Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-5256
 
 
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Pennsylvania
 
23-1180120
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification number)
105 Corporate Center Boulevard
Greensboro, North Carolina 27408
(Address of principal executive offices)
(336) 424-6000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On July 29, 2017, there were 393,621,349 shares of the registrant’s common stock outstanding.
 



VF CORPORATION
Table of Contents
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Part I — Financial Information
Item 1 — Financial Statements (Unaudited)
VF CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
 
June 2017
 
December 2016
 
June 2016
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
$
672,542

 
$
1,227,862

 
$
676,262

Accounts receivable, less allowance for doubtful accounts of: June 2017 – $18,817; December 2016 – $20,539; June 2016 – $24,229
1,155,674

 
1,161,393

 
1,121,053

Inventories
1,712,972

 
1,471,300

 
1,667,895

Other current assets
356,147

 
296,698

 
304,612

Current assets of discontinued operations
315

 
135,845

 
298,194

Total current assets
3,897,650

 
4,293,098

 
4,068,016

Property, plant and equipment, net
918,975

 
926,010

 
927,058

Intangible assets, net
1,895,287

 
1,797,271

 
1,921,151

Goodwill
1,736,407

 
1,708,323

 
1,767,525

Other assets
725,409

 
929,190

 
899,772

Other assets of discontinued operations

 
85,395

 
90,586

Total assets
$
9,173,728

 
$
9,739,287

 
$
9,674,108

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings
$
921,109

 
$
26,029

 
$
1,404,493

Current portion of long-term debt
253,783

 
253,689

 
3,566

Accounts payable
502,908

 
642,970

 
480,797

Accrued liabilities
753,343

 
827,507

 
720,374

Current liabilities of discontinued operations

 
35,205

 
51,403

Total current liabilities
2,431,143

 
1,785,400

 
2,660,633

Long-term debt
2,111,623

 
2,039,180

 
1,400,636

Other liabilities
986,623

 
977,076

 
967,729

Other liabilities of discontinued operations

 
(3,290
)
 
(3,327
)
Commitments and contingencies

 

 

Total liabilities
5,529,389

 
4,798,366

 
5,025,671

Stockholders’ equity
 
 
 
 
 
Preferred Stock, par value $1; shares authorized, 25,000,000; no shares outstanding at June 2017, December 2016 or June 2016

 

 

Common Stock, stated value $0.25; shares authorized, 1,200,000,000; shares outstanding at June 2017 – 393,308,684; December 2016 – 414,012,954; June 2016 – 415,352,893
98,327

 
103,503

 
103,838

Additional paid-in capital
3,398,901

 
3,333,423

 
3,269,656

Accumulated other comprehensive loss
(930,597
)
 
(1,041,463
)
 
(1,001,455
)
Retained earnings
1,077,708

 
2,545,458

 
2,276,398

Total stockholders’ equity
3,644,339

 
4,940,921

 
4,648,437

Total liabilities and stockholders’ equity
$
9,173,728

 
$
9,739,287

 
$
9,674,108

See notes to consolidated financial statements.

3


VF CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
 
Three Months Ended June
 
Six Months Ended June
 
2017
 
2016
 
2017
 
2016
Net sales
$
2,333,288

 
$
2,294,762

 
$
4,888,981

 
$
4,901,744

Royalty income
26,293

 
25,704

 
52,277

 
53,139

Total revenues
2,359,581

 
2,320,466

 
4,941,258

 
4,954,883

Costs and operating expenses
 
 
 
 
 
 
 
Cost of goods sold
1,187,011

 
1,185,247

 
2,473,696

 
2,535,947

Selling, general and administrative expenses
1,004,548

 
940,797

 
2,008,066

 
1,912,717

Total costs and operating expenses
2,191,559

 
2,126,044

 
4,481,762

 
4,448,664

Operating income
168,022

 
194,422

 
459,496

 
506,219

Interest income
3,583

 
2,236

 
7,101

 
4,244

Interest expense
(24,190
)
 
(23,630
)
 
(47,896
)
 
(45,658
)
Other income (expense), net
(1,653
)
 
1,501

 
(1,720
)
 
2,793

Income from continuing operations before income taxes
145,762

 
174,529

 
416,981

 
467,598

Income taxes
30,897

 
38,036

 
87,437

 
89,170

Income from continuing operations
114,865

 
136,493

 
329,544

 
378,428

Loss from discontinued operations, net of tax
(4,976
)
 
(85,478
)
 
(10,492
)
 
(67,144
)
Net income
$
109,889

 
$
51,015

 
$
319,052

 
$
311,284

Earnings (loss) per common share - basic
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.33

 
$
0.81

 
$
0.90

Discontinued operations
(0.01
)
 
(0.21
)
 
(0.03
)
 
(0.16
)
Total earnings per common share - basic
$
0.28

 
$
0.12

 
$
0.79

 
$
0.74

Earnings (loss) per common share - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.32

 
$
0.81

 
$
0.89

Discontinued operations
(0.01
)
 
(0.20
)
 
(0.03
)
 
(0.16
)
Total earnings per common share - diluted
$
0.27

 
$
0.12

 
$
0.78

 
$
0.73

Cash dividends per common share
$
0.42

 
$
0.37

 
$
0.84

 
$
0.74

See notes to consolidated financial statements.

