aspects of hedge accounting rules to better portray the economic results of risk management activities in the financial statements. The FASB subsequently issued updates to the standard to provide additional guidance on specific topics. This guidance became effective for VF in the first quarter of Fiscal 2020, but did not impact VF's consolidated financial statements.
In February 2018, the FASB issued ASU No. 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 Cuts and Jobs Act ("Tax Act") on items within accumulated other comprehensive income (loss). The guidance became effective for VF in the first quarter of Fiscal 2020. The Company elected to reclassify the income tax effects of the Tax Act on items within accumulated other comprehensive income (loss) of
$61.9 million
to retained earnings, which primarily related to deferred taxes previously recorded for pension benefits. The adoption of this guidance did not have an impact on VF's consolidated results of operations or cash flows.
In June 2018, the FASB issued ASU No. 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. This guidance became effective for VF in the first quarter of Fiscal 2020, but did not impact VF's consolidated financial statements.
In July 2018, the FASB issued ASU No. 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 update; however, many of them became effective for VF in the first quarter of Fiscal 2020. The guidance did not impact VF's consolidated financial statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No. 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. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. 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 2018, the FASB issued ASU No. 2018-13,
"Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement"
, an update that modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The guidance will be effective for VF in the first quarter of Fiscal 2021 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF's disclosures.
In August 2018, the FASB issued ASU No. 2018-14,
"Compensation— Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans"
, an update that modifies the disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. The guidance will be effective for VF in Fiscal 2021 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF's disclosures.
In August 2018, the FASB issued ASU No. 2018-15,
"Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract"
, an update that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for VF in the first quarter of Fiscal 2021 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF's consolidated financial statements.
VF Corporation Q1 FY20 Form 10-Q
10
NOTE 3 — REVENUES
The following table provides information about accounts receivable, contract assets and contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2019
|
|
|
March 2019
|
|
June 2018
|
Accounts receivable, net
|
|
$
|
1,306,270
|
|
|
|
$
|
1,465,855
|
|
|
$
|
1,222,938
|
|
Contract assets
(a)
|
|
1,576
|
|
|
|
2,569
|
|
|
1,543
|
|
Contract liabilities
(b)
|
|
44,364
|
|
|
|
30,181
|
|
|
27,105
|
|
|
|
(a)
|
Included in the other current assets line item in the Consolidated Balance Sheets.
|
|
|
(b)
|
Included in the accrued liabilities and other liabilities line items in the Consolidated Balance Sheets.
|
For the
three
months ended
June 2019
, the Company recognized
$24.7 million
of revenue that was included in the contract liability balance during the period. 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.
For the
three
months ended
June 2019
, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not material.
As of
June 2019
, the Company expects to recognize
$85.0 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 related to licensing arrangements is not disclosed as a remaining performance obligation as it qualifies for the sales-based royalty exemption. VF has also elected the practical expedient to not disclose the transaction price allocated to remaining performance obligations for contracts with an original expected duration of one year or less.
As of
June 2019
, there were 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.
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 2019
|
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Other
|
|
Total
|
|
Channel revenues
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
$
|
341,756
|
|
|
$
|
660,142
|
|
|
$
|
377,548
|
|
|
$
|
2,808
|
|
|
$
|
1,382,254
|
|
|
Direct-to-consumer
|
266,342
|
|
|
565,887
|
|
|
40,852
|
|
|
3,454
|
|
|
876,535
|
|
|
Royalty
|
2,522
|
|
|
6,097
|
|
|
4,071
|
|
|
—
|
|
|
12,690
|
|
|
Total
|
$
|
610,620
|
|
|
$
|
1,232,126
|
|
|
$
|
422,471
|
|
|
$
|
6,262
|
|
|
$
|
2,271,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic revenues
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
303,052
|
|
|
$
|
711,205
|
|
|
$
|
346,160
|
|
|
$
|
—
|
|
|
$
|
1,360,417
|
|
|
International
|
307,568
|
|
|
520,921
|
|
|
76,311
|
|
|
6,262
|
|
|
911,062
|
|
|
Total
|
$
|
610,620
|
|
|
$
|
1,232,126
|
|
|
$
|
422,471
|
|
|
$
|
6,262
|
|
|
$
|
2,271,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2018
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Other
|
|
Total
|
Channel revenues
|
|
|
|
|
|
|
|
|
|
Wholesale
|
$
|
309,776
|
|
|
$
|
654,848
|
|
|
$
|
381,364
|
|
|
$
|
8,305
|
|
|
$
|
1,354,293
|
|
Direct-to-consumer
|
255,964
|
|
|
475,536
|
|
|
36,838
|
|
|
—
|
|
|
768,338
|
|
Royalty
|
2,860
|
|
|
6,553
|
|
|
5,091
|
|
|
—
|
|
|
14,504
|
|
Total
|
$
|
568,600
|
|
|
$
|
1,136,937
|
|
|
$
|
423,293
|
|
|
$
|
8,305
|
|
|
$
|
2,137,135
|
|
|
|
|
|
|
|
|
|
|
|
Geographic revenues
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
262,856
|
|
|
$
|
644,105
|
|
|
$
|
331,099
|
|
|
$
|
8,305
|
|
|
$
|
1,246,365
|
|
International
|
305,744
|
|
|
492,832
|
|
|
92,194
|
|
|
—
|
|
|
890,770
|
|
Total
|
$
|
568,600
|
|
|
$
|
1,136,937
|
|
|
$
|
423,293
|
|
|
$
|
8,305
|
|
|
$
|
2,137,135
|
|
11
VF Corporation Q1 FY20 Form 10-Q
NOTE 4 — ACQUISITIONS
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, subject to working capital and other adjustments. The purchase price was primarily funded with short-term borrowings. The purchase price decreased NZ
$1.4 million
(
$0.9 million
) for the year ended March 2019, related to working capital adjustments, resulting in a revised purchase price of NZ
$273.0 million
(
$197.6 million
). The purchase price allocation was finalized during the three months ended March 2019.
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 position VF as a global leader in the Merino wool and natural fiber categories.
