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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9 VF Corporation Q1 FY22 Form 10-Q
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 April 4, 2021 through April 2, 2022 ("Fiscal 2022"). Accordingly, this Form 10-Q presents our first quarter of Fiscal 2022. For presentation purposes herein, all references to periods ended June 2021 and June 2020 relate to the fiscal periods ended on July 3, 2021 and June 27, 2020, respectively. References to March 2021 relate to information as of April 3, 2021.
On June 28, 2021, VF completed the sale of its Occupational Workwear business. The Occupational Workwear business was 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 included the license of certain Dickies® occupational workwear products that have historically been sold through the business-to-business channel. The results of the Occupational Workwear business and the related cash flows have been reported as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively, through the date of sale. The related held-for-sale assets and liabilities have been reported 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 condensed 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 2022 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 2021 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 2021 are not necessarily indicative of results that may be expected for any other interim period or for Fiscal 2022. 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 April 3, 2021 (“Fiscal 2021 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, continues to impact 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 December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 became effective for VF in the first quarter of Fiscal 2022, but did not have a material impact on VF's consolidated financial statements.
Recently Issued Accounting Standards
In March 2020 and January 2021, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" and ASU No. 2021-01, "Reference Rate Reform (Topic 848): Scope", respectively. This guidance 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.
NOTE 3 — REVENUES
Contract Balances
The following table provides information about contract assets and contract liabilities:
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(In thousands)
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June 2021
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March 2021
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June 2020
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Contract assets (a)
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$
|
1,135
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$
|
880
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|
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$
|
2,487
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Contract liabilities (b)
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68,921
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49,869
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45,622
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(a)Included in the other current assets line item in the Consolidated Balance Sheets.
(b)Included in the accrued liabilities line item in the Consolidated Balance Sheets.
VF Corporation Q1 FY22 Form 10-Q 10
For the three months ended June 2021, the Company recognized $91.0 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 were 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.
Performance Obligations
As of June 2021, the Company expects to recognize $63.8 million of fixed consideration related to the future minimum guarantees in effect under its licensing agreements and expects such amounts to be recognized over time based on the contractual terms, with the majority of the revenue recognized by Fiscal
2025. The variable consideration related to licensing arrangements is not disclosed as a remaining performance obligation as it qualifies for the sales-based royalty exemption. VF has also elected the practical expedient to not disclose the transaction price allocated to remaining performance obligations for contracts with an original expected duration of one year or less.
As of June 2021, there were no arrangements with transaction price allocated to remaining performance obligations other than contracts for which the Company has applied the practical expedients and the fixed consideration related to future minimum guarantees discussed above.
For the three months ended June 2021, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not material.
Disaggregation of Revenue
The following tables disaggregate our revenues by channel and geography, which provides a meaningful depiction of how the nature, timing and uncertainty of revenues are affected by economic factors.
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Three Months Ended June 2021
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(In thousands)
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Outdoor
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Active
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Work
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Other
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Total
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Channel revenues
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Wholesale
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$
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334,875
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$
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546,025
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$
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226,871
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$
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—
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$
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1,107,771
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Direct-to-consumer
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279,658
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751,235
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42,812
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—
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1,073,705
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Royalty
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3,221
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4,808
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5,052
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—
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13,081
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Total
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$
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617,754
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$
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1,302,068
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$
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274,735
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$
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—
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$
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2,194,557
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Geographic revenues
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United States
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$
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283,158
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$
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695,835
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$
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217,526
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$
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—
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$
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1,196,519
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International:
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Europe
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218,555
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307,216
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14,196
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—
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539,967
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Asia-Pacific
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88,060
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238,473
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26,139
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—
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352,672
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Americas (non-U.S.)
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27,981
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60,544
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16,874
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—
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105,399
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Total
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$
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617,754
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$
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1,302,068
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$
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274,735
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$
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—
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$
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2,194,557
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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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Europe
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99,024
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125,526
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13,301
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1,319
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239,170
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Asia-Pacific
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79,267
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162,414
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24,509
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—
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266,190
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Americas (non-U.S.)
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10,460
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17,869
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9,988
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—
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38,317
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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 FY22 Form 10-Q
NOTE 4 — ACQUISITION
On December 28, 2020, VF acquired 100% of the outstanding shares of Supreme Holdings, Inc. ("Supreme") for $2.2 billion in cash, which is subject to working capital and other adjustments. The transaction also included $0.2 billion of cash acquired by VF. The preliminary purchase price was primarily funded with cash on hand.