4


VF CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
 
Three Months Ended June
 
Six Months Ended June
 
2017
 
2016
 
2017
 
2016
Net income
$
109,889

 
$
51,015

 
$
319,052

 
$
311,284

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation and other
 
 
 
 
 
 
 
Gains (losses) arising during the period
87,343

 
(73,489
)
 
135,168

 
44,068

Less income tax effect
21,729

 
1,166

 
26,202

 
(1,112
)
Defined benefit pension plans
 
 
 
 
 
 
 
Amortization of net deferred actuarial losses
10,002

 
16,319

 
21,384

 
32,625

Amortization of deferred prior service costs
645

 
645

 
1,357

 
1,292

Current year actuarial gains (losses) and curtailment loss

 

 
20,996

 

Less income tax effect
(4,015
)
 
(6,951
)
 
(16,129
)
 
(13,020
)
Derivative financial instruments
 
 
 
 
 
 
 
Gains (losses) arising during the period
(56,339
)
 
39,049

 
(66,433
)
 
23,266

Less income tax effect
7,863

 
(14,916
)
 
10,423

 
(8,831
)
Reclassification to net income for (gains) losses realized
(11,319
)
 
(21,024
)
 
(27,810
)
 
(59,319
)
Less income tax effect
1,534

 
8,031

 
5,708

 
22,798

Other comprehensive income (loss)
57,443

 
(51,170
)
 
110,866

 
41,767

Comprehensive income (loss)
$
167,332

 
$
(155
)
 
$
429,918

 
$
353,051

See notes to consolidated financial statements.


5


VF CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June
 
2017
 
2016
Operating activities
 
 
 
Net income
$
319,052

 
$
311,284

Adjustments to reconcile net income to cash (used) provided by operating activities:
 
 
 
Depreciation and amortization
131,908

 
137,472

Stock-based compensation
34,461

 
41,560

Provision for doubtful accounts
6,483

 
10,573

Pension expense in excess of contributions
12,987

 
19,961

Loss on sale of businesses
5,186

 
100,556

Other, net
30,836

 
(18,958
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
43,271

 
124,934

Inventories
(207,984
)
 
(215,617
)
Accounts payable
(158,133
)
 
(180,457
)
Income taxes
(127,039
)
 
(162,857
)
Accrued liabilities
(70,129
)
 
(83,050
)
Other assets and liabilities
(25,445
)
 
(68,813
)
Cash (used) provided by operating activities
(4,546
)
 
16,588

Investing activities
 
 
 
Proceeds from sale of businesses, net of cash sold
208,215

 

Capital expenditures
(78,211
)
 
(82,642
)
Software purchases
(33,731
)
 
(17,361
)
Other, net
(7,148
)
 
(1,297
)
Cash provided (used) by investing activities
89,125

 
(101,300
)
Financing activities
 
 
 
Net increase in short-term borrowings
894,708

 
954,424

Payments on long-term debt
(1,821
)
 
(11,536
)
Payment of debt issuance costs

 
(327
)
Purchases of treasury stock
(1,200,304
)
 
(833,846
)
Cash dividends paid
(337,606
)
 
(309,583
)
Proceeds from issuance of Common Stock, net of shares withheld for taxes
14,713

 
12,417

Cash used by financing activities
(630,310
)
 
(188,451
)
Effect of foreign currency rate changes on cash, cash equivalents and restricted cash
(8,355
)
 
8,342

Net change in cash, cash equivalents and restricted cash
(554,086
)
 
(264,821
)
Cash, cash equivalents and restricted cash – beginning of year
1,231,026

 
946,396

Cash, cash equivalents and restricted cash – end of period
$
676,940

 
$
681,575

 
 
 
 
Balances per Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
$
672,542

 
$
676,262

Other current assets
3,716

 
4,583

Other assets
682

 
730

Total cash, cash equivalents and restricted cash
$
676,940

 
$
681,575

See notes to consolidated financial statements.

6


VF CORPORATION
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)
 
 
 
 
 
Additional Paid-in Capital
 
Accumulated
Other Comprehensive Loss
 
 
 
Common Stock
 
 
 
Retained Earnings
 
Shares
 
Amounts
 
 
 
Balance, December 2015
426,614,274

 
$
106,654

 
$
3,192,675

 
$
(1,043,222
)
 
$
3,128,731

Net income

 

 

 

 
1,074,106

Dividends on Common Stock

 

 

 

 
(635,994
)
Purchase of treasury stock
(15,932,075
)
 
(3,983
)
 

 

 
(996,485
)
Stock-based compensation, net
3,330,755

 
832

 
140,748

 

 
(24,900
)
Foreign currency translation and other

 

 

 
(76,410
)
 

Defined benefit pension plans

 

 

 
69,498

 

Derivative financial instruments

 

 

 
8,671

 

Balance, December 2016
414,012,954

 
103,503

 
3,333,423

 
(1,041,463
)
 
2,545,458

Adoption of new accounting standard

 

 

 

 
(237,764
)
Net income

 

 

 

 
319,052

Dividends on Common Stock

 

 

 

 
(337,606
)
Purchase of treasury stock
(22,212,322
)
 
(5,553
)
 

 

 
(1,194,751
)
Stock-based compensation, net
1,508,052

 
377

 
65,478

 

 
(16,681
)
Foreign currency translation and other

 

 

 
161,370

 

Defined benefit pension plans

 

 

 
27,608

 

Derivative financial instruments

 

 

 
(78,112
)
 

Balance, June 2017
393,308,684

 
$
98,327

 
$
3,398,901

 
$
(930,597
)
 
$
1,077,708

See notes to consolidated financial statements.


