Notes to Consolidated Financial Statements
(Unaudited)
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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PAGE NUMBER
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NOTE 1
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NOTE 2
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NOTE 3
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NOTE 4
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NOTE 5
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NOTE 6
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NOTE 7
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NOTE 8
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NOTE 9
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NOTE 10
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NOTE 11
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NOTE 12
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NOTE 13
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NOTE 14
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NOTE 15
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NOTE 16
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NOTE 17
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NOTE 18
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NOTE 19
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NOTE 20
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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 29, 2020 through April 3, 2021 ("Fiscal 2021"). Accordingly, this Form 10-Q presents our first quarter of Fiscal 2021. For presentation purposes herein, all references to periods ended June 2020 and June 2019 relate to the fiscal periods ended on June 27, 2020 and June 29, 2019, respectively. References to March 2020 relate to information as of March 28, 2020.
On January 21, 2020, VF announced its decision to explore the divestiture of its Occupational Workwear business. The Occupational Workwear business is comprised primarily of the following brands and businesses: Red Kap®, VF Solutions®, Bulwark®, Workrite®, Walls®, Terra®, Kodiak®, Work Authority® and Horace Small®. The business also includes certain Dickies® occupational workwear products that have historically been sold through the business-to-business channel. During the three months ended March 2020, the Company determined that the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria and expects to divest this business during Fiscal 2021. Accordingly, the Company has reported the results of the Occupational Workwear business and the related cash flows as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively. The related held-for-
sale assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets. These changes have been applied to all periods presented.
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 OutletTM business, into an independent, publicly traded company. As a result, VF reported the results for the Jeans business and the related cash flows as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively. These changes have been applied to all periods presented.
Certain prior year amounts have been reclassified to conform to the Fiscal 2021 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 2020 condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management,
9 VF Corporation Q1 FY21 Form 10-Q
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 2020 are not necessarily indicative of results that may be expected for any other interim period or for Fiscal 2021. 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 28, 2020 (“Fiscal 2020 Form 10-K”).
In preparing the condensed consolidated financial statements, management makes estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. The duration and severity of the novel coronavirus ("COVID-19") pandemic, which is subject to uncertainty, is having a significant impact on VF's business. Management's estimates and assumptions have contemplated both current and expected impacts related to COVID-19 based on available information. Actual results may differ from those estimates.
NOTE 2 — RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Recently Adopted 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. The guidance became effective for VF in the first quarter of Fiscal 2021, but did not have a material impact on VF's consolidated financial statements. As a result of the adoption of this guidance, the following significant accounting policy from the Company’s Fiscal 2020 Form 10-K has been updated:
Accounts Receivable
Trade accounts receivable are recorded at invoiced amounts, less contractual allowances for trade terms, sales incentive programs and discounts. Royalty receivables are recorded at amounts earned based on the licensees' sales of licensed products, subject in some cases to contractual minimum royalties due from individual licensees. VF maintains an allowance for doubtful accounts for estimated losses that will result from the inability of customers and licensees to make required payments. The allowance is determined based on review of specific customer accounts where collection is doubtful, as well as an assessment of the collectability of total receivables, which are grouped based on similar risk characteristics, considering historical trends, adjusted for current economic conditions and reasonable and supportable forecasts when appropriate. The allowance represents the current estimate of lifetime expected credit losses for all outstanding accounts receivable and reflects the Company's ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses and future expectations. Receivables are written off against the allowance when it is determined that the amounts will not be recovered.
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 became effective for VF in the first quarter of Fiscal 2021, but did not have a material impact 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 became effective for VF in the first quarter of Fiscal 2021, but did not have a material impact on VF's consolidated financial statements.
Recently Issued Accounting Standards
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 annual disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans. The guidance will be effective for VF in Fiscal 2021, but the Company does not expect the adoption of this guidance to have a material impact on VF's disclosures.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", an update that amends and simplifies the accounting for income taxes by removing certain exceptions in existing guidance and providing new guidance to reduce complexity in certain areas. The guidance will be effective for VF in the first quarter of the year ending April 2, 2022 ("Fiscal 2022") with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", an update that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The optional guidance is provided to ease the potential burden of accounting for reference rate reform. The guidance is effective and can be adopted no later than December 31, 2022. The Company is evaluating the impact that adopting this guidance would have on VF's consolidated financial statements.