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
|
|
21,262
|
|
Deferred income tax liabilities
|
|
26,870
|
|
Other noncurrent liabilities
|
|
433
|
|
Total liabilities assumed
|
|
57,875
|
|
|
|
|
Net assets acquired
|
|
107,666
|
|
Goodwill
|
|
89,943
|
|
Purchase price
|
|
$
|
197,609
|
|
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
were 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 and the remainder was recognized prior to Fiscal 2019. In addition, the Company 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 and the remainder was recognized prior to Fiscal 2019.
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.
VF Corporation Q1 FY20 Form 10-Q
12
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. The purchase price decreased
$0.1 million
during the year ended March 2019, related to working capital adjustments, resulting in a revised purchase price of
$131.6 million
. The allocation of the purchase price was finalized during the three months ended December 2018, resulting in a decrease of goodwill
by
$1.5 million
related to a final adjustment to working capital balances.
Altra
®
, the primary brand, is an athletic and performance-based lifestyle footwear brand. Altra provides VF with a unique and differentiated technical footwear brand and a capability that, when applied across VF's footwear platforms, will serve as a catalyst for growth.
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
|
|
$
|
11,629
|
|
Inventories
|
|
9,310
|
|
Other current assets
|
|
575
|
|
Property, plant and equipment
|
|
1,107
|
|
Intangible assets
|
|
59,700
|
|
Total assets acquired
|
|
82,321
|
|
|
|
|
Accounts payable
|
|
5,068
|
|
Other current liabilities
|
|
7,415
|
|
Total liabilities assumed
|
|
12,483
|
|
|
|
|
Net assets acquired
|
|
69,838
|
|
Goodwill
|
|
61,719
|
|
Purchase price
|
|
$
|
131,557
|
|
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 were
$2.3 million
, all of which were recognized in the selling, general and administrative expenses line item in the Consolidated Statement 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.
13
VF Corporation Q1 FY20 Form 10-Q
NOTE 5 — DISCONTINUED OPERATIONS AND OTHER DIVESTITURES
The Company continuously assesses the composition of its portfolio to ensure it is aligned with its strategic objectives and positioned to maximize growth and return to shareholders.
Jeans Business
On May 22, 2019, VF completed the spin-off its Jeans business, which included the
Wrangler
®
,
Lee
®
and
Rock & Republic
®
brands, as well as the
VF Outlet
TM
business, into an independent, publicly traded company now operating under the name Kontoor Brands, Inc. ("Kontoor Brands") and trading under the symbol "KTB" on the New York Stock Exchange. The spin-off was effected through a distribution to VF shareholders of one share of Kontoor Brands common stock for every seven shares of VF common stock held on the record date of May 10, 2019. Accordingly, the Company has reported the results of the Jeans business as discontinued operations in the Consolidated Statements of Income and presented the related assets and liabilities as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, through the date the spin-off was completed.
In connection with the spin-off, Kontoor Brands entered into a credit agreement with respect to
$1.55 billion
in senior secured credit facilities consisting of a senior secured
five
-year
$750.0 million
term loan A facility, a senior secured
seven
-year
$300.0 million
term loan B facility and a
five
-year
$500.0 million
senior secured revolving credit facility (collectively, the "Kontoor Credit Facilities"). Prior to the effective date of the spin-off, Kontoor Brands incurred
$1.05 billion
of indebtedness under the Kontoor Credit Facilities, which was primarily used to fund a transfer of
$906.1 million
to VF and its subsidiaries, net of
$126.8 million
of cash received from VF. As a result of the spin-off, VF divested net assets of
$54.9 million
, including the indebtedness under the Kontoor Credit Facilities. Also included in the net assets divested was
$75.3 million
of net accumulated other comprehensive losses attributable to the Jeans business, primarily related to foreign currency translation.
The results of the
Wrangler
®
,
Lee
®
and
Rock & Republic
®
brands were previously reported in the Jeans segment, the results of the
Wrangler
®
RIGGS
brand were previously reported in the Work segment, and the results of the non-VF products sold in
VF Outlet
TM
stores were previously reported in the Other category included in the reconciliation of segment revenues and segment profit. The results of the Jeans business recorded in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income were a loss of
$48.0 million
and income of
$98.6
million for the three months ended June 2019 and June 2018, respectively.
Certain corporate overhead costs and segment costs previously allocated to the Jeans business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations. The results of the Jeans business reported as discontinued operations include
$59.5 million
of separation and related expenses during the three months ended June 2019.
In connection with the spin-off of the Jeans business, the Company entered into several agreements with Kontoor Brands that govern
the relationship of the parties following the spin-off including the Separation and Distribution Agreement, the Tax Matters Agreement, the Transition Services Agreement, the VF Intellectual Property License Agreement and the Employee Matters Agreement. Under the terms of the Transition Services Agreement, the Company and Kontoor Brands agreed to provide each other certain transitional services including information technology, information management, human resources, employee benefits administration, supply chain, facilities, and other limited finance and accounting related services for periods up to 18 months. Payments and operating expense reimbursements for transition services are recorded within the reportable segments or within the corporate and other expenses line item, in the reconciliation of segment profit in Note 15, based on the function providing the service.
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 held-for-sale assets and liabilities as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, through the date of sale.
On April 30, 2018, VF completed the sale of the
Nautica
®
brand business. The Company received proceeds of
$285.8 million
, net of cash sold, resulting in a final after-tax loss on sale of
$38.2 million
, including a
$5.0 million
decrease in the estimated loss on sale that was recorded in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Income for the three months ended
June 2018
.
The results of the
Nautica
®
brand business recorded in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement 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
.
Under the terms of the transition services agreement, the Company provided certain support services for periods up to
12
months from the closing date of the transaction. Revenue and related expense items associated with the transition services were recorded in the Other category, and operating expense reimbursements were recorded within the corporate and other expenses line item, in the reconciliation of segment revenues and segment profit in Note 15.