7


VF CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note A – Basis of Presentation
VF Corporation (together with its subsidiaries, collectively known as “VF” or “the Company”) uses a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to periods ended June 2017, December 2016 and June 2016 relate to the fiscal periods ended on July 1, 2017, December 31, 2016 and July 2, 2016, respectively. During the first quarter of 2017, the Company approved a change in fiscal year end to the Saturday closest to March 31 from the Saturday closest to December 31. Accordingly, the Company’s 2017 fiscal year will end as planned on December 30, 2017, followed by a three-month transition period from December 31, 2017 through March 31, 2018. The Company’s next fiscal year will run from April 1, 2018 through March 30, 2019 (“fiscal 2019”).
On April 28, 2017, VF completed the sale of its Licensed Sports Group (“LSG”) business. As a result, VF has reported the operating results for this business in the loss from discontinued operations, net of tax line in the Consolidated Statements of Income for all periods presented. In addition, the related assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets through the date of sale. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business and hold the assets of the JanSport® brand collegiate licensing business for sale. During the first quarter of 2017, VF began to separately report the results of our JanSport® brand collegiate business as discontinued operations in our Consolidated Statements of Income, and present the related assets as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented.
In addition, VF completed the sale of its Contemporary Brands coalition on August 26, 2016, and has reported the operating results for this business in the loss from discontinued operations, net of tax line in the Consolidated Statements of Income for the three and six months ended June 2016. The related assets and liabilities have been reported as current assets and liabilities of discontinued operations in the Consolidated Balance Sheet at June 2016. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note B for additional information on discontinued operations.
The accompanying unaudited 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 December 2016 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 and six months ended June 2017 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 30, 2017. For further information, refer to the consolidated financial statements and notes included in VF’s Annual Report on Form 10-K for the year ended December 2016 (“2016 Form 10-K”).
Note B – Discontinued Operations
The Company continuously assesses the composition of our portfolio to ensure it is aligned with our strategic objectives and positioned to maximize growth and return to our shareholders.
Divestiture of the Licensing Business
On April 28, 2017, VF completed the sale of LSG to Fanatics, Inc. for $225.0 million in cash, subject to working capital adjustments.  LSG includes the Majestic® brand, which supplies apparel and fanware through licensing agreements with U.S. and international professional sports leagues and teams, and was previously included within our Imagewear coalition. Under the terms of the transition services agreement, the Company will provide certain support services for periods ranging from three to 24 months from the closing date of the transaction. Revenue and expense items associated with the transition services are primarily recorded in the Imagewear coalition.
Through the end of the second quarter of 2017, VF has received net proceeds of $208.2 million and recorded an estimated after-tax loss on sale of $4.4 million, which is included in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income for the first six months of 2017. The adjustment to the estimated after-tax loss on sale was $3.0 million in the second quarter of 2017. VF expects to finalize the working capital adjustments during the third quarter of 2017.

8


Beginning in the first quarter of 2017, VF has reported the results of LSG in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income; accordingly the results have been excluded from continuing operations and segment results for all periods presented. The LSG results, including the estimated loss on sale, recorded in the loss from discontinued operations, net of tax line item were losses of $4.6 million and $4.9 million for the second quarter and first six months of 2017, respectively, and income of $11.8 million and $27.0 million for the second quarter and first six months of 2016, respectively. Prior to the sale, the related assets and liabilities of LSG were reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.
In conjunction with the LSG divestiture, VF executed its plan to entirely exit all of its licensing businesses, and has classified the assets of the JanSport® brand collegiate business as held-for-sale in VF’s Consolidated Balance Sheets for all periods presented. The assets of the JanSport® brand collegiate business are recorded at their fair value of $0.3 million at June 2017.
Management determined that the expected sale of the JanSport® brand collegiate business met the criteria for presentation as discontinued operations in the first quarter of 2017. Accordingly, the results of the JanSport® brand collegiate business have been presented as discontinued operations in VF’s Consolidated Statements of Income beginning in the first quarter of 2017, and thus have been excluded from continuing operations and segment results for all periods presented. The JanSport® brand collegiate results, including the estimated loss on sale, recorded in the loss from discontinued operations, net of tax line item were losses of $0.4 million and $5.6 million for the second quarter and first six months of 2017, respectively, and losses of $0.0 million and $0.3 million for the second quarter and first six months of 2016, respectively. The JanSport® brand collegiate business was previously included within our Outdoor & Action Sports coalition.
Certain corporate overhead and other costs previously allocated to the licensing business for segment reporting purposes do not qualify for classification within discontinued operations and have been reallocated to continuing operations. 
Divestiture of the Contemporary Brands Coalition
On August 26, 2016, VF completed the sale of its Contemporary Brands coalition to Delta Galil Industries, Ltd. for $116.9 million. The Contemporary Brands coalition included the businesses of the 7 For All Mankind®, Splendid®, and Ella Moss® brands (the “Businesses”) and was previously disclosed as a separate reportable segment of VF.
The transaction resulted in an after-tax loss on sale of $104.4 million, $100.6 million of which was included in the loss from discontinued operations, net of tax line item in the Consolidated Statements of Income for the second quarter and first half of 2016.
VF has reported the results of the Businesses as discontinued operations for the second quarter and first six months of 2016 and excluded them from continuing operations and segment results. The results of the Businesses, including the loss on sale, recorded in the loss from discontinued operations, net of tax line item for the second quarter and first six months of 2016 were losses of $97.3 million and $93.9 million, respectively. The assets and liabilities of the Businesses have been reported as current assets and liabilities of discontinued operations in the Consolidated Balance Sheet at June 2016.
VF is providing certain support services under transition services agreements for a limited period of time. These support services did not have a material impact on VF’s Consolidation Statement of Income for the six months ended June 2017.