The acquisition of Supreme includes a contingent arrangement that may require additional cash consideration to be paid to the selling shareholders of Supreme ranging from zero to $300.0 million, subject to the achievement of certain financial targets over the one-year earn-out period ending January 31, 2022. The initial estimated fair value of the contingent consideration of $207.0 million is included in the preliminary purchase price and was reported in the other liabilities line item in the Consolidated Balance Sheet at March 2021. The estimated fair value of the contingent consideration was determined based on the probability-weighted present value of various future cash payment outcomes. In subsequent reporting periods, the contingent consideration liability is remeasured at fair value with changes recognized in the selling, general and administrative expenses line item in the Consolidated Statements of Operations. Refer to Note 16 for additional information on fair value measurements.
Supreme was a privately-held company based in New York, New York and is a global streetwear leader that sells apparel, accessories and footwear under its namesake brand, Supreme®, through direct-to-consumer channels, including digital. The acquisition of Supreme accelerates VF's long-term growth
strategy and builds on a long-standing relationship between Supreme and VF, with the Supreme® brand being a regular collaborator with VF's Vans®, The North Face® and Timberland® brands. The acquisition also provides VF with deeper access to attractive consumer segments and the ability to leverage VF's enterprise platforms and capabilities to enable sustainable long-term growth.
In connection with the acquisition, VF deposited in escrow 605,050 shares of VF Common Stock. The common shares are subject to certain future service requirements and vest over periods of up to four years. For accounting purposes, VF will recognize the stock-based compensation cost for the fair value of these awards of $51.7 million over the vesting periods.
For the three months ended June 2021, Supreme contributed revenues of $145.7 million and net income of $26.3 million. The results of Supreme have been reported in the Active segment since the date of acquisition. Total transaction expenses for the Supreme acquisition were $8.7 million, all of which were recognized in the year ended March 2021 in the selling, general and administrative expenses line item in the Consolidated Statement of Operations.
The allocation of the purchase price is preliminary and subject to change, primarily for certain income tax matters and final adjustments for net working capital. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the valuation date.
The following table summarizes the preliminary estimated fair values of the Supreme assets acquired and liabilities assumed at the date of acquisition:
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(In thousands)
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December 28, 2020
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Cash and equivalents
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$
|
218,104
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Accounts receivable
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19,698
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Inventories
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44,937
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Other current assets
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|
35,091
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Property, plant and equipment
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18,914
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Intangible asset
|
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1,201,000
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Operating lease right-of-use assets
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|
55,668
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Other assets
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|
58,479
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Total assets acquired
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1,651,891
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Accounts payable
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|
25,717
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Other current liabilities
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|
78,205
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Operating lease liabilities
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|
53,062
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Deferred income tax liabilities
|
|
275,718
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Other liabilities
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|
35,245
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Total liabilities assumed
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|
467,947
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|
|
Net assets acquired
|
|
1,183,944
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Goodwill
|
|
1,250,311
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Purchase price
|
|
$
|
2,434,255
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VF Corporation Q1 FY22 Form 10-Q 12
The preliminary purchase price consisted of the following components:
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(In thousands)
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December 28, 2020
|
Cash consideration
|
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$
|
2,227,255
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Contingent consideration
|
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207,000
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Purchase price
|
|
$
|
2,434,255
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The goodwill is attributable to our ability to expand the Supreme® brand into new markets, the acquired workforce and future collaboration opportunities for the Supreme® brand. All of the goodwill was assigned to the Active segment and will not be deductible for tax purposes.
The Supreme® trademark, which management believes to have an indefinite life, has been valued at $1.2 billion using the relief-from-royalty method, which is an income valuation approach. The relief-from-royalty method requires the use of significant estimates and assumptions, including but not limited to, future revenues, growth rates, royalty rate, tax rates and discount rate.
The following unaudited pro forma summary presents consolidated information of VF as if the acquisition of Supreme had occurred on March 31, 2019:
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|
|
|
|
(In thousands, except per share amounts)
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Three Months Ended
June 2020
(unaudited)
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Total revenues
|
|
$
|
1,190,285
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|
Income (loss) from continuing operations
|
|
(264,463)
|
|
Earnings (loss) per common share from continuing operations
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|
|
Basic
|
|
$
|
(0.68)
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|
Diluted
|
|
(0.68)
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|
These pro forma amounts have been calculated after applying VF’s accounting policies and adjusting the results of Supreme to reflect the fair value adjustments to intangible assets, property, plant and equipment and inventory. The results of Supreme have also been adjusted for historical interest expense as the acquired business was debt-free on the acquisition date. These changes have been applied from March 31, 2019, with related tax effects.