VF Corporation Q1 FY20 Form 10-Q
14
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items for the Jeans business and
Nautica
®
brand business that are included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
Net revenues
|
|
$
|
335,203
|
|
|
|
$
|
672,924
|
|
Cost of goods sold
|
|
203,124
|
|
|
|
394,394
|
|
Selling, general and administrative expenses
|
|
152,798
|
|
|
|
165,931
|
|
Interest, net
|
|
(552
|
)
|
|
|
969
|
|
Other income (expense), net
|
|
(667
|
)
|
|
|
(969
|
)
|
Income (loss) from discontinued operations before income taxes
|
|
(21,938
|
)
|
|
|
112,599
|
|
Gain on the sale of discontinued operations before income taxes
|
|
—
|
|
|
|
4,206
|
|
Total income (loss) from discontinued operations before income taxes
|
|
(21,938
|
)
|
|
|
116,805
|
|
Income tax expense
(a)
|
|
(26,090
|
)
|
|
|
(17,811
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(48,028
|
)
|
|
|
$
|
98,994
|
|
|
|
(a)
|
Income tax expense for the three months ended June 2019 includes additional tax expense on nondeductible transaction costs and uncertain tax positions.
|
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 2019
|
|
|
March 2019
|
|
June 2018
|
Cash and equivalents
|
|
$
|
—
|
|
|
|
$
|
97,892
|
|
|
$
|
75,742
|
|
Accounts receivable, net
|
|
—
|
|
|
|
242,941
|
|
|
205,596
|
|
Inventories
|
|
—
|
|
|
|
510,370
|
|
|
472,166
|
|
Other current assets
|
|
—
|
|
|
|
44,827
|
|
|
38,356
|
|
Property, plant and equipment, net
|
|
—
|
|
|
|
142,091
|
|
|
142,826
|
|
Intangible assets
|
|
—
|
|
|
|
51,913
|
|
|
55,263
|
|
Goodwill
|
|
—
|
|
|
|
213,570
|
|
|
221,176
|
|
Other assets
|
|
—
|
|
|
|
74,144
|
|
|
68,392
|
|
Total assets of discontinued operations
|
|
$
|
—
|
|
|
|
$
|
1,377,748
|
|
|
$
|
1,279,517
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
—
|
|
|
|
$
|
5,995
|
|
|
$
|
5,062
|
|
Accounts payable
|
|
—
|
|
|
|
113,866
|
|
|
109,638
|
|
Accrued liabilities
|
|
—
|
|
|
|
141,621
|
|
|
132,380
|
|
Other liabilities
|
|
—
|
|
|
|
48,581
|
|
|
47,774
|
|
Total liabilities of discontinued operations
|
|
$
|
—
|
|
|
|
$
|
310,063
|
|
|
$
|
294,854
|
|
The following table presents information regarding certain components of cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
Cash provided by operating activities
|
|
$
|
13,212
|
|
|
|
$
|
177,807
|
|
Cash used by investing activities
|
|
(2,327
|
)
|
|
|
(17,483
|
)
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4,829
|
|
|
|
$
|
18,234
|
|
Capital expenditures
|
|
2,651
|
|
|
|
6,435
|
|
15
VF Corporation Q1 FY20 Form 10-Q
Reef
®
Brand Business
During the three months ended September 29, 2018, the Company reached the decision to sell the
Reef
®
brand business, which was included in the Active segment.
VF signed a definitive agreement for the sale of the
Reef
®
brand business on October 2, 2018, and completed the transaction on October 26, 2018. VF received cash proceeds of
$139.4 million
, and recorded a
$14.4 million
final loss on sale, which was included in the other income (expense), net line item in the Consolidated Statement of Income for the year ended March 2019.
Under the terms of the transition services agreement, the Company is providing certain support services for periods up to
21
months from the closing date of the transaction. Revenue and related expense items associated with the transition services and
operating expense reimbursements are recorded in the Other category in the reconciliation of segment revenues and segment profit in Note 15.
Van Moer Business
During the three months ended September 29, 2018, the Company reached the decision to sell the Van Moer business, which was acquired in connection with the Williamson-Dickie business and included in the Work segment.
VF completed the sale of the Van Moer business on October 5, 2018, and received cash proceeds of
€7.0 million
(
$8.1 million
). VF recorded a
$22.4 million
final loss on sale, which was included in the other income (expense), net line item in the Consolidated Statement of Income for the year ended March 2019.
NOTE 6 — SALE OF ACCOUNTS RECEIVABLE
In connection with the spin-off of its Jeans business, VF terminated its agreement with the financial institution to sell trade accounts receivable on a recurring, non-recourse basis. As of
June 2019
, the Company had
no
outstanding amounts related to accounts receivable previously sold to the financial institution and no other obligations or liabilities related to the agreement.
NOTE 7 — INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2019
|
|
|
March 2019
|
|
June 2018
|
Finished products
|
|
$
|
1,511,217
|
|
|
|
$
|
1,284,293
|
|
|
$
|
1,373,591
|
|
Work-in-process
|
|
77,921
|
|
|
|
73,968
|
|
|
75,871
|
|
Raw materials
|
|
75,994
|
|
|
|
74,399
|
|
|
72,197
|
|
Total inventories
|
|
$
|
1,665,132
|
|
|
|
$
|
1,432,660
|
|
|
$
|
1,521,659
|
|
NOTE 8 — INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2019
|
|
|
March 2019
|
(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
|
|
|
$
|
332,746
|
|
|
$
|
141,015
|
|
|
$
|
191,731
|
|
|
|
$
|
197,129
|
|
License agreements
|
|
19 years
|
|
Accelerated
|
|
|
7,616
|
|
|
4,835
|
|
|
2,781
|
|
|
|
2,807
|
|
Trademark
|
|
3 years
|
|
Straight-line
|
|
|
800
|
|
|
458
|
|
|
342
|
|
|
|
399
|
|
Other
|
|
8 years
|
|
Straight-line
|
|
|
8,264
|
|
|
4,443
|
|
|
3,821
|
|
|
|
4,032
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
|
198,675
|
|
|
|
204,367
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
1,782,246
|
|
|
|
1,767,997
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
$
|
1,980,921
|
|
|
|
$
|
1,972,364
|
|
Intangible assets
increased
during the
three months
ended
June 2019
due to the impact of foreign currency fluctuations.
Amortization expense for the
three
months ended
June 2019
was
$6.3 million
. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five years beginning in Fiscal 2020 is
$25.7 million
,
$24.3 million
,
$22.7 million
,
$21.3 million
and
$20.5 million
, respectively.