9


Summarized Discontinued Operations Financial Information
The following table summarizes the major line items included in the loss from discontinued operations for the divestitures of the Licensing Business and Contemporary Brands coalition:
 
Three Months Ended June
 
Six Months Ended June
In thousands
2017
 
2016
 
2017
 
2016
Revenues
$
32,495

 
$
195,072

 
$
153,825

 
$
399,955

Cost of goods sold
26,371

 
113,033

 
114,592

 
234,339

Selling, general and administrative expenses
9,081

 
62,738

 
34,718

 
121,860

Interest expense, net
(7
)
 
(27
)
 
(25
)
 
(162
)
Other income (expense), net

 
(2
)
 

 
(4
)
Income (loss) from discontinued operations before income taxes
(2,964
)
 
19,272

 
4,490

 
43,590

Estimated loss on the sale of discontinued operations before income taxes
(6,386
)
 
(149,836
)
 
(9,917
)
 
(149,836
)
Total loss from discontinued operations before income taxes
(9,350
)
 
(130,564
)
 
(5,427
)
 
(106,246
)
Income tax (expense) benefit(a)
4,374

 
45,086

 
(5,065
)
 
39,102

Loss from discontinued operations, net of tax
$
(4,976
)
 
$
(85,478
)
 
$
(10,492
)
 
$
(67,144
)
(a) 
Income tax (expense) benefit for the three and six months ended June 2017 includes $1.1 million and $8.6 million, respectively, of deferred tax expense related to GAAP and tax basis differences for LSG.
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented.
In thousands
June 2017
 
December 2016
 
June 2016
Accounts receivable, net
$

 
$
36,285

 
$
68,803

Inventories

 
98,025

 
166,448

Other current assets, including cash and equivalents

 
1,535

 
6,290

Property, plant and equipment
315

 
13,640

 
53,702

Intangible assets

 
42,427

 
210,814

Goodwill

 
28,636

 
28,636

Other assets

 
692

 
3,923

Allowance to reduce assets to estimated fair value, less costs to sell



 
(149,836
)
Total assets of discontinued operations(a)
$
315

 
$
221,240

 
$
388,780

Accounts payable
$

 
$
21,674

 
$
30,339

Accrued liabilities

 
13,531

 
10,512

Other liabilities

 
791

 
11,365

Deferred income tax liabilities(b)

 
(4,081
)
 
(4,140
)
Total liabilities of discontinued operations(a)
$

 
$
31,915

 
$
48,076

(a) 
Amounts at December 2016 and June 2016 have been classified as current and long-term in the Consolidated Balance Sheets for the licensing business.
(b) 
Deferred income tax balances reflect VF’s consolidated netting by jurisdiction.
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. There were no significant capital expenditures and operating noncash items for any periods presented. Depreciation and amortization expense was $3.0 million and $8.1 million for the six months ended June 2017 and 2016, respectively.

10


Note C – Sale of Accounts Receivable
VF has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis. Under the agreement, up to $367.5 million of VF’s accounts receivable may be sold to the financial institution and remain outstanding at any point in time. VF removes the accounts receivable from the Consolidated Balance Sheets at the time of sale. VF does not retain any interests in the sold accounts receivable but continues to service and collect outstanding accounts receivable on behalf of the financial institution. During the first six months of 2017, VF sold total accounts receivable of $584.8 million. As of June 2017December 2016 and June 2016, $199.3 million, $209.5 million and $237.2 million, respectively, of the sold accounts receivable had been removed from the Consolidated Balance Sheets but remained outstanding with the financial institution. The funding fee charged by the financial institution is included in the other income (expense), net line item in the Consolidated Statements of Income, and was $1.0 million and $1.9 million for the second quarter and first six months of 2017, respectively, and $0.9 million and $1.7 million for the second quarter and first six months of 2016, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
Note D – Inventories
In thousands
June 2017
 
December 2016
 
June 2016
Finished products
$
1,511,930

 
$
1,278,504

 
$
1,479,644

Work-in-process
101,728

 
97,725

 
92,930

Raw materials
99,314

 
95,071

 
95,321

Total inventories
$
1,712,972

 
$
1,471,300

 
$
1,667,895

Note E – Intangible Assets
 
 
 