Pro forma financial information is not necessarily indicative of VF’s operating results if the acquisition had been effected at the date indicated, nor is it necessarily indicative of future operating results. Amounts do not include any marketing leverage, or operating efficiencies that VF believes are achievable.
NOTE 5 — 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 the license of certain Dickies® occupational workwear products that have historically been sold through the business-to-business channel. As of March 28, 2020, the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria. 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, through the date of sale. The related held-for-sale assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, through the date of sale.
On June 28, 2021, VF completed the sale of the Occupational Workwear business. The Company received proceeds of $616.5 million, net of cash sold, resulting in an estimated after-tax gain on sale of $145.6 million, which is included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Operations for the three months ended June 2021, and is subject to working capital and other adjustments.
The results of the Occupational Workwear business were previously reported in the Work segment. The results of the Occupational Workwear business recorded in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Operations were income of $170.3 million (including an estimated after-tax gain on sale of $145.6 million) and a loss of $7.9 million for the three months ended June 2021 and June 2020, respectively.
Under the terms of a transition services agreement, the Company will provide certain support services for periods generally up to 12 months from the closing date of the transaction.
13 VF Corporation Q1 FY22 Form 10-Q
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items for the Occupational Workwear business that are included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Operations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Net revenues
|
|
$
|
181,424
|
|
|
|
$
|
125,333
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
117,193
|
|
|
|
101,470
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
38,735
|
|
|
|
33,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
194
|
|
|
|
293
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
6
|
|
|
|
—
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
|
25,696
|
|
|
|
(9,100)
|
|
|
|
|
|
|
|
Gain on the sale of discontinued operations before income taxes
|
|
133,571
|
|
|
|
—
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations before income taxes
|
|
159,267
|
|
|
|
(9,100)
|
|
|
|
|
|
|
|
Income tax benefit (a)
|
|
(11,006)
|
|
|
|
(1,229)
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
170,273
|
|
|
|
$
|
(7,871)
|
|
|
|
|
|
|
|
(a)Income tax benefit for the three months ended June 2021 includes $12.0 million of deferred tax benefit related to capital and other losses realized upon the sale of the Occupational Workwear 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)
|
|
June 2021
|
|
|
March 2021
|
|
June 2020
|
Cash and equivalents
|
|
$
|
—
|
|
|
|
$
|
34,132
|
|
|
$
|
42,986
|
|
Accounts receivable, net
|
|
—
|
|
|
|
103,835
|
|
|
64,065
|
|
Inventories
|
|
—
|
|
|
|
245,227
|
|
|
258,632
|
|
Other current assets
|
|
—
|
|
|
|
8,208
|
|
|
10,027
|
|
Property, plant and equipment, net
|
|
—
|
|
|
|
49,394
|
|
|
46,697
|
|
Intangible assets, net
|
|
—
|
|
|
|
54,471
|
|
|
54,471
|
|
Goodwill
|
|
—
|
|
|
|
43,530
|
|
|
43,530
|
|
Operating lease right-of-use assets
|
|
—
|
|
|
|
43,220
|
|
|
39,452
|
|
Other assets
|
|
—
|
|
|
|
5,561
|
|
|
5,275
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
—
|
|
|
|
$
|
587,578
|
|
|
$
|
565,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
|
$
|
59,965
|
|
|
$
|
27,810
|
|
Accrued liabilities
|
|
—
|
|
|
|
38,956
|
|
|
31,134
|
|
Operating lease liabilities
|
|
—
|
|
|
|
31,301
|
|
|
34,462
|
|
Other liabilities
|
|
—
|
|
|
|
3,863
|
|
|
2,284
|
|
Deferred income tax liabilities (a)
|
|
—
|
|
|
|
(8,828)
|
|
|
(4,407)
|
|
Total liabilities of discontinued operations
|
|
$
|
—
|
|
|
|
$
|
125,257
|
|
|
$
|
91,283
|
|
(a)Deferred income tax balances reflect VF's consolidated netting by jurisdiction.