VF Corporation Q1 FY20 Form 10-Q
16
NOTE 9 — GOODWILL
Changes in goodwill are summarized by reportable segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Total
|
|
Balance, March 2019
|
$
|
983,889
|
|
|
$
|
393,956
|
|
|
$
|
163,469
|
|
|
$
|
1,541,314
|
|
|
Currency translation
|
349
|
|
|
2,675
|
|
|
(206
|
)
|
|
2,818
|
|
|
Balance, June 2019
|
$
|
984,238
|
|
|
$
|
396,631
|
|
|
$
|
163,263
|
|
|
$
|
1,544,132
|
|
|
No
impairment charges were recorded during the
three
months ended
June 2019
and there are no remaining accumulated impairment charges.
NOTE 10 — LEASES
VF determines if an arrangement is or contains a lease at contract inception and determines its classification as an operating or finance lease at lease commencement. The Company leases certain retail locations, office space, distribution facilities, machinery and equipment, and vehicles. While the substantial majority of these leases are operating leases, certain distribution centers and office spaces are finance leases.
Leases for real estate typically have initial terms ranging from
3
to
15
years, generally with renewal options. Leases for equipment typically have initial terms ranging from
2
to
5
years and vehicle leases typically have initial terms ranging from
1
to
8
years. In determining the lease term used in the lease right-of-use asset and lease liability calculations, the Company considers various factors such as market conditions and the terms of any renewal or termination options that may exist. When deemed reasonably certain, the renewal and termination options are included in the determination of the lease term and calculation of the lease right-of-use asset and lease liability.
Most leases have fixed rental payments. Many of the real estate leases also require additional variable payments for occupancy-related costs, real estate taxes and insurance, as well as other payments (e.g., contingent rent) owed when sales at individual retail store locations exceed a stated base amount. Variable lease payments are excluded from the measurement of the lease liability and are recognized in profit and loss in the period in which the event or conditions that triggers those payments occur.
VF estimates the amount it expects to pay to the lessor under a residual value guarantee and includes it in lease payments used to measure the lease liability only for amounts probable of being owed by VF at the commencement date.
VF calculates lease right-of-use assets and lease liabilities as the present value of lease payments over the lease term at
commencement date. When readily determinable, the Company uses the implicit rate to determine the present value of lease payments, which generally does not happen in practice. As the rate implicit in the majority of the Company's leases is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the lease term, currency, country specific risk premium and adjustments for collateralized debt.
Operating lease expense is recorded as a single lease cost on a straight-line basis over the lease term. For finance leases, right-of-use asset amortization and interest on lease liabilities are presented separately in the Consolidated Statement of Income.
The Company assesses whether a sale leaseback transaction qualifies as a sale when the transaction occurs. For transactions qualifying as a sale, VF derecognizes the underlying asset and recognizes the entire gain or loss at the time of the sale. The corresponding lease entered into with the buyer-lessor is accounted for as an operating lease. During the three months ended June 2019, the Company entered into a sale leaseback transaction for certain office real estate and related assets. The transaction qualified as a sale, and thus the Company recognized a gain of
$11.3 million
resulting from the transaction during the three months ended June 2019.
As of June 2019, the Company has signed certain distribution center leases that have not yet commenced but will create significant rights and obligations. The leases will commence in Fiscal 2020 and Fiscal 2021 and have lease terms of
15
years. Other leases signed that have not yet commenced are not individually significant. The Company does not have material subleases.
17
VF Corporation Q1 FY20 Form 10-Q
The assets and liabilities related to operating and finance leases were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
Location in Consolidated Balance Sheet
|
|
|
June 2019
|
|
Assets:
|
|
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
|
|
$
|
1,281,106
|
|
|
Finance lease assets
|
Property, plant and equipment
|
|
|
24,437
|
|
|
Total lease assets
|
|
|
|
$
|
1,305,543
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating lease liabilities
|
Accrued liabilities
|
|
|
$
|
326,874
|
|
|
Finance lease liabilities
|
Current portion of long-term debt
|
|
|
5,068
|
|
|
Noncurrent
|
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities
|
|
|
1,043,664
|
|
|
Finance lease liabilities
|
Long-term debt
|
|
|
27,586
|
|
|
Total lease liabilities
|
|
|
|
$
|
1,403,192
|
|
|
The components of lease costs were as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended June 2019
|
|
Operating lease cost
(a)
|
|
$
|
101,459
|
|
|
Finance lease cost – amortization of right-of-use asset
|
|
969
|
|
|
Finance lease cost – interest on lease liability
|
|
284
|
|
|
Short-term lease cost
|
|
569
|
|
|
Variable lease cost
|
|
1,690
|
|
|
Gain recognized from sale-leaseback transactions
|
|
(11,329
|
)
|
|
Total lease cost
|
|
$
|
93,642
|
|
|
|
|
(a)
|
Includes sublease income, which is not material.
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended June 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows – operating leases
|
|
$
|
104,539
|
|
|
Operating cash flows – finance leases
|
|
284
|
|
|
Financing cash flows – finance leases
|
|
1,223
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities:
|
|
|
|
|
Operating leases
(a)
|
|
1,374,872
|
|
|
Finance leases
|
|
—
|
|
|
|
|
(a)
|
Includes amounts recorded upon adoption of ASC 842.
|
VF Corporation Q1 FY20 Form 10-Q
18
Lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
June 2019
|
|
Weighted average remaining lease term:
|
|
|
|
Operating leases
|
|
5.58 years
|
|
|
Finance leases
|
|
13.41 years
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
Operating leases
|
|
2.50
|
%
|
|
Finance leases
|
|
3.22
|
%
|
|
Maturities of operating and finance lease liabilities for the next five fiscal years (including the remainder of Fiscal 2020) and thereafter as of June 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
|
Remainder of 2020
|
|
$
|
269,262
|
|
|
$
|
4,522
|
|
|
$
|
273,784
|
|
|
2021
|
|
366,243
|
|
|
6,532
|
|
|
372,775
|
|
|
2022
|
|
254,351
|
|
|
1,911
|
|
|
256,262
|
|
|
2023
|
|
186,670
|
|
|
1,626
|
|
|
188,296
|
|
|
2024
|
|
118,016
|
|
|
1,550
|
|
|
119,566
|
|
|
Thereafter
|
|
281,021
|
|
|
23,495
|
|
|
304,516
|
|
|
Total lease payments
|
|
1,475,563
|
|
|
39,636
|
|
|
1,515,199
|
|
|
Less: present value adjustment
|
|
105,025
|
|
|
6,982
|
|
|
112,007
|
|
|
Present value of lease liabilities
|
|
$
|
1,370,538
|
|
|
$
|
32,654
|
|
|
$
|
1,403,192
|
|
|
The Company excluded approximately
$286.5 million
of leases (undiscounted basis) that have not yet commenced. These leases will commence in Fiscal 2020 with lease terms of
2
to
15
years.