VF Corporation Q1 FY21 Form 10-Q 10
NOTE 3 — REVENUES
The following table provides information about accounts receivable, contract assets and contract liabilities:
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(In thousands)
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June 2020
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March 2020
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June 2019
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Accounts receivable, net
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$
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934,984
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$
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1,308,051
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$
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1,211,347
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Contract assets (a)
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2,487
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1,181
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1,576
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Contract liabilities (b)
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45,622
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37,498
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42,196
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(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 2020, the Company recognized $35.6 million of revenue that was included in the contract liability balance during the period, including amounts recorded as a contract liability and subsequently recognized as revenue as performance obligations are satisfied within the same period, such as order deposits from customers. 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 2020, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not material.
As of June 2020, the Company expects to recognize $62.9 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 based on the contractual terms, including $15.4 million in the remainder of Fiscal 2021. The variable consideration related to licensing arrangements is not disclosed as a remaining performance obligation as it qualifies for the sales-based royalty exemption. VF has also elected the practical expedient to not disclose the transaction price allocated to remaining performance obligations for contracts with an original expected duration of one year or less.
As of June 2020, there were no arrangements with transaction price allocated to remaining performance obligations other than contracts for which the Company has applied the practical expedients and the fixed consideration related to future minimum guarantees discussed above.
Disaggregation of Revenue
The following tables disaggregate our revenues by channel and geography, which provides a meaningful depiction of how the nature, timing and uncertainty of revenues were affected by economic factors. The wholesale channel includes fees generated from sourcing activities as the customers and point-in-time revenue recognition are similar to other wholesale arrangements.
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Three Months Ended June 2020
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(In thousands)
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Outdoor
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Active
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Work
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Other
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Total
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Channel revenues
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Wholesale
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$
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158,506
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$
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241,164
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$
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117,604
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$
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1,275
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$
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518,549
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Direct-to-consumer
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180,014
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324,201
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40,615
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44
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544,874
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Royalty
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2,708
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5,951
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4,211
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—
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12,870
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Total
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$
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341,228
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$
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571,316
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$
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162,430
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$
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1,319
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$
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1,076,293
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Geographic revenues
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United States
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$
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152,477
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$
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265,507
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$
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114,632
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$
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—
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$
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532,616
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International
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188,751
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305,809
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47,798
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1,319
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543,677
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Total
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$
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341,228
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$
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571,316
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$
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162,430
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$
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1,319
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$
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1,076,293
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11 VF Corporation Q1 FY21 Form 10-Q
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Three Months Ended June 2019
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(In thousands)
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Outdoor
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Active
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Work
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Other
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Total
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Channel revenues
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Wholesale
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$
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341,756
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$
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660,142
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$
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164,280
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$
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2,808
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$
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1,168,986
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Direct-to-consumer
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266,342
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565,887
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33,519
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3,454
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869,202
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Royalty
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2,522
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6,097
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3,847
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—
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12,466
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Total
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$
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610,620
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$
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1,232,126
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$
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201,646
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$
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6,262
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$
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2,050,654
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Geographic revenues
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United States
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$
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303,052
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$
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711,205
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$
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142,631
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$
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—
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$
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1,156,888
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International
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307,568
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520,921
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59,015
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6,262
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893,766
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Total
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$
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610,620
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$
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1,232,126
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$
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201,646
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$
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6,262
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$
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2,050,654
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NOTE 4 — DISCONTINUED OPERATIONS
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.
Occupational Workwear Business
On January 21, 2020, VF announced its decision to explore the divestiture of its Occupational Workwear business. The Occupational Workwear business is comprised primarily of the following brands and businesses: Red Kap®, VF Solutions®, Bulwark®, Workrite®, Walls®, Terra®, Kodiak®, Work Authority® and Horace Small®. The business also includes certain Dickies® occupational workwear products that have historically been sold through the business-to-business channel.
During the three months ended March 2020, the Company determined the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria and expects to divest this business during Fiscal 2021. Accordingly, the Company has reported the results of the Occupational Workwear business and the related cash flows as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively. The related held-for-sale assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.
The results of the Occupational Workwear business were previously reported in the Work segment. The results of the Occupational Workwear business recorded in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Operations were a loss of $7.9 million and income of $32.0 million for the three months ended June 2020 and June 2019, respectively.
Certain corporate overhead costs and segment costs previously allocated to the Occupational Workwear business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.
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 OutletTM 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 and the related cash flows as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively.
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 OutletTM 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 loss from discontinued operations, net of tax line item in the Consolidated Statement of Operations were a loss of $48.0 million for the three months ended June 2019, including $59.5 million of separation and related expenses.