NOTE 6 — INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2021
|
|
|
March 2021
|
|
June 2020
|
Finished products
|
|
$
|
1,139,926
|
|
|
|
$
|
983,472
|
|
|
$
|
1,314,399
|
|
Work-in-process
|
|
53,202
|
|
|
|
54,386
|
|
|
64,401
|
|
Raw materials
|
|
23,690
|
|
|
|
23,981
|
|
|
24,058
|
|
Total inventories
|
|
$
|
1,216,818
|
|
|
|
$
|
1,061,839
|
|
|
$
|
1,402,858
|
|
VF Corporation Q1 FY22 Form 10-Q 14
NOTE 7 — INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2021
|
|
|
March 2021
|
(In thousands)
|
|
Weighted
Average
Amortization
Period
|
|
Amortization
Method
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
Net
Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
19 years
|
|
Accelerated
|
|
|
$
|
264,354
|
|
|
$
|
150,845
|
|
|
$
|
113,509
|
|
|
|
$
|
117,207
|
|
License agreements
|
|
20 years
|
|
Accelerated
|
|
|
6,794
|
|
|
4,372
|
|
|
2,422
|
|
|
|
2,448
|
|
Other
|
|
9 years
|
|
Straight-line
|
|
|
6,941
|
|
|
5,151
|
|
|
1,790
|
|
|
|
1,986
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
|
117,721
|
|
|
|
121,641
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
2,910,165
|
|
|
|
2,907,904
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
$
|
3,027,886
|
|
|
|
$
|
3,029,545
|
|
Amortization expense for the three months ended June 2021 was $4.1 million. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five years beginning in Fiscal 2022 is $15.6 million, $14.6 million, $14.1 million, $13.6 million and $12.6 million, respectively.
NOTE 8 — GOODWILL
Changes in goodwill are summarized by reportable segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Outdoor
|
|
Active
|
|
Work
|
|
Total
|
|
Balance, March 2021
|
$
|
665,278
|
|
|
$
|
1,645,769
|
|
|
$
|
114,380
|
|
|
$
|
2,425,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
365
|
|
|
1,211
|
|
|
321
|
|
|
1,897
|
|
|
Balance, June 2021
|
$
|
665,643
|
|
|
$
|
1,646,980
|
|
|
$
|
114,701
|
|
|
$
|
2,427,324
|
|
|
Accumulated impairment charges for the Outdoor segment were $323.2 million as of June 2021 and March 2021. No impairment charges were recorded during the three months ended June 2021.
NOTE 9 — 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 and impairment. Components of lease cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
113,500
|
|
|
|
$
|
108,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other lease costs
|
|
27,939
|
|
|
|
14,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
141,439
|
|
|
|
$
|
123,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 2021 and 2020, the Company paid $119.4 million and $65.0 million of cash for operating leases, respectively. The increase was primarily driven by the timing of payments and lease concessions related to the effects of COVID-19 in the three months ended June 2020. During the three months ended June 2021 and 2020, the Company obtained $52.3 million and $190.2 million of right-of-use assets in exchange for lease liabilities, respectively. The decrease was primarily driven by the commencement of a new distribution center lease during the three months ended June 2020.
15 VF Corporation Q1 FY22 Form 10-Q
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)
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Service cost – benefits earned during the period
|
|
$
|
3,613
|
|
|
|
$
|
3,632
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligations
|
|
9,475
|
|
|
|
11,948
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
(19,385)
|
|
|
|
(20,539)
|
|
|
|
|
|
|
|
Settlement charge
|
|
948
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
|
2,840
|
|
|
|
2,863
|
|
|
|
|
|
|
|
Deferred prior service credits
|
|
(118)
|
|
|
|
(17)
|
|
|
|
|
|
|
|
Net periodic pension cost (income)
|
|
$
|
(2,627)
|
|
|
|
$
|
(2,113)
|
|
|
|
|
|
|
|
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, settlement charges and amortization of deferred actuarial losses and prior service credits, in the other income (expense), net line item in the Consolidated Statements of Operations.
VF contributed $4.1 million to its defined benefit plans during the three months ended June 2021, and intends to make approximately $23.4 million of contributions during the remainder of Fiscal 2022.
VF recorded a $0.9 million settlement charge in the other income (expense), net line item in the Consolidated Statement of Operations for the three months ended June 2021. The settlement charge related to the recognition of deferred actuarial losses resulting from lump sum payments of retirement benefits in the supplemental defined benefit pension plan. Actuarial assumptions used in the interim valuation were reviewed and revised as appropriate. The discount rate used to determine the supplemental defined benefit pension obligation as of June 2021 was 2.90%.