Future minimum lease payments under operating leases with noncancelable lease terms in excess of one year from continuing operations as of March 2019, prior to the adoption of ASC 842, were as follows:
|
|
|
|
|
|
(In thousands)
|
|
Operating Leases
|
2020
|
|
$
|
320,224
|
|
2021
|
|
287,829
|
|
2022
|
|
212,918
|
|
2023
|
|
154,920
|
|
2024
|
|
100,789
|
|
Thereafter
|
|
251,228
|
|
Total lease payments
|
|
$
|
1,327,908
|
|
19
VF Corporation Q1 FY20 Form 10-Q
NOTE 11 — PENSION PLANS
The components of pension (income) cost for VF’s defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
Service cost – benefits earned during the period
|
|
$
|
3,381
|
|
|
|
$
|
6,224
|
|
Interest cost on projected benefit obligations
|
|
14,761
|
|
|
|
16,013
|
|
Expected return on plan assets
|
|
(23,178
|
)
|
|
|
(23,834
|
)
|
Settlement charges
|
|
—
|
|
|
|
6,842
|
|
Curtailments
|
|
—
|
|
|
|
9,483
|
|
Amortization of deferred amounts:
|
|
|
|
|
|
Net deferred actuarial losses
|
|
4,019
|
|
|
|
8,822
|
|
Deferred prior service costs
|
|
13
|
|
|
|
669
|
|
Net periodic pension (income) cost
|
|
$
|
(1,004
|
)
|
|
|
$
|
24,219
|
|
The amounts reported in these disclosures for prior periods have not been segregated between continuing and discontinued operations.
VF has reported the service cost component of net periodic pension (income) cost in operating income and the other components (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 in the Consolidated Statements of Income.
VF contributed
$1.8 million
to its defined benefit plans during the
three months
ended
June 2019
, and intends to make approximately
$22.6 million
of contributions during the remainder of Fiscal
2020
.
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.
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.
NOTE 12 — CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Stock
During the
three months
ended
June 2019
, 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. These are treated as treasury stock transactions when shares are repurchased.
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 2019
,
March 2019
or
June 2018
. 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.
Prior to March 2019, VF Common Stock was also held by the Company’s deferred compensation plans and was treated as treasury shares for financial reporting purposes. As of
June 2019
, there were
no
shares held in the Company's deferred compensation plans.
Balances related to shares held for deferred compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
June 2019
|
|
|
March 2019
|
|
June 2018
|
Shares held for deferred compensation plans
|
|
—
|
|
|
|
—
|
|
|
210,124
|
|
Cost of shares held for deferred compensation plans
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
2,663
|
|
VF Corporation Q1 FY20 Form 10-Q
20
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 2019
|
|
|
March 2019
|
|
June 2018
|
Foreign currency translation and other
|
|
$
|
(635,901
|
)
|
|
|
$
|
(725,679
|
)
|
|
$
|
(651,739
|
)
|
Defined benefit pension plans
|
|
(290,468
|
)
|
|
|
(243,184
|
)
|
|
(230,517
|
)
|
Derivative financial instruments
|
|
58,983
|
|
|
|
66,788
|
|
|
178
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(867,386
|
)
|
|
|
$
|
(902,075
|
)
|
|
$
|
(882,078
|
)
|
The changes in accumulated OCI, net of related taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2019
|
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
|
Balance, March 2019
|
$
|
(725,679
|
)
|
|
$
|
(243,184
|
)
|
|
$
|
66,788
|
|
|
$
|
(902,075
|
)
|
|
Adoption of new accounting standard, ASU 2018-02
|
(9,088
|
)
|
|
(50,402
|
)
|
|
(2,371
|
)
|
|
(61,861
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
15,772
|
|
|
(823
|
)
|
|
10,900
|
|
|
25,849
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
3,147
|
|
|
(7,739
|
)
|
|
(4,592
|
)
|
|
Spin-off of Jeans Business
|
83,094
|
|
|
794
|
|
|
(8,595
|
)
|
|
75,293
|
|
|
Net other comprehensive income (loss)
|
89,778
|
|
|
(47,284
|
)
|
|
(7,805
|
)
|
|
34,689
|
|
|
Balance, June 2019
|
$
|
(635,901
|
)
|
|
$
|
(290,468
|
)
|
|
$
|
58,983
|
|
|
$
|
(867,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
21
VF Corporation Q1 FY20 Form 10-Q
Reclassifications out of accumulated OCI were 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
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Amortization of defined benefit pension plans:
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
Other income (expense), net
|
|
|
$
|
(4,019
|
)
|
|
|
$
|
(8,822
|
)
|
|
Deferred prior service costs
|
Other income (expense), net
|
|
|
(13
|
)
|
|
|
(669
|
)
|
|
Pension curtailment losses and settlement charges
|
Other income (expense), net
|
|
|
—
|
|
|
|
(16,325
|
)
|
|
Total before tax
|
|
|
|
(4,032
|
)
|
|
|
(25,816
|
)
|
|
Tax benefit
|
|
|
|
885
|
|
|
|
6,943
|
|
|
Net of tax
|
|
|
|
(3,147
|
)
|
|
|
(18,873
|
)
|
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Net sales
|
|
|
(2,905
|
)
|
|
|
945
|
|
|
Foreign exchange contracts
|
Cost of goods sold
|
|
|
11,105
|
|
|
|
(11,938
|
)
|
|
Foreign exchange contracts
|
Selling, general and administrative expenses
|
|
|
716
|
|
|
|
(2,698
|
)
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
|
2,872
|
|
|
|
(1,393
|
)
|
|
Interest rate contracts
|
Interest expense
|
|
|
(1,293
|
)
|
|
|
(1,233
|
)
|
|
Total before tax
|
|
|
|
10,495
|
|
|
|
(16,317
|
)
|
|
Tax (expense) benefit
|
|
|
|
(2,756
|
)
|
|
|
1,867
|
|
|
Net of tax
|
|
|
|
7,739
|
|
|
|
(14,450
|
)
|
|
Total reclassifications for the period, net of tax
|
|
|
$
|
4,592
|
|
|
|
$
|
(33,323
|
)
|
VF Corporation Q1 FY20 Form 10-Q
22
NOTE 13 — STOCK-BASED COMPENSATION
Spin-Off of Jeans Business
In connection with the spin-off of the Jeans business on May 22, 2019, the Company adjusted its outstanding equity awards in accordance with the terms of the Employee Matters Agreement between the Company and Kontoor Brands. Adjustments to the underlying shares and terms of outstanding stock options, restricted stock units ("RSUs") and restricted stock were made to preserve the intrinsic value of the awards immediately before the separation. The adjustment of the underlying shares and exercise prices, as applicable, was determined using a ratio based on the relative values of the VF pre-distribution stock value and the VF post-distribution stock value as determined by the Company. The
outstanding awards continue to vest over their original vesting periods. The Company will recognize
$13.0 million
of total incremental compensation cost related to the adjustment of the VF equity awards, of which
$12.0 million
was recognized during the three months ended June 2019.