 
 
 
June 2017
 
December 2016
In thousands
 
Weighted
Average
Amortization
Period
 
Amortization
Methods
 
Cost
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Net
Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
20 years
 
Accelerated
 
$
258,849

 
$
127,868

 
$
130,981

 
$
128,422

License agreements
 
28 years
 
Accelerated and straight-line
 
109,146

 
61,134

 
48,012

 
49,682

Trademark
 
16 years
 
Straight-line
 
58,132

 
5,450

 
52,682

 
54,499

Other
 
9 years
 
Straight-line
 
9,465

 
3,485

 
5,980

 
3,297

Amortizable intangible assets, net
 
 
 
 
 
 
 
237,655

 
235,900

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
 
 
 
1,657,632

 
1,561,371

Intangible assets, net
 
 
 
 
 
 
 
 
 
$
1,895,287

 
$
1,797,271

Amortization expense for the second quarter and first six months of 2017 was $5.4 million and $10.7 million, respectively. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five 12-month periods beginning in 2017 is $21.5 million, $20.9 million, $20.3 million, $19.4 million and $18.5 million, respectively.
Note F – Goodwill
Changes in goodwill are summarized by business segment as follows:
In thousands
Outdoor &
Action Sports
 
Jeanswear
 
Imagewear
 
Sportswear
 
Total
Balance, December 2016
$
1,310,133

 
$
210,765

 
$
30,111

 
$
157,314

 
$
1,708,323

Currency translation
22,781

 
5,303

 

 

 
28,084

Balance, June 2017
$
1,332,914

 
$
216,068

 
$
30,111

 
$
157,314

 
$
1,736,407

Accumulated impairment charges were $82.7 million for the Outdoor & Action Sports coalition and $58.5 million for the Sportswear coalition as of the dates presented above. No impairment charges were recorded in the first six months of 2017.

11


Note G – Pension Plans
The components of pension cost for VF’s defined benefit plans were as follows:
 
Three Months Ended June
 
Six Months Ended June
In thousands
2017
 
2016
 
2017
 
2016
Service cost – benefits earned during the period
$
6,115

 
$
6,507

 
$
12,531

 
$
12,956

Interest cost on projected benefit obligations
14,709

 
17,041

 
29,524

 
34,075

Expected return on plan assets
(23,797
)
 
(24,926
)
 
(47,152
)
 
(49,845
)
Amortization of deferred amounts:
 
 
 
 
 
 
 
Net deferred actuarial losses
10,002

 
16,319

 
21,384

 
32,625

Deferred prior service costs
645

 
645

 
1,357

 
1,292

Net periodic pension cost
$
7,674

 
$
15,586

 
$
17,644

 
$
31,103

VF contributed $4.7 million to its defined benefit plans during the first six months of 2017, and intends to make approximately $10.1 million of additional contributions during the remainder of 2017.
In conjunction with the sale of the Licensing Business, the Company recognized a $1.1 million pension curtailment loss in the loss from discontinued operations, net of tax line item in the Consolidated Statement of Income in the first six months of 2017.
Note H – Capital and Accumulated Other Comprehensive Loss
During the first six months of 2017, the Company purchased 22.2 million shares of Common Stock in open market transactions for $1.2 billion under its share repurchase program authorized by VF’s Board of Directors. These transactions were treated as treasury stock transactions.
Common Stock outstanding is net of shares held in treasury which are, in substance, retired. During the first six months of 2017, VF restored 22.3 million treasury shares to an unissued status, after which they were no longer recognized as shares held in treasury. There were no shares held in treasury at the end of June 2017, December 2016 or June 2016. The excess of the cost of treasury shares acquired over the $0.25 per share stated value of Common Stock is deducted from retained earnings.
VF Common Stock is also held by the Company’s deferred compensation plans and is treated as treasury shares for financial reporting purposes. During the first half of 2017, the Company purchased 5,700 shares of Common Stock in open market transactions for $0.3 million. Balances related to shares held for deferred compensation plans were as follows:
In thousands, except share amounts
June 2017
 
December 2016
 
June 2016
Shares held for deferred compensation plans
343,975

 
439,667

 
477,867

Cost of shares held for deferred compensation plans
$
4,167

 
$
5,464

 
$
5,754

Accumulated Other Comprehensive Loss
Comprehensive income consists of net income and specified components of other comprehensive income (“OCI”), which relates to changes in assets and liabilities that are not included in net income under GAAP but are instead deferred and accumulated within a separate component of stockholders’ equity in the balance sheet. VF’s comprehensive income is presented in the Consolidated Statements of Comprehensive Income (Loss). The deferred components of OCI are reported, net of related income taxes, in accumulated OCI in stockholders’ equity, as follows:
In thousands
June 2017
 
December 2016
 
June 2016
Foreign currency translation and other
$
(633,209
)
 
$
(794,579
)
 
$
(675,213
)
Defined benefit pension plans
(275,089
)
 
(302,697
)
 
(351,298
)
Derivative financial instruments
(22,299
)
 
55,813

 
25,056

Accumulated other comprehensive loss
$
(930,597
)
 
$
(1,041,463
)
 
$
(1,001,455
)

12


The changes in accumulated OCI, net of related taxes, are as follows:
 