NOTE 11 — CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Stock
During the three months ended June 2021, 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 2021, March 2021 or June 2020. 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 relate 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 2021
|
|
|
March 2021
|
|
June 2020
|
Foreign currency translation and other
|
|
$
|
(663,120)
|
|
|
|
$
|
(700,173)
|
|
|
$
|
(685,236)
|
|
Defined benefit pension plans
|
|
(257,431)
|
|
|
|
(257,747)
|
|
|
(259,290)
|
|
Derivative financial instruments
|
|
(45,335)
|
|
|
|
(51,080)
|
|
|
46,985
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(965,886)
|
|
|
|
$
|
(1,009,000)
|
|
|
$
|
(897,541)
|
|
VF Corporation Q1 FY22 Form 10-Q 16
The changes in accumulated OCI, net of related taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 2021
|
|
(In thousands)
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
|
Balance, March 2021
|
$
|
(700,173)
|
|
|
$
|
(257,747)
|
|
|
$
|
(51,080)
|
|
|
$
|
(1,009,000)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
37,053
|
|
|
(2,411)
|
|
|
(4,371)
|
|
|
30,271
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
2,727
|
|
|
10,116
|
|
|
12,843
|
|
|
Net other comprehensive income (loss)
|
37,053
|
|
|
316
|
|
|
5,745
|
|
|
43,114
|
|
|
Balance, June 2021
|
$
|
(663,120)
|
|
|
$
|
(257,431)
|
|
|
$
|
(45,335)
|
|
|
$
|
(965,886)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Reclassifications out of accumulated OCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Three Months Ended June
|
|
|
|
Details About Accumulated Other Comprehensive Income (Loss) Components
|
Affected Line Item in the Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
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
|
|
|
(2,840)
|
|
|
|
(2,863)
|
|
|
|
|
|
|
|
Deferred prior service credits
|
Other income (expense), net
|
|
|
118
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension settlement charge
|
Other income (expense), net
|
|
|
(948)
|
|
|
|
—
|
|
|
|
|
|
|
|
Total before tax
|
|
|
|
(3,670)
|
|
|
|
(2,846)
|
|
|
|
|
|
|
|
Tax benefit
|
|
|
|
943
|
|
|
|
651
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
(2,727)
|
|
|
|
(2,195)
|
|
|
|
|
|
|
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Net revenues
|
|
|
(1,798)
|
|
|
|
171
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Cost of goods sold
|
|
|
(6,169)
|
|
|
|
16,705
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Selling, general and administrative expenses
|
|
|
(917)
|
|
|
|
1,607
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
|
(1,702)
|
|
|
|
1,770
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
Total before tax
|
|
|
|
(10,559)
|
|
|
|
20,280
|
|
|
|
|
|
|
|
Tax (expense) benefit
|
|
|
|
443
|
|
|
|
(4,107)
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
(10,116)
|
|
|
|
16,173
|
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax
|
|
|
$
|
(12,843)
|
|
|
|
$
|
(28,386)
|
|
|
|
|
|
|
|
17 VF Corporation Q1 FY22 Form 10-Q
NOTE 12 — STOCK-BASED COMPENSATION
Incentive Equity Awards Granted
During the three months ended June 2021, VF granted stock options to employees and nonemployee members of VF's Board of Directors to purchase 1,491,580 shares of its Common Stock at an exercise price of $77.78 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 2021
|
|
Expected volatility
|
|
28% to 40%
|
|
Weighted average expected volatility
|
|
36%
|
|
Expected term (in years)
|
|
6.2 to 7.9
|
|
Weighted average dividend yield
|
|
2.6%
|
|
Risk-free interest rate
|
|
0.04% to 1.56%
|
|
Weighted average fair value at date of grant
|
|
$20.20
|
|
During the three months ended June 2021, VF granted 323,718 performance-based restricted stock units ("RSUs") to employees that enable them to receive shares of VF Common Stock at the end of a three-year performance cycle. The fair market value of VF Common Stock at the date the units were granted was $77.78 per share. 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 financial targets include 50% weighting based on VF's revenue growth over the three-year period compared to a group of industry peers and 50% weighting based on VF's total shareholder return ("TSR") over the three-year period compared to the TSR for companies included in the Standard & Poor's 500 Consumer Discretionary Index. The grant date fair value of the TSR portion of the performance-based RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was $101.56 per share. Additionally, the actual number of performance-based RSUs earned may be adjusted upward or downward by 25% of the target award, based on VF's gross margin performance over the three-year period.
During the three months ended June 2021, VF granted 12,023 nonperformance-based 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 $77.78 per share.