In connection with the spin-off, stock options to purchase
756,709
shares of VF Common Stock,
52,018
performance-based RSUs,
79,187
nonperformance-based RSUs and
112,763
restricted shares of VF Common Stock were converted into Kontoor Brands equity awards.
Incentive Equity Awards Granted
During the
three months
ended
June 2019
, VF granted stock options to employees and nonemployee members of VF's Board of Directors to purchase
1,452,414
shares of its Common Stock at an exercise price of
$84.23
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
. Stock options granted to nonemployee members of VF's Board of Directors vest upon grant and become exercisable
one year
from the date of grant.
The grant date fair value of each option award was calculated using a lattice option-pricing valuation model, which incorporated a range of assumptions for inputs as follows:
|
|
|
|
|
|
|
Three Months Ended June 2019
|
|
Expected volatility
|
|
24% to 27%
|
|
Weighted average expected volatility
|
|
25%
|
|
Expected term (in years)
|
|
6.2 to 7.6
|
|
Weighted average dividend yield
|
|
2.5%
|
|
Risk-free interest rate
|
|
2.1% to 2.4%
|
|
Weighted average fair value at date of grant
|
|
$17.20
|
|
Also during the
three months
ended
June 2019
, VF granted
268,449
performance-based RSUs 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 will be 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
$84.23
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
$7.11
per share.
VF granted
10,780
nonperformance-based RSUs to nonemployee members of the Board of Directors during the three months ended
June 2019. These units vest upon grant and will be settled in shares of VF Common Stock
one year
from the date of grant. The fair market value of VF Common Stock at the date the units were granted was
$84.23
per share.
VF granted
7,500
nonperformance-based RSUs to certain key employees in international jurisdictions during the
three months
ended
June 2019
. These units vest
50%
over a
two
-year period and
50%
over a
four
-year period from the date of grant and each unit entitles the holder to
one
share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was
$84.23
per share.
In addition, VF granted
158,215
nonperformance-based RSUs to employees during the
three months
ended
June 2019
. These awards vest
50%
over a
two
-year period and
50%
over a
four
-year period from the date of grant and entitle the holder to
one
share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was
$84.23
per share.
VF granted
40,205
restricted shares of VF Common Stock to certain members of management during the
three months
ended
June 2019
. These shares vest over periods of up to
four years
from the date of grant. The fair market value of VF Common Stock at the date the shares were granted was
$84.23
per share.
23
VF Corporation Q1 FY20 Form 10-Q
NOTE 14 — INCOME TAXES
The effective income tax rate for the
three months
ended
June 2019
was
21.5%
compared to
10.8%
in the
2018
period. The
three months
ended
June 2019
included a discrete tax benefit of
$2.2 million
related to stock compensation and a discrete tax expense of
$2.2 million
related to unrecognized tax benefits and interest. The
2018
period included a net discrete tax benefit of
$6.4 million
, which included a
$5.7 million
tax benefit related to stock compensation,
$0.6 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
$6.4 million
net discrete tax benefit in the
2018
period reduced the effective income tax rate by
9.3%
. Without discrete items, the effective income tax rate for the
three months
ended
June 2019
increased by
1.4%
compared with the
2018
period primarily due to a lower percentage of income in lower tax rate jurisdictions.
VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. In the U.S., the Internal Revenue Service ("IRS") examinations for tax years through 2014 have been effectively settled. The examination of Timberland’s 2011 tax return is ongoing.
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.
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. On February 14, 2019 the General Court annulled the EU decision and on April 26, 2019 the EU appealed the General Court’s annulment. Both listed requests for annulment remain open and unresolved. If this matter is adversely resolved, these amounts will not be collected by VF.
During the
three months
ended
June 2019
, the amount of net unrecognized tax benefits and associated interest increased by
$6.3 million
to
$180.2 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
$24.9 million
related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which
$23.8 million
would reduce income tax expense.
On May 19, 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing ("Swiss Tax Act"). Due to various factors, the Swiss Tax Act was not considered enacted for GAAP purposes during the three months ended June 2019. The Company is currently evaluating the Swiss Tax Act and the associated tax effects will be reflected in the period the Swiss Tax Act is considered enacted. We believe the Swiss Tax Act will have a material impact to the Company's tax expense.
VF Corporation Q1 FY20 Form 10-Q
24
NOTE 15 — REPORTABLE SEGMENT INFORMATION
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 meet the similar economic characteristics and qualitative aggregation criteria set forth in the relevant accounting guidance. The Company's reportable segments have been identified as:
Outdoor, Active and Work. We have included an Other category in the table below for purposes of reconciliation of revenues and profit, but it is not considered a reportable segment. Other includes results from transition services related to the sales of the
Reef
®
and
Nautica
®
brand businesses, as well as sales of non-VF products.