Three Months Ended June 2017
In thousands
Foreign Currency Translation and Other
 
Defined Benefit Pension Plans
 
Derivative Financial Instruments
 
Total
Balance, March 2017
$
(742,281
)
 
$
(281,721
)
 
$
35,962

 
$
(988,040
)
Other comprehensive income (loss) before reclassifications
109,072

 

 
(48,476
)
 
60,596

Amounts reclassified from accumulated other comprehensive income (loss)

 
6,632

 
(9,785
)
 
(3,153
)
Net other comprehensive income (loss)
109,072

 
6,632

 
(58,261
)
 
57,443

Balance, June 2017
$
(633,209
)
 
$
(275,089
)
 
$
(22,299
)
 
$
(930,597
)
 
 
Three Months Ended June 2016
In thousands
Foreign Currency Translation and Other
 
Defined Benefit Pension Plans
 
Derivative Financial Instruments
 
Total
Balance, March 2016
$
(602,890
)
 
$
(361,311
)
 
$
13,916

 
$
(950,285
)
Other comprehensive income (loss) before reclassifications
(72,323
)
 

 
24,133

 
(48,190
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
10,013

 
(12,993
)
 
(2,980
)
Net other comprehensive income (loss)
(72,323
)
 
10,013

 
11,140

 
(51,170
)
Balance, June 2016
$
(675,213
)
 
$
(351,298
)
 
$
25,056

 
$
(1,001,455
)
 
 
Six Months Ended June 2017
In thousands
Foreign Currency Translation and Other
 
Defined Benefit Pension Plans
 
Derivative Financial Instruments
 
Total
Balance, December 2016
$
(794,579
)
 
$
(302,697
)
 
$
55,813

 
$
(1,041,463
)
Other comprehensive income (loss) before reclassifications
161,370

 
12,253

 
(56,010
)
 
117,613

Amounts reclassified from accumulated other comprehensive income (loss)

 
15,355

 
(22,102
)
 
(6,747
)
Net other comprehensive income (loss)
161,370

 
27,608

 
(78,112
)
 
110,866

Balance, June 2017
$
(633,209
)
 
$
(275,089
)
 
$
(22,299
)
 
$
(930,597
)
 
Six Months Ended June 2016
In thousands
Foreign Currency Translation and Other
 
Defined Benefit Pension Plans
 
Derivative Financial Instruments
 
Total
Balance, December 2015
$
(718,169
)
 
$
(372,195
)
 
$
47,142

 
$
(1,043,222
)
Other comprehensive income (loss) before reclassifications
42,956

 

 
14,435

 
57,391

Amounts reclassified from accumulated other comprehensive income (loss)

 
20,897

 
(36,521
)
 
(15,624
)
Net other comprehensive income (loss)
42,956

 
20,897

 
(22,086
)
 
41,767

Balance, June 2016
$
(675,213
)
 
$
(351,298
)
 
$
25,056

 
$
(1,001,455
)

13


Reclassifications out of accumulated OCI are as follows:
In thousands
 
Affected Line Item in the Consolidated Statements of Income
 
Three Months Ended June
 
Six Months Ended June
Details About Accumulated Other Comprehensive Income (Loss) Components
 
 
2017
 
2016
 
2017
 
2016
Amortization of defined benefit pension plans:
 
 
 
 
 
 
 
 
Net deferred actuarial losses
 
(a) 
 
$
(10,002
)
 
$
(16,319
)
 
$
(21,384
)
 
$
(32,625
)
Deferred prior service costs
 
(a) 
 
(645
)
 
(645
)
 
(1,357
)
 
(1,292
)
Pension curtailment loss
 
Loss from discontinued operations, net of tax
 

 

 
(1,105
)
 

 
 
Total before tax
 
(10,647
)
 
(16,964
)
 
(23,846
)
 
(33,917
)
 
 
Tax benefit
 
4,015

 
6,951

 
8,491

 
13,020

 
 
Net of tax
 
(6,632
)
 
(10,013
)
 
(15,355
)
 
(20,897
)
Gains (losses) on derivative financial instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net sales
 
7,047

 
2,284

 
13,460

 
(2,679
)
Foreign exchange contracts
 
Cost of goods sold
 
5,653

 
20,772

 
16,927

 
64,609

Foreign exchange contracts
 
Selling, general and administrative expenses
 
(243
)
 
(1,535
)
 
(330
)
 
(2,513
)
Foreign exchange contracts
 
Other income (expense), net
 
37

 
624

 
86

 
2,127

Interest rate contracts
 
Interest expense
 
(1,175
)
 
(1,121
)
 
(2,333
)
 
(2,225
)
 
 
Total before tax
 
11,319

 
21,024

 
27,810

 
59,319

 
 
Tax expense
 
(1,534
)
 
(8,031
)
 
(5,708
)
 
(22,798
)
 