In connection with the spin-off of the Jeans business, the Company entered into several agreements with Kontoor Brands that govern the relationship of the parties following the spin-off
VF Corporation Q1 FY21 Form 10-Q 12
including the Separation and Distribution Agreement, the Tax Matters Agreement, the Transition Services Agreement, the VF Intellectual Property License Agreement and the Employee Matters Agreement. Under the terms of the Transition Services Agreement, the Company and Kontoor Brands agreed to provide each other certain transitional services including information technology, information management, human resources,
employee benefits administration, supply chain, facilities, and other limited finance and accounting related services for periods up to 24 months. Payments and operating expense reimbursements for transition services are recorded within the reportable segments or within the corporate and other expenses line item, in the reconciliation of segment profit in Note 14, based on the function providing the service.
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items included for the Occupational Workwear business and the Jeans business that are included in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Operations:
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Three Months Ended June
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(In thousands)
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2020
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2019
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Net revenues
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$
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125,333
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$
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556,028
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Cost of goods sold
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101,470
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342,954
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Selling, general and administrative expenses
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33,256
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196,466
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|
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|
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|
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Interest income, net
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293
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|
33
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Other income (expense), net
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—
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(623)
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Income (loss) from discontinued operations before income taxes
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(9,100)
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|
16,018
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Income tax expense (benefit) (a)
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(1,229)
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32,070
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Loss from discontinued operations, net of tax
|
|
$
|
(7,871)
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|
|
|
$
|
(16,052)
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(a)Income tax expense for the three months ended June 2019 includes additional tax expense on nondeductible transaction costs and uncertain tax positions related to the Jeans business.
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
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(In thousands)
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June 2020
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|
|
March 2020
|
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June 2019
|
Cash and equivalents
|
|
$
|
42,986
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|
|
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$
|
39,752
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|
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$
|
45,198
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Accounts receivable, net
|
|
64,065
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|
|
|
83,650
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|
|
94,923
|
|
Inventories
|
|
258,632
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|
|
|
294,000
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|
|
283,619
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Other current assets
|
|
10,027
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|
|
|
6,701
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|
|
8,168
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Property, plant and equipment, net
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46,697
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|
|
|
44,863
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|
|
38,571
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Intangible assets, net
|
|
54,471
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|
|
54,471
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|
|
63,404
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Goodwill
|
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43,530
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43,530
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49,630
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Operating lease right-of-use assets
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39,452
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38,941
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|
|
34,121
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Other assets
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5,275
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|
|
5,231
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|
4,534
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Total assets of discontinued operations
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$
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565,135
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$
|
611,139
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$
|
622,168
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Accounts payable
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$
|
27,810
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|
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$
|
63,380
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|
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$
|
80,842
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Accrued liabilities
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31,134
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|
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29,699
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|
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31,585
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Operating lease liabilities
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34,462
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|
35,867
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|
|
32,082
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Other liabilities
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|
2,284
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|
|
|
2,270
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|
|
3,442
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Deferred income tax liabilities (a)
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(4,407)
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(4,435)
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|
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(10,248)
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Total liabilities of discontinued operations
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$
|
91,283
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|
|
$
|
126,781
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|
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$
|
137,703
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(a)Deferred income tax balances reflect VF's consolidated netting by jurisdiction.
13 VF Corporation Q1 FY21 Form 10-Q
NOTE 5 — INVENTORIES
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(In thousands)
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|
June 2020
|
|
|
March 2020
|
|
June 2019
|
Finished products
|
|
$
|
1,314,399
|
|
|
|
$
|
1,201,562
|
|
|
$
|
1,290,814
|
|
Work-in-process
|
|
64,401
|
|
|
|
67,603
|
|
|
62,268
|
|
Raw materials
|
|
24,058
|
|
|
|
24,747
|
|
|
28,431
|
|
Total inventories
|
|
$
|
1,402,858
|
|
|
|
$
|
1,293,912
|
|
|
$
|
1,381,513
|
|
NOTE 6 — INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2020
|
|
|
|
|
|
|
March 2020
|
(In thousands)
|
|
Weighted
Average
Amortization
Period
|
|
Amortization
Method
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
Net
Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
18 years
|
|
Accelerated
|
|
|
$
|
278,522
|
|
|
$
|
144,548
|
|
|
$
|
133,974
|
|
|
|
$
|
137,017
|
|
License agreements
|
|
19 years
|
|
Accelerated
|
|
|
7,542
|
|
|
5,019
|
|
|
2,523
|
|
|
|
2,548
|
|
Other
|
|
8 years
|
|
Straight-line
|
|
|
8,086
|
|
|
5,376
|
|
|
2,710
|
|
|
|
2,909
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
139,207
|
|
|
|
142,474
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
|
|
1,716,557
|
|
|
|
1,712,071
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
$
|
1,855,764
|
|
|
|
$
|
1,854,545
|
|
Intangible assets increased during the three months ended June 2020 due to the impact of foreign currency fluctuations.