Financial information for VF's reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
Segment revenues:
|
|
|
|
|
|
Outdoor
|
|
$
|
610,620
|
|
|
|
$
|
568,600
|
|
Active
|
|
1,232,126
|
|
|
|
1,136,937
|
|
Work
|
|
422,471
|
|
|
|
423,293
|
|
Other
|
|
6,262
|
|
|
|
8,305
|
|
Total segment revenues
|
|
$
|
2,271,479
|
|
|
|
$
|
2,137,135
|
|
Segment profit (loss):
|
|
|
|
|
|
Outdoor
|
|
$
|
(80,270
|
)
|
|
|
$
|
(83,495
|
)
|
Active
|
|
307,566
|
|
|
|
269,197
|
|
Work
|
|
47,025
|
|
|
|
48,927
|
|
Other
|
|
(1,616
|
)
|
|
|
2,233
|
|
Total segment profit
|
|
272,705
|
|
|
|
236,862
|
|
Corporate and other expenses
(a)
|
|
(133,815
|
)
|
|
|
(143,188
|
)
|
Interest expense, net
|
|
(14,998
|
)
|
|
|
(24,853
|
)
|
Income from continuing operations before income taxes
|
|
$
|
123,892
|
|
|
|
$
|
68,821
|
|
|
|
(a)
|
Certain corporate overhead and other costs of
$24.6 million
for the
three
-month period ended
June 2018
, previously allocated to the former Jeans segment and Other category for segment reporting purposes, have been reallocated to continuing operations.
|
NOTE 16 — EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
Earnings per share – basic:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
97,249
|
|
|
|
$
|
61,364
|
|
Weighted average common shares outstanding
|
|
396,727
|
|
|
|
394,165
|
|
Earnings per share from continuing operations
|
|
$
|
0.25
|
|
|
|
$
|
0.16
|
|
Earnings per share – diluted:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
97,249
|
|
|
|
$
|
61,364
|
|
Weighted average common shares outstanding
|
|
396,727
|
|
|
|
394,165
|
|
Incremental shares from stock options and other dilutive securities
|
|
5,187
|
|
|
|
5,383
|
|
Adjusted weighted average common shares outstanding
|
|
401,914
|
|
|
|
399,548
|
|
Earnings per share from continuing operations
|
|
$
|
0.24
|
|
|
|
$
|
0.15
|
|
Outstanding options to purchase approximately
1.5 million
and
1.8 million
shares were excluded from the calculations of diluted earnings per share for the
three
-month periods ended
June 2019
and
June 2018
, respectively, because the effect of their inclusion would have been anti-dilutive.
In addition,
0.8 million
and
0.9 million
shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for the
three
-month periods ended
June 2019
and
June 2018
, respectively, because these units were not considered to be contingent outstanding shares in those periods.
25
VF Corporation Q1 FY20 Form 10-Q
NOTE 17 — FAIR VALUE MEASUREMENTS
Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable
|
data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities, or (iii) information derived from or corroborated by observable market data.
|
|
•
|
Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
|
The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
Fair Value Measurement Using
(a)
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
June 2019
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
344,357
|
|
|
$
|
344,357
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Time deposits
|
3,726
|
|
|
3,726
|
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments
|
80,351
|
|
|
—
|
|
|
80,351
|
|
|
—
|
|
|
Investment securities
|
131,989
|
|
|
124,627
|
|
|
7,362
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
11,374
|
|
|
—
|
|
|
11,374
|
|
|
—
|
|
|
Deferred compensation
|
144,131
|
|
|
—
|
|
|
144,131
|
|
|
—
|
|
|
|
Total Fair Value
|
|
Fair Value Measurement Using
(a)
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
March 2019
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
248,560
|
|
|
$
|
248,560
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Time deposits
|
8,257
|
|
|
8,257
|
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments
|
92,771
|
|
|
—
|
|
|
92,771
|
|
|
—
|
|
|
Investment securities
|
186,698
|
|
|
176,209
|
|
|
10,489
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
22,337
|
|
|
—
|
|
|
22,337
|
|
|
—
|
|
|
Deferred compensation
|
199,336
|
|
|
—
|
|
|
199,336
|
|
|
—
|
|
|
The amounts reported in the table above for prior periods have not been segregated between continuing and discontinued operations. The March 2019 balances include
$50.8 million
of deferred compensation liabilities and associated assets related to the Jeans business, which were transferred in connection with the spin-off.
|
|
(a)
|
There were
no
transfers among the levels within the fair value hierarchy during the
three months
ended
June 2019
or the year ended
March 2019
.
|
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 primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or quoted prices in inactive markets for identical assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments.
VF Corporation Q1 FY20 Form 10-Q
26
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 2019
and
March 2019
, their carrying values approximated fair value. Additionally,
at
June 2019
and
March 2019
, the carrying values of VF’s long-term debt, including the current portion, were
$2,131.9 million
and
$2,121.1 million
, respectively, compared with fair values of
$2,392.5 million
and
$2,318.6 million
at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
NOTE 18 — 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
$3.1 billion
at
June 2019
,
$2.8 billion
at
March 2019
and
$2.9 billion
at
June 2018
, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Swiss franc, Swedish krona, South Korean won, New Zealand dollar, Polish zloty and Japanese yen. 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 2019
|
|
|
March 2019
|
|
June 2018
|
|
|
June 2019
|
|
|
March 2019
|
|
June 2018
|
Foreign currency exchange contracts designated as hedging instruments
|
|
$
|
67,979
|
|
|
|
$
|
92,356
|
|
|
$
|
53,417
|
|
|
|
$
|
(9,359
|
)
|
|
|
$
|
(21,798
|
)
|
|
$
|
(33,984
|
)
|
Foreign currency exchange contracts not designated as hedging instruments
|
|
12,372
|
|
|
|
415
|
|
|
—
|
|
|
|
(2,015
|
)
|
|
|
(539
|
)
|
|
(205
|
)
|
Total derivatives
|
|
$
|
80,351
|
|
|
|
$
|
92,771
|
|
|
$
|
53,417
|
|
|
|
$
|
(11,374
|
)
|
|
|
$
|
(22,337
|
)
|
|
$
|
(34,189
|
)
|
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 2019
|
|
|
March 2019
|
|
June 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
|
$
|
80,351
|
|
|
$
|
(11,374
|
)
|
|
|
$
|
92,771
|
|
|
$
|
(22,337
|
)
|
|
$
|
53,417
|
|
|
$
|
(34,189
|
)
|
Gross amounts not offset in the Consolidated Balance Sheets