 
Net of tax
 
9,785

 
12,993

 
22,102

 
36,521

Total reclassifications for the period
 
Net of tax
 
$
3,153

 
$
2,980

 
$
6,747

 
$
15,624

(a) 
These accumulated OCI components are included in the computation of net periodic pension cost (refer to Note G for additional details).
Note I – Stock-based Compensation
During the second quarter of 2017, VF did not grant any stock-based compensation awards.
During the first quarter of 2017, VF granted stock options to employees and nonemployee members of VF’s Board of Directors to purchase 3,407,216 shares of its Common Stock at an exercise price of $53.47 per share. The exercise price of each option granted was equal to the fair market value of VF Common Stock on the date of grant. Employee stock options vest in equal annual installments over three years. Stock options granted to nonemployee members of VF’s Board of Directors become exercisable one year from the date of grant. The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates a range of assumptions for inputs as follows:
 
2017
Expected volatility
23% to 29%
Weighted average expected volatility
24%
Expected term (in years)
6.3 to 7.7
Weighted average dividend yield
2.8%
Risk-free interest rate
0.7% to 2.4%
Weighted average fair value at date of grant
$9.88
Also during the first quarter of 2017, VF granted 597,121 performance-based restricted stock units (“RSU”) to employees that enable them to receive shares of VF Common Stock at the end of a three-year period. Each performance-based RSU has a potential final payout ranging from zero to two shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of a three-year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. Shares are issued to participants in the year following the conclusion of each three-year performance period. The fair market value of VF Common Stock at the date the units were granted was $53.47 per share.

14


The actual number of performance-based RSUs earned may also be adjusted upward or downward by 25% of the target award, based on how VF’s total shareholder return (“TSR”) over the three-year period compares to the TSR for companies included in the Standard & Poor’s 500 Index. The grant date fair value of the TSR-based adjustment related to the 2017 performance-based RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was $2.67 per share.
VF granted 17,964 nonperformance-based RSUs to nonemployee members of the Board of Directors during the first quarter of 2017. These units vest upon grant and will be settled in shares of VF Common Stock one year from the date of grant. The fair market value of VF Common Stock at the date the units were granted was $53.47 per share.
VF granted 76,702 nonperformance-based RSUs to certain key employees in international jurisdictions during the first quarter of 2017. These units vest four years from the date of grant and each unit entitles the holder to one share of VF Common Stock. The fair market value of VF Common Stock at the date the units were granted was $53.47.
VF granted 263,770 restricted shares of VF Common Stock to certain members of management during the first quarter of 2017. These shares vest over periods of up to five years from the date of grant. The fair market value of VF Common Stock at the date the shares were granted was $53.47 per share.
Note J – Income Taxes
The effective income tax rate for the first half of 2017 was 21.0% compared to 19.1% in the first half of 2016. Discrete tax items had no net impact on the effective tax rate for the first six months of 2017, as a $4.9 million tax benefit related to stock compensation was fully offset by $3.0 million of net tax expense related to unrecognized tax benefits and interest, and $1.9 million of discrete tax expense related to the effects of tax rate changes. The first six months of 2016 included a net discrete tax benefit of $17.1 million, which included a $17.4 million tax benefit related to the early adoption of the accounting standards update on stock compensation, $3.8 million of net tax benefits related to the realization of previously unrecognized tax benefits and interest and $4.1 million of discrete tax expense related to the effects of tax rate changes. The $17.1 million net discrete tax benefit in 2016 reduced the effective income tax rate by 3.6%. Without discrete items, the effective income tax rate for the first half of 2017 decreased by 1.7% compared with the 2016 period primarily due to a higher percentage of income in lower tax rate jurisdictions and the impact of early adopting the accounting standards update regarding intra-entity asset transfers.
VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. In the U.S., the Internal Revenue Service (“IRS”) examinations for tax years through 2012 have been effectively settled. The examination of Timberland’s 2011 tax return is ongoing. The IRS has proposed material adjustments to Timberland’s 2011 tax return that would significantly impact the timing of cash tax payments and assessment of interest charges. The Company has formally disagreed with the proposed adjustments. During 2015, VF filed a petition to the U.S. Tax Court to begin the process of resolving this matter, but it has not yet reached a resolution. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and has concluded that VF’s provision for income taxes is adequate. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these audits and negotiations will conclude during the next 12 months.
VF was granted a ruling which lowered the effective income tax rate on taxable earnings for years 2010 through 2014 under Belgium’s excess profit tax regime. In February 2015, the European Union Commission (“EU”) opened a state aid investigation into Belgium’s rulings. On January 11, 2016, the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF. On March 22, 2016, the Belgium government filed an appeal seeking annulment of the EU decision. Additionally, on June 21, 2016, VF Europe BVBA filed its own application for annulment of the EU decision. Both of the listed requests for annulment remain open and unresolved.
On December 22, 2016, Belgium adopted a law which entitled the Belgium tax authorities to issue tax assessments, and demand timely payments from companies which benefited from the excess profits regime. On January 10, 2017, VF Europe BVBA received an assessment for €31.9 million tax and interest related to excess profits benefits received in prior years. VF Europe BVBA remitted €31.9 million ($33.9 million) on January 13, 2017, which was recorded as an income tax receivable based on the expected success of the aforementioned requests for annulment. If this matter is adversely resolved, these amounts will not be collected by VF.
During the first half of 2017, the amount of net unrecognized tax benefits and associated interest increased by $8.1 million to $158.7 million. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits and interest may decrease during the next 12 months by approximately $28.1 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $25.1 million would reduce income tax expense.