In addition, VF granted 280,202 nonperformance-based RSUs to employees during the three months ended June 2021. These units generally vest over periods of up to four years from the date of grant and each unit entitles the holder to one share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was $77.78 per share.
VF also granted 31,214 restricted shares of VF Common Stock to certain members of management during the three months ended June 2021. 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 $77.78 per share.
NOTE 13 — INCOME TAXES
The effective income tax rate for the three months ended June 2021 was 14.1% compared to 11.2% in the 2020 period. The three months ended June 2021 included a net discrete tax benefit of $2.3 million, which included a $1.2 million net tax expense related to unrecognized tax benefits and interest, a $1.1 million tax benefit related to stock compensation, and a $2.4 million net tax benefit related to tax rate change on deferred tax items. Excluding the $2.3 million net discrete tax benefit in the 2021 period, the effective income tax rate would have been 15.3%. 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%. Without discrete items, the effective income tax rate for the three months ended June 2021 increased by 3.5% compared
with the 2020 period primarily due to losses generated in the prior year.
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
VF Corporation Q1 FY22 Form 10-Q 18
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. During 2015, the European Union Commission (“EU”) investigated and announced its decision that these rulings were illegal and ordered the tax benefits to be collected from affected companies, including VF. Requests for annulment were filed by Belgium and VF Europe BVBA individually. During 2017 and 2018, VF Europe BVBA was assessed and paid €35.0 million tax and interest, which was recorded as an income tax receivable based on the expected success of the requests for annulment. During 2019, the General
Court annulled the EU decision and the EU subsequently appealed the General Court’s annulment. Both requests remain open and unresolved. If this matter is adversely resolved, these amounts will not be collected by VF.
During the three months ended June 2021, the amount of net unrecognized tax benefits and associated interest increased by $5.9 million to $196.1 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 $34.6 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $12.1 million would reduce income tax expense.
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 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Outdoor
|
|
$
|
617,754
|
|
|
|
$
|
341,228
|
|
|
|
|
|
|
|
Active
|
|
1,302,068
|
|
|
|
571,316
|
|
|
|
|
|
|
|
Work
|
|
274,735
|
|
|
|
162,430
|
|
|
|
|
|
|
|
Other
|
|
—
|
|
|
|
1,319
|
|
|
|
|
|
|
|
Total segment revenues
|
|
$
|
2,194,557
|
|
|
|
$
|
1,076,293
|
|
|
|
|
|
|
|
Segment profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Outdoor
|
|
$
|
(71,747)
|
|
|
|
$
|
(160,711)
|
|
|
|
|
|
|
|
Active
|
|
270,862
|
|
|
|
7,136
|
|
|
|
|
|
|
|
Work
|
|
41,004
|
|
|
|
(11,401)
|
|
|
|
|
|
|
|
Other
|
|
(282)
|
|
|
|
(2,361)
|
|
|
|
|
|
|
|
Total segment profit (loss)
|
|
239,837
|
|
|
|
(167,337)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other expenses
|
|
(27,912)
|
|
|
|
(117,659)
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(32,775)
|
|
|
|
(27,949)
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
179,150
|
|
|
|
$
|
(312,945)
|
|
|
|
|
|
|
|
19 VF Corporation Q1 FY22 Form 10-Q
NOTE 15 — EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Earnings (loss) per share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
153,972
|
|
|
|
$
|
(277,742)
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
391,351
|
|
|
|
388,695
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
0.39
|
|
|
|
$
|
(0.71)
|
|
|
|
|
|
|
|
Earnings (loss) per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
153,972
|
|
|
|
$
|
(277,742)
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
391,351
|
|
|
|
388,695
|
|
|
|
|
|
|
|
Incremental shares from stock options and other dilutive securities
|
|
2,777
|
|
|
|
2,096
|
|
|
|
|
|
|
|
Adjusted weighted average common shares outstanding
|
|
394,128
|
|
|
|
390,791
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
0.39
|
|
|
|
$
|
(0.71)
|
|
|
|
|
|
|
|
Outstanding options to purchase approximately 2.9 million and 5.4 million shares were excluded from the calculations of diluted earnings per share for the three-month periods ended June 2021 and June 2020, respectively because the effect of their inclusion would have been anti-dilutive.
In addition, 0.6 million and 0.4 million shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for the three-month periods ended June 2021 and June 2020, respectively, because these units were not considered to be contingent outstanding shares in those periods.