|
|
(11,301
|
)
|
|
11,301
|
|
|
|
(22,274
|
)
|
|
22,274
|
|
|
(30,304
|
)
|
|
30,304
|
|
Net amounts
|
|
$
|
69,050
|
|
|
$
|
(73
|
)
|
|
|
$
|
70,497
|
|
|
$
|
(63
|
)
|
|
$
|
23,113
|
|
|
$
|
(3,885
|
)
|
Derivatives are classified as current or non-current based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2019
|
|
|
March 2019
|
|
June 2018
|
Other current assets
|
|
$
|
72,132
|
|
|
|
$
|
83,582
|
|
|
$
|
32,144
|
|
Accrued liabilities
|
|
(8,143
|
)
|
|
|
(18,590
|
)
|
|
(32,508
|
)
|
Other assets
|
|
8,219
|
|
|
|
9,189
|
|
|
21,273
|
|
Other liabilities
|
|
(3,231
|
)
|
|
|
(3,747
|
)
|
|
(1,681
|
)
|
27
VF Corporation Q1 FY20 Form 10-Q
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
|
|
2019
|
|
|
2018
|
Foreign currency exchange
|
|
$
|
14,774
|
|
|
|
$
|
94,629
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gain (Loss) Reclassified from Accumulated OCI into Income Three Months Ended June
|
|
|
|
|
|
|
Location of Gain (Loss)
|
|
2019
|
|
|
2018
|
Net sales
|
|
$
|
(2,905
|
)
|
|
|
$
|
945
|
|
Cost of goods sold
|
|
11,105
|
|
|
|
(11,938
|
)
|
Selling, general and administrative expenses
|
|
716
|
|
|
|
(2,698
|
)
|
Other income (expense), net
|
|
2,872
|
|
|
|
(1,393
|
)
|
Interest expense
|
|
(1,293
|
)
|
|
|
(1,233
|
)
|
Total
|
|
$
|
10,495
|
|
|
|
$
|
(16,317
|
)
|
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 the case of derivative contracts executed on foreign currency exposures that are no longer probable of occurring, VF de-designates these hedges and the fair value changes of these instruments are also recognized directly in earnings.
Foreign currency exchange contracts not designated as hedges as of June 2019 also include contracts still owned by VF that are related to the former Jeans business. In connection with the spin-off, VF transferred the value of the unrecognized gain on these contracts to Kontoor Brands.
The changes in fair value of derivative contracts not designated as hedges that have been recognized as gains or losses in VF's Consolidated Statements of Income were not material for the three months ended June 2019 and June 2018.
Other Derivative Information
At
June 2019
, accumulated OCI included
$66.5 million
of pre-tax net deferred gains for foreign currency exchange contracts that are expected to be reclassified to earnings during the next
12 months
. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in
2021
and
2033
, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pre-tax net deferred loss in accumulated OCI was
$10.4 million
at
June 2019
, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. VF reclassified
$1.3 million
and
$1.2 million
of net deferred losses from accumulated OCI into interest expense for the
three
-month periods ended
June 2019
and
June 2018
, respectively. VF expects to reclassify
$5.3 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 2019
and
June 2018
, the Company recognized an after-tax loss of
$8.7 million
and an after-tax gain of
$41.0 million
, respectively. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated.
VF Corporation Q1 FY20 Form 10-Q
28
NOTE 19 — RESTRUCTURING
The Company typically incurs restructuring charges related to strategic initiatives and cost optimization of business activities, primarily related to severance and employee-related benefits. During the
three
months ended
June 2019
, VF leadership approved
$4.8 million
of restructuring charges, of which
$3.4 million
was recognized in selling, general and administrative expenses and
$1.4 million
in cost of goods sold. The Company
has not recognized significant incremental costs related to the actions for the year ended March 2019 or prior periods
.
Of the
$57.9 million
total restructuring accrual at
June 2019
,
$55.3 million
is expected to be paid out within the next 12 months and is classified within accrued liabilities. The remaining
$2.6 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 2019
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
|
|
Other
|
|
Total
|
|
Accrual at March 2019
|
$
|
58,106
|
|
|
$
|
11,035
|
|
|
$
|
69,141
|
|
|
Charges
|
2,224
|
|
|
2,564
|
|
|
4,788
|
|
|
Cash payments
|
(8,887
|
)
|
|
(8,335
|
)
|
|
(17,222
|
)
|
|
Adjustments to accruals
|
1,303
|
|
|
—
|
|
|
1,303
|
|
|
Currency translation
|
11
|
|
|
(97
|
)
|
|
(86
|
)
|
|
Accrual at June 2019
|
$
|
52,757
|
|
|
$
|
5,167
|
|
|
$
|
57,924
|
|
|
Restructuring charges were incurred as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended June 2019
|
|
|
Three Months Ended June 2018
|
Outdoor
|
|
$
|
4,215
|
|
|
|
$
|
2,898
|
|
Active
|
|
20
|
|
|
|
2,559
|
|
Work
|
|
553
|
|
|
|
2,828
|
|
Corporate and other
|
|
—
|
|
|
|
1,506
|
|
Total
|
|
$
|
4,788
|
|
|
|
$
|
9,791
|
|
NOTE 20 — CONTINGENCIES
The Company petitioned the U.S. Tax Court to resolve an IRS dispute regarding the timing of income inclusion associated with the 2011 Timberland acquisition. The Company remains confident in our timing and treatment of the income inclusion, and therefore this matter is not reflected in our financial statements. We are vigorously defending our position, and do not expect the resolution to have a material adverse impact on the Company's financial position, results of operations or cash flows. While the IRS argues immediate income inclusion, the Company's position is to include the income over a period of years. As the matter relates to 2011, nearly half of the timing at dispute has passed with the Company including the income, and paying the related tax, on our income
tax returns. The Company notes that should the IRS prevail in this timing matter, the net interest expense would be up to
$137 million
. Further, this timing matter is impacted by the Tax Act that reduced the U.S. corporate income tax rate from 35% to 21%. If the IRS is successful, this rate differential would increase tax expense by approximately
$136 million
.
The Company is currently involved in other legal proceedings that are ordinary, routine litigation incidental to the business. The resolution of any particular proceeding is not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows.
NOTE 21 — SUBSEQUENT EVENT
On
July 15, 2019
, VF’s Board of Directors declared a quarterly cash dividend of
$0.43
per share, payable on
September 20, 2019
to stockholders of record on
September 10, 2019
.
29
VF Corporation Q1 FY20 Form 10-Q