Amortization expense for the three months ended June 2020 was $4.4 million. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five years beginning in Fiscal 2021 is $17.5 million, $16.3 million, $15.2 million, $14.6 million and $14.2 million, respectively.
NOTE 7 — GOODWILL
Changes in goodwill are summarized by reportable segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Total
|
|
Balance, March 2020
|
$
|
653,433
|
|
|
$
|
389,848
|
|
|
$
|
112,738
|
|
|
$
|
1,156,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
3,931
|
|
|
2,602
|
|
|
54
|
|
|
6,587
|
|
|
Balance, June 2020
|
$
|
657,364
|
|
|
$
|
392,450
|
|
|
$
|
112,792
|
|
|
$
|
1,162,606
|
|
|
Accumulated impairment charges for the Outdoor segment were $323.2 million as of June 2020 and March 2020. No impairment charges were recorded during the three months ended June 2020.
NOTE 8 — LEASES
The Company leases certain retail locations, office space, distribution facilities, machinery and equipment, and vehicles. The substantial majority of these leases are operating leases. Total lease cost includes operating lease cost, variable lease cost, finance lease cost, short-term lease cost, impairment and gain recognized from sale-leaseback transactions. Components of lease cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
108,852
|
|
|
|
$
|
99,588
|
|
|
|
|
|
|
|
Other lease costs
|
|
14,998
|
|
|
|
17,904
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
123,850
|
|
|
|
$
|
117,492
|
|
|
|
|
|
|
|
During the three months ended June 2020 and 2019, the Company paid $65.0 million and $102.6 million of cash for operating leases, respectively. The decrease was driven by the timing of payments. During the three months ended June 2020 and 2019, the Company obtained $190.2 million and $146.4 million of right of use assets in exchange for lease liabilities, respectively.
VF Corporation Q1 FY21 Form 10-Q 14
NOTE 9 — SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Revolving Credit Facility
In April 2020, VF entered into Amendment No. 1 to its $2.25 billion senior unsecured revolving line of credit (the "Global Credit Facility") (the “Amendment”). The Amendment provides for (i) an increase in VF’s consolidated indebtedness to consolidated capitalization ratio financial covenant to 0.70 to 1.00 (from 0.60 to 1.00) through the last day of the fiscal quarter ending March 31, 2022, (ii) calculation of consolidated indebtedness (and, thereby consolidated capitalization) net of unrestricted cash of VF and its subsidiaries and (iii) testing of such financial covenant solely as of the last day of each fiscal quarter during such period. In addition, the Amendment requires VF and its subsidiaries to maintain minimum liquidity in the form of unrestricted cash and unused financing commitments of not less than $750.0 million at all times during such period. As of June 2020, VF was in compliance with all covenants.
Senior Notes Issuance
In April 2020, VF issued senior unsecured notes, as outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Scheduled Maturity
|
|
Aggregate Principal
|
|
Effective Annual Interest Rate
|
|
Interest Payments
|
2.050% notes, due 2022
|
|
$
|
1,000,000
|
|
|
2.277
|
%
|
|
Semiannually
|
2.400% notes, due 2025
|
|
750,000
|
|
|
2.603
|
%
|
|
Semiannually
|
2.800% notes, due 2027
|
|
500,000
|
|
|
2.953
|
%
|
|
Semiannually
|
2.950% notes, due 2030
|
|
750,000
|
|
|
3.071
|
%
|
|
Semiannually
|
Total Issuance
|
|
$
|
3,000,000
|
|
|
|
|
|
VF used a portion of the net proceeds from this offering to repay borrowings under its Global Credit Facility. The aggregate outstanding balance of these notes was $2.98 billion at June 2020, which was net of unamortized original issue discount and debt issuance costs.
NOTE 10 — PENSION PLANS
The components of pension cost (income) for VF’s defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Service cost – benefits earned during the period
|
|
$
|
3,632
|
|
|
|
$
|
3,381
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligations
|
|
11,948
|
|
|
|
14,761
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
(20,539)
|
|
|
|
(23,178)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
|
2,863
|
|
|
|
4,019
|
|
|
|
|
|
|
|
Deferred prior service costs (credits)
|
|
(17)
|
|
|
|
13
|
|
|
|
|
|
|
|
Net periodic pension cost (income)
|
|
$
|
(2,113)
|
|
|
|
$
|
(1,004)
|
|
|
|
|
|
|
|
The amounts reported in these disclosures have not been segregated between continuing and discontinued operations.