NOTE 16 — FAIR VALUE MEASUREMENTS
Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable
data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities, or (iii) information derived from or corroborated by observable market data.
•Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
VF Corporation Q1 FY22 Form 10-Q 20
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 2021
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
368,227
|
|
|
$
|
368,227
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Time deposits
|
4,856
|
|
|
4,856
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
598,806
|
|
|
598,806
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
13,838
|
|
|
—
|
|
|
13,838
|
|
|
—
|
|
|
Deferred compensation
|
143,633
|
|
|
143,633
|
|
|
—
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
65,725
|
|
|
—
|
|
|
65,725
|
|
|
—
|
|
|
Deferred compensation
|
154,338
|
|
|
—
|
|
|
154,338
|
|
|
—
|
|
|
Contingent consideration
|
134,000
|
|
|
—
|
|
|
—
|
|
|
134,000
|
|
|
|
Total Fair Value
|
|
Fair Value Measurement Using (a)
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
March 2021
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
216,591
|
|
|
$
|
216,591
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Time deposits
|
102,914
|
|
|
102,914
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
598,806
|
|
|
598,806
|
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments
|
13,257
|
|
|
—
|
|
|
13,257
|
|
|
—
|
|
|
Deferred compensation
|
141,072
|
|
|
141,072
|
|
|
—
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
74,255
|
|
|
—
|
|
|
74,255
|
|
|
—
|
|
|
Deferred compensation
|
150,713
|
|
|
—
|
|
|
150,713
|
|
|
—
|
|
|
Contingent consideration
|
207,000
|
|
|
—
|
|
|
—
|
|
|
207,000
|
|
|
(a)There were no transfers among the levels within the fair value hierarchy during the three months ended June 2021 or the year ended March 2021.
The following table presents the changes in fair value of the contingent consideration liability designated as Level 3:
|
|
|
|
|
|
|
|
|
(In thousands)
|
Contingent Consideration
|
Balance, March 2021
|
$
|
207,000
|
|
|
|
|
|
Change in fair value
|
(73,000)
|
|
|
Balance, June 2021
|
$
|
134,000
|
|
|
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 that approximates 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.
The contingent consideration liability represents the estimated amount of additional cash consideration to be paid to the selling shareholders of Supreme, which is dependent upon the achievement of certain financial targets over the one-year earn-out period ending January 31, 2022. The estimated fair value of the contingent consideration liability, which could range from zero to $300.0 million, was $207.0 million as of March 2021. The contingent consideration liability is remeasured at fair value with changes recognized in the selling, general and administrative expenses line item in the Consolidated Statements of
21 VF Corporation Q1 FY22 Form 10-Q
Operations. As of June 2021, the fair value of the contingent consideration liability was remeasured to an estimated fair value of $134.0 million based on the probability-weighted present value of various future cash payment outcomes resulting from the estimated achievement levels of the financial targets. Refer to Note 4 for additional information on the acquisition of Supreme.
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 2021 and March 2021, their carrying values approximated fair value. Additionally, at June 2021 and March 2021, the carrying values of VF’s long-term debt, including the current portion, were $5,727.3 million and $5,710.2 million, respectively, compared with fair values of $6,082.1 million and $6,017.3 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 $2.7 billion at June 2021, $2.5 billion at March 2021 and $2.9 billion at June 2020, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, South Korean won, Mexican peso, 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 2021
|
|
|
March 2021
|
|
June 2020
|
|
|
June 2021
|
|
|
March 2021
|
|
June 2020
|
Foreign currency exchange contracts designated as hedging instruments
|
|
$
|
13,580
|
|
|
|
$
|
12,301
|
|
|
$
|
53,810
|
|
|
|
$
|
(64,616)
|
|
|
|
$
|
(73,087)
|
|
|
$
|
(13,329)
|
|
Foreign currency exchange contracts not designated as hedging instruments
|
|
258
|
|
|
|
956
|
|
|
14,775
|
|
|
|
(1,109)
|
|
|
|
(1,168)
|
|
|
(2,302)
|
|
Total derivatives
|
|
$
|
13,838
|
|
|
|
$
|
13,257
|
|
|
$
|
68,585
|
|
|
|
$
|
(65,725)
|
|
|
|
$
|
(74,255)
|
|
|
$
|
(15,631)
|
|
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 2021
|
|
|
March 2021
|
|
June 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
|
$
|
13,838
|
|
|
$
|
(65,725)
|
|
|
|
$
|
13,257
|
|
|
$
|
(74,255)
|
|
|
$
|
68,585
|
|
|
$
|
(15,631)
|
|
Gross amounts not offset in the Consolidated Balance Sheets
|
|
(13,825)
|
|
|
13,825
|
|
|
|
(13,246)
|
|
|
13,246
|
|
|
(15,607)
|
|
|
15,607
|
|
Net amounts
|
|
$
|
13
|
|
|
$
|
(51,900)
|
|
|
|
$
|
11
|
|
|
$
|
(61,009)
|
|
|
$
|
52,978
|
|
|
$
|
(24)
|
|
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 2021
|
|
|
March 2021
|
|
June 2020
|
Other current assets
|
|
$
|
6,746
|
|
|
|
$
|
7,440
|
|
|
$
|
56,428
|
|
Accrued liabilities
|
|
(61,391)
|
|
|
|
(66,351)
|
|
|
(10,103)
|
|
Other assets
|
|
7,092
|
|
|
|
5,817
|
|
|
12,157
|
|
Other liabilities
|
|
(4,334)
|
|
|
|
(7,904)
|
|
|
(5,528)
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VF Corporation Q1 FY22 Form 10-Q 22
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:
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(In thousands)
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Gain (Loss) on Derivatives Recognized in OCI
Three Months Ended June
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Cash Flow Hedging Relationships
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2021
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2020
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Foreign currency exchange
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$
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(4,563)
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$
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(7,595)
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(In thousands)
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Gain (Loss) Reclassified from Accumulated OCI into Income (Loss)
Three Months Ended June
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Location of Gain (Loss)
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2021
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2020
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Net revenues
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$
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(1,798)
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$
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171
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Cost of goods sold
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(6,169)
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16,705
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Selling, general and administrative expenses
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(917)
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1,607
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Other income (expense), net
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(1,702)
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1,770
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Interest expense