VF has reported the service cost component of net periodic pension cost (income) in operating income and the other components, which include interest cost, expected return on plan assets, and amortization of deferred actuarial losses and prior service costs (credits), in the other income (expense), net line item in the Consolidated Statements of Operations.
VF contributed $1.7 million to its defined benefit plans during the three months ended June 2020, and intends to make approximately $15.9 million of contributions during the remainder of Fiscal 2021.
15 VF Corporation Q1 FY21 Form 10-Q
NOTE 11 — CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Stock
During the three months ended June 2020, 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 2020, March 2020 or June 2019. 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.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and specified components of other comprehensive income (“OCI”), which relates to changes in assets and liabilities that are not included in net income (loss) under GAAP but are instead deferred and accumulated within a separate component of stockholders’ equity in the balance sheet. VF’s comprehensive income (loss) is presented in the Consolidated Statements of Comprehensive Income (Loss). The deferred components of OCI are reported, net of related income taxes, in accumulated OCI in stockholders’ equity, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2020
|
|
|
March 2020
|
|
June 2019
|
Foreign currency translation and other
|
|
$
|
(685,236)
|
|
|
|
$
|
(737,709)
|
|
|
$
|
(635,901)
|
|
Defined benefit pension plans
|
|
(259,290)
|
|
|
|
(262,472)
|
|
|
(290,468)
|
|
Derivative financial instruments
|
|
46,985
|
|
|
|
69,223
|
|
|
58,983
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(897,541)
|
|
|
|
$
|
(930,958)
|
|
|
$
|
(867,386)
|
|
The changes in accumulated OCI, net of related taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2020
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
|
Balance, March 2020
|
$
|
(737,709)
|
|
|
$
|
(262,472)
|
|
|
$
|
69,223
|
|
|
$
|
(930,958)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
10,109
|
|
|
987
|
|
|
(6,065)
|
|
|
5,031
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
42,364
|
|
|
2,195
|
|
|
(16,173)
|
|
|
28,386
|
|
|
Net other comprehensive income (loss)
|
52,473
|
|
|
3,182
|
|
|
(22,238)
|
|
|
33,417
|
|
|
Balance, June 2020
|
$
|
(685,236)
|
|
|
$
|
(259,290)
|
|
|
$
|
46,985
|
|
|
$
|
(897,541)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
VF Corporation Q1 FY21 Form 10-Q 16
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 Operations
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Losses on foreign currency translation and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of foreign entities
|
Other income (expense), net
|
|
|
$
|
(42,364)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Total before tax
|
|
|
|
(42,364)
|
|
|
|
—
|
|
|
|
|
|
|
|
Tax (expense) benefit
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
(42,364)
|
|
|
|
—
|
|
|
|
|
|
|
|
Amortization of defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
Other income (expense), net
|
|
|
(2,863)
|
|
|
|
(4,019)
|
|
|
|
|
|
|
|
Deferred prior service (costs) credits
|
Other income (expense), net
|
|
|
17
|
|
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before tax
|
|
|
|
(2,846)
|
|
|
|
(4,032)
|
|
|
|
|
|
|
|
Tax benefit
|
|
|
|
651
|
|
|
|
885
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
(2,195)
|
|
|
|
(3,147)
|
|
|
|
|
|
|
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Net revenues
|
|
|
171
|
|
|
|
(2,905)
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Cost of goods sold
|
|
|
16,705
|
|
|
|
11,105
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Selling, general and administrative expenses
|
|
|
1,607
|
|
|
|
716
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
|
1,770
|
|
|
|
2,872
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
|
27
|
|
|
|
(1,293)
|
|
|
|
|
|
|
|
Total before tax
|
|
|
|
20,280
|
|
|
|
10,495
|
|
|
|
|
|
|
|
Tax expense
|
|
|
|
(4,107)
|
|
|
|
(2,756)
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
16,173
|
|
|
|
7,739
|
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax
|
|
|
|
$
|
(28,386)
|
|
|
|
$
|
4,592
|
|
|
|
|
|
|
|
NOTE 12 — STOCK-BASED COMPENSATION
Incentive Equity Awards Granted
During the three months ended June 2020, VF granted stock options to employees and nonemployee members of VF's Board of Directors to purchase 1,679,918 shares of its Common Stock at an exercise price of $55.74 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. All options have ten-year terms.
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 2020
|
|
Expected volatility
|
|
28% to 48%
|
|
Weighted average expected volatility
|
|
37%
|
|
Expected term (in years)
|
|
6.2 to 8.0
|
|
Weighted average dividend yield
|
|
2.4%
|
|
Risk-free interest rate
|
|
0.2% to 0.7%
|
|
Weighted average fair value at date of grant
|
|
$15.78
|
|
Also during the three months ended June 2020, VF granted 16,775 nonperformance-based restricted stock units ("RSUs") to nonemployee members of the Board of Directors. 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 $55.74 per share.
VF granted 10,000 nonperformance-based RSUs to certain key employees in international jurisdictions during the three months ended June 2020. These units vest over periods of up to four years from the date of grant and each unit entitles the holder to one share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was $55.74 per share.
17 VF Corporation Q1 FY21 Form 10-Q
In addition, VF granted 266,190 nonperformance-based RSUs to employees during the three months ended June 2020. These awards 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 $55.74 per share.
VF granted 50,061 restricted shares of VF Common Stock to certain members of management during the three months ended June 2020. 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 $55.74 per share.
NOTE 13 — INCOME TAXES
The effective income tax rate for the three months ended June 2020 was 11.2% compared to 24.0% in the 2019 period. The three months ended June 2020 included a net discrete tax expense of $1.8 million, which primarily related to unrecognized tax benefits and interest. The $1.8 million net discrete tax expense in the 2020 period reduced the effective income tax rate by 0.6%. The 2019 period included a discrete tax benefit of $2.0 million related to stock compensation and a discrete tax expense of $2.0 million related to unrecognized tax benefits and interest. Without discrete items, the effective income tax rate for the three months ended June 2020 decreased by 12.2% compared with the 2019 period primarily due to a higher percentage of income in lower tax rate jurisdictions and losses in the current quarter.
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 2015 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 in 2017 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. Additionally, the EU has initiated proceedings related to individual rulings granted by Belgium, including the ruling granted to VF. If this matter is adversely resolved, these amounts will not be collected by VF.
During the three months ended June 2020, the amount of net unrecognized tax benefits and associated interest increased by $1.2 million to $166.3 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 $15.7 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $8.7 million would reduce income tax expense.
VF Corporation Q1 FY21 Form 10-Q 18
NOTE 14 — 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 (loss), but it is not considered a reportable segment. Other includes results primarily related to the sale of non-VF products.
Financial information for VF's reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Outdoor
|
|
$
|
341,228
|
|
|
|
$
|
610,620
|
|
|
|
|
|
|
|
Active
|
|
571,316
|
|
|
|
1,232,126
|
|
|
|
|
|
|
|
Work
|
|
162,430
|
|
|
|
201,646
|
|
|
|
|
|
|
|
Other
|
|
1,319
|
|
|
|
6,262
|
|
|
|
|
|
|
|
Total segment revenues
|
|
$
|
1,076,293
|
|
|
|
$
|
2,050,654
|
|
|
|
|
|
|
|
Segment profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Outdoor
|
|
$
|
(160,711)
|
|
|
|
$
|
(80,270)
|
|
|
|
|
|
|
|
Active
|
|
7,136
|
|
|
|
307,566
|
|
|
|
|
|
|
|
Work
|
|
(11,401)
|
|
|
|
15,471
|
|
|
|
|
|
|
|
Other
|
|
(2,361)
|
|
|
|
(1,616)
|
|
|
|
|
|
|
|
Total segment profit (loss)
|
|
(167,337)
|
|
|
|
241,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other expenses (a)
|
|
(117,659)
|
|
|
|
(139,632)
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(27,949)
|
|
|
|
(15,583)
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(312,945)
|
|
|
|
$
|
85,936
|
|
|
|
|
|
|
|
(a)Certain corporate overhead and other costs of $6.1 million for the three-month period ended June 2019, previously allocated to the Work segment have been reallocated to continuing operations.
NOTE 15 — EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Earnings (loss) per share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(277,742)
|
|
|
|
$
|
65,273
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
388,695
|
|
|
|
396,727
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(0.71)
|
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
Earnings (loss) per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(277,742)
|
|
|
|
$
|
65,273
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
388,695
|
|
|
|
396,727
|
|
|
|
|
|
|
|
Incremental shares from stock options and other dilutive securities
|
|
2,096
|
|
|
|
5,187
|
|
|
|
|
|
|
|
Adjusted weighted average common shares outstanding
|
|
390,791
|
|
|
|
401,914
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(0.71)
|
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
Outstanding options to purchase approximately 5.4 million and 1.5 million shares were excluded from the calculations of diluted earnings per share for the three-month periods ended June 2020 and June 2019, respectively, because the effect of their inclusion would have been anti-dilutive.