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27
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27
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Total
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$
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(10,559)
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$
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20,280
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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.
During the three months ended June 2020, primarily as a result of the COVID-19 pandemic and actions expected to be taken by the Company, certain derivative contracts were de-designated as the 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 impact of de-designated derivative contracts was not significant in the three months ended June 2021.
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 2021 and June 2020.
Other Derivative Information
At June 2021, accumulated OCI included $63.3 million of pre-tax net deferred losses for foreign currency exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
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 2021 and June 2020, the Company recognized after-tax losses of $11.5 million and $18.1 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.
23 VF Corporation Q1 FY22 Form 10-Q
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 2021, VF recognized $4.3 million of restructuring charges, related to approved initiatives. Of the restructuring charges recognized in the three months ended June 2021, $2.9 million were reflected in selling, general and administrative expenses, and $1.4 million in cost of goods sold, respectively. The Company has not recognized any
significant incremental costs related to accruals for the year ended March 2021 or prior periods.
Of the $54.9 million total restructuring accrual at June 2021, $52.8 million is expected to be paid out within the next 12 months and is classified within accrued liabilities. The remaining $2.1 million will be paid out beyond the next 12 months and thus is classified within other liabilities.
The components of the restructuring charges are as follows:
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Three Months Ended June
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(In thousands)
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2021
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2020
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Severance and employee-related benefits
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$
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2,874
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$
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18,509
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Accelerated depreciation
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1,431
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3,807
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Contract termination and other
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—
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141
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Total restructuring charges
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$
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4,305
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$
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22,457
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Restructuring costs by business segment are as follows:
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Three Months Ended June
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(In thousands)
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2021
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2020
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Outdoor
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$
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2,223
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$
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4,750
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Active
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732
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370
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Work
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—
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429
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Other
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1,350
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16,908
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Total
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$
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4,305
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$
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22,457
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The activity in the restructuring accrual for the three-month period ended June 2021 was as follows:
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(In thousands)
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Severance
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Other
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Total
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Accrual at March 2021
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$
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59,810
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$
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6,944
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$
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66,754
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Charges
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2,874
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—
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2,874
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Cash payments and settlements
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(12,929)
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(3,223)
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(16,152)
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Adjustments to accruals
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1,352
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5
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1,357
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Impact of foreign currency
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63
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5
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68
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Accrual at June 2021
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$
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51,170
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$
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3,731
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$
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54,901
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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 consolidated 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 $186.2 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 $136.3 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 EVENT
On July 27, 2021, VF’s Board of Directors declared a quarterly cash dividend of $0.49 per share, payable on September 20, 2021 to stockholders of record on September 10, 2021.
VF Corporation Q1 FY22 Form 10-Q 24