In addition, 0.4 million and 0.8 million shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for the three-month periods ended June 2020 and June 2019, respectively, because these units were not considered to be contingent outstanding shares in those periods.
19 VF Corporation Q1 FY21 Form 10-Q
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.
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 2020
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,476,533
|
|
|
$
|
1,476,533
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Time deposits
|
373,440
|
|
|
373,440
|
|
|
—
|
|
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Managed income fund
|
500,000
|
|
|
500,000
|
|
|
—
|
|
|
—
|
|
|
Time deposits
|
200,000
|
|
|
200,000
|
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments
|
68,585
|
|
|
—
|
|
|
68,585
|
|
|
—
|
|
|
Deferred compensation
|
120,359
|
|
|
120,359
|
|
|
—
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
15,631
|
|
|
—
|
|
|
15,631
|
|
|
—
|
|
|
Deferred compensation
|
126,326
|
|
|
—
|
|
|
126,326
|
|
|
—
|
|
|
|
Total Fair Value
|
|
Fair Value Measurement Using (a)
|
|
|
|
|
|
(In thousands)
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
March 2020
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,211,887
|
|
|
$
|
1,211,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Time deposits
|
1,932
|
|
|
1,932
|
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments
|
91,834
|
|
|
—
|
|
|
91,834
|
|
|
—
|
|
|
Deferred compensation
|
105,706
|
|
|
105,706
|
|
|
—
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
14,531
|
|
|
—
|
|
|
14,531
|
|
|
—
|
|
|
Deferred compensation
|
113,289
|
|
|
—
|
|
|
113,289
|
|
|
—
|
|
|
(a)There were no transfers among the levels within the fair value hierarchy during the three months ended June 2020 or the year ended March 2020.
VF’s cash equivalents include money market funds, and time deposits with maturities within three months of their purchase dates, 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. VF's short-term investments include excess cash invested in a managed income fund, and time deposits with
maturities greater than three months but less than one year from their purchase dates, that approximate fair value based on Level 1 measurements. VF’s deferred compensation assets primarily represent investments held within plan trusts 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. 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 FY21 Form 10-Q 20
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 2020 and March 2020, their carrying values approximated fair
value. Additionally, at June 2020 and March 2020, the carrying values of VF’s long-term debt, including the current portion, were $5,610.8 million and $2,609.3 million, respectively, compared with fair values of $5,899.4 million and $2,672.9 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.
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 June 2020, $2.6 billion at
March 2020 and $3.1 billion at June 2019, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Swiss franc, South Korean won, Swedish krona, Polish zloty, Japanese yen 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 2020
|
|
|
March 2020
|
|
June 2019
|
|
|
June 2020
|
|
|
March 2020
|
|
June 2019
|
Foreign currency exchange contracts designated as hedging instruments
|
|
$
|
53,810
|
|
|
|
$
|
78,298
|
|
|
$
|
67,979
|
|
|
|
$
|
(13,329)
|
|
|
|
$
|
(12,682)
|
|
|
$
|
(9,359)
|
|
Foreign currency exchange contracts not designated as hedging instruments
|
|
14,775
|
|
|
|
13,536
|
|
|
12,372
|
|
|
|
(2,302)
|
|
|
|
(1,849)
|
|
|
(2,015)
|
|
Total derivatives
|
|
$
|
68,585
|
|
|
|
$
|
91,834
|
|
|
$
|
80,351
|
|
|
|
$
|
(15,631)
|
|
|
|
$
|
(14,531)
|
|
|
$
|
(11,374)
|
|
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 2020
|
|
|
|
|
March 2020
|
|
|
|
June 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
|
$
|
68,585
|
|
|
$
|
(15,631)
|
|
|
|
$
|
91,834
|
|
|
$
|
(14,531)
|
|
|
$
|
80,351
|
|
|
$
|
(11,374)
|
|
Gross amounts not offset in the Consolidated Balance Sheets
|
|
(15,607)
|
|
|
15,607
|
|
|
|
(14,393)
|
|
|
14,393
|
|
|
(11,301)
|
|
|
11,301
|
|
Net amounts
|
|
$
|
52,978
|
|
|
$
|
(24)
|
|
|
|
$
|
77,441
|
|
|
$
|
(138)
|
|
|
$
|
69,050
|
|
|
$
|
(73)
|
|
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2020
|
|
|
March 2020
|
|
June 2019
|
Other current assets
|
|
$
|
56,428
|
|
|
|
$
|
71,784
|
|
|
$
|
72,132
|
|
Accrued liabilities
|
|
(10,103)
|
|
|
|
(11,378)
|
|
|
(8,143)
|
|
Other assets
|
|
12,157
|
|
|
|
20,050
|
|
|
8,219
|
|
Other liabilities
|
|
(5,528)
|
|
|
|
(3,153)
|
|
|
(3,231)
|
|
21 VF Corporation Q1 FY21 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 Operations and Consolidated Statements of Comprehensive Income (Loss) are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gain (Loss) on Derivatives Recognized in OCI
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedging Relationships
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Foreign currency exchange
|
|
$
|
(7,595)
|
|
|
|
$
|
14,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gain (Loss) Reclassified from Accumulated OCI into Income (Loss)
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Net revenues
|
|
$
|
171
|
|
|
|
$
|
(2,905)
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
16,705
|
|
|
|
11,105
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
1,607
|
|
|
|
716
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
1,770
|
|
|
|
2,872
|
|
|
|
|
|
|
|
Interest expense
|
|
27
|
|
|
|
(1,293)
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,280
|
|
|
|
$
|
10,495
|
|
|
|
|
|
|
|
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. As a result of the COVID-19 pandemic and actions expected to be taken by the Company, certain derivative contracts were de-designated as hedged forecasted transactions were no longer deemed probable of occurring. Accordingly, the Company reclassified amounts from accumulated OCI and recognized a $5.0 million net gain during the three months ended June 2020, which was primarily recorded in cost of goods sold.
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 Operations were not material for the three months ended June 2020 and June 2019.
Other Derivative Information
At June 2020, accumulated OCI included $43.3 million of pre-tax net deferred gains for foreign currency exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
Net Investment Hedge
The Company has designated its €1.850 billion 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 2020 and June 2019, the Company recognized after-tax losses of $18.1 million and $8.7 million, respectively, in OCI related to the net investment hedge transaction. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated.
VF Corporation Q1 FY21 Form 10-Q 22
NOTE 18 — 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 2020, VF recognized $22.5 million of restructuring charges related to approved restructuring initiatives. Of the $22.5 million of restructuring charges recognized in the three months ended June 2020, $8.5 million were reflected in selling, general and administrative expenses and $14.0 million in cost of goods sold. The Company
has not recognized any significant incremental costs related to accruals for the year ended March 2020 or prior periods.
Of the $49.9 million total restructuring accrual at June 2020, $49.6 million is expected to be paid out within the next 12 months and is classified within accrued liabilities. The remaining $0.3 million will be paid out beyond the next 12 months and thus is classified within other liabilities.
The components of the restructuring charges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
Severance and employee-related benefits
|
|
$
|
18,509
|
|
|
|
$
|
2,224
|
|
Accelerated depreciation
|
|
3,807
|
|
|
|
—
|
|
Contract termination and other
|
|
141
|
|
|
|
2,121
|
|
Total restructuring charges
|
|
$
|
22,457
|
|
|
|
$
|
4,345
|
|
Restructuring costs by business segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Outdoor
|
|
$
|
4,750
|
|
|
|
$
|
4,215
|
|
|
|
|
|
|
|
Active
|
|
370
|
|
|
|
20
|
|
|
|
|
|
|
|
Work
|
|
429
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
16,908
|
|
|
|
—
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,457
|
|
|
|
$
|
4,345
|
|
|
|
|
|
|
|
The activity in the restructuring accrual for the three-month period ended June 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
|
|
Other
|
|
Total
|
|
Accrual at March 2020
|
$
|
38,052
|
|
|
$
|
2,888
|
|
|
$
|
40,940
|
|
|
Charges
|
18,509
|
|
|
141
|
|
|
18,650
|
|
|
Cash payments
|
(8,806)
|
|
|
(421)
|
|
|
(9,227)
|
|
|
Adjustments to accruals
|
173
|
|
|
—
|
|
|
173
|
|
|
Impact of foreign currency
|
(639)
|
|
|
34
|
|
|
(605)
|
|
|
Accrual at June 2020
|
$
|
47,289
|
|
|
$
|
2,642
|
|
|
$
|
49,931
|
|
|
NOTE 19 — 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 $165 million. Further, this timing matter is impacted by the Tax Cuts and Jobs 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 20 — SUBSEQUENT EVENTS
On July 28, 2020, VF’s Board of Directors declared a quarterly cash dividend of $0.48 per share, payable on September 21, 2020 to stockholders of record on September 10, 2020. The Board of Directors also granted approximately 400,000 performance-based RSUs.
23 VF Corporation Q1 FY21 Form 10-Q