15


Note K – Business Segment Information
VF’s businesses are grouped into product categories, and by brands within those product categories, for internal financial reporting used by management. These groupings of businesses within VF are referred to as “coalitions” and are the basis for VF’s reportable segments. Financial information for VF’s reportable segments is as follows:
 
Three Months Ended June
 
Six Months Ended June
In thousands
2017
 
2016
 
2017
 
2016
Coalition revenues:
 
 
 
 
 
 
 
Outdoor & Action Sports
$
1,466,187

 
$
1,412,751

 
$
3,144,997

 
$
3,051,836

Jeanswear
600,807

 
629,180

 
1,248,249

 
1,339,770

Imagewear
150,008

 
134,830

 
284,974

 
276,641

Sportswear
114,259

 
114,875

 
212,576

 
233,272

Other
28,320

 
28,830

 
50,462

 
53,364

Total coalition revenues
$
2,359,581

 
$
2,320,466

 
$
4,941,258

 
$
4,954,883

Coalition profit: (a)
 
 
 
 
 
 
 
Outdoor & Action Sports
$
121,773

 
$
123,253

 
$
352,717

 
$
351,363

Jeanswear
84,757

 
108,843

 
202,776

 
246,137

Imagewear
25,572

 
24,377

 
49,972

 
50,516

Sportswear
11,345

 
6,300

 
10,276

 
11,076

Other
(293
)
 
(574
)
 
(2,488
)
 
(3,182
)
Total coalition profit
243,154

 
262,199

 
613,253

 
655,910

Corporate and other expenses (a)
(76,785
)
 
(66,276
)
 
(155,477
)
 
(146,898
)
Interest expense, net
(20,607
)
 
(21,394
)
 
(40,795
)
 
(41,414
)
Income from continuing operations before income taxes
$
145,762

 
$
174,529

 
$
416,981

 
$
467,598

 
(a) 
Certain corporate overhead and other costs of $6.0 million and $12.2 million for the three and six-month periods ended June 2016, previously allocated to the Imagewear and Outdoor & Action Sports coalitions for segment reporting purposes, have been reallocated to continuing operations as discussed in Note B.
Note L – Earnings Per Share
 
Three Months Ended June
 
Six Months Ended June
In thousands, except per share amounts
2017
 
2016
 
2017
 
2016
Earnings per share – basic:
 
 
 
 
 
 
 
Income from continuing operations
$
114,865

 
$
136,493

 
$
329,544

 
$
378,428

Weighted average common shares outstanding
397,065

 
415,991

 
404,527

 
418,870

Earnings per share from continuing operations
$
0.29

 
$
0.33

 
$
0.81

 
$
0.90

Earnings per share – diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
114,865

 
$
136,493

 
$
329,544

 
$
378,428

Weighted average common shares outstanding
397,065

 
415,991

 
404,527

 
418,870

Incremental shares from stock options and other dilutive securities
3,447

 
6,068

 
3,709

 
6,726

Adjusted weighted average common shares outstanding
400,512

 
422,059

 
408,236

 
425,596

Earnings per share from continuing operations
$
0.29

 
$
0.32

 
$
0.81

 
$
0.89

Outstanding options to purchase 10.3 million and 10.4 million shares of Common Stock were excluded from the calculations of diluted earnings per share for the three and six-month periods ended June 2017, respectively, and options to purchase 5.4 million shares were excluded from the calculations of diluted earnings per share for both the three and six-month periods ended June 2016, because the effect of their inclusion would have been antidilutive to those periods. In addition, 1.1 million shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for both the three and six-month periods ended June 2017, and 1.0 million and 1.1 million shares of performance-based RSUs were excluded from the calculations of diluted

16


earnings per share for the three and six-month periods ended June 2016, respectively, because these units were not considered to be contingent outstanding shares in those periods.
Note M – Fair Value Measurements
Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:
 
Total Fair  Value
 
Fair Value Measurement Using (a)
In thousands
 
Level 1
 
Level 2
 
Level 3
June 2017
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
363,279

 
$
363,279

 
$

 
$

Time deposits
12,342

 
12,342

 

 

Derivative financial instruments
36,265

 

 
36,265

 

Investment securities
205,079

 
190,380

 
14,699

 

Financial liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
52,634

 

 
52,634

 

Deferred compensation
236,413

 

 
236,413

 

December 2016
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
840,842

 
$
840,842

 
$

 
$

Time deposits
14,774

 
14,774

 

 

Derivative financial instruments
103,340

 

 
103,340

 

Investment securities
196,738

 
179,673

 
17,065

 

Financial liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
25,574

 

 
25,574

 

Deferred compensation
232,214

 

 
232,214

 

 
(a) 
There were no transfers among the levels within the fair value hierarchy during the first half of 2017 or the year ended December 2016.
VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of forward foreign currency exchange contracts, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies, and considers the credit risk of the Company and its counterparties. Investment securities are held in VF’s deferred compensation plans as an economic hedge of the related deferred compensation liabilities. These investments are classified as trading securities and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or

17


quoted prices in inactive markets for identical assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments.
All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At June 2017 and December 2016, their carrying values approximated their fair values. Additionally, at June 2017 and December 2016, the carrying values of VF’s long-term debt, including the current portion, were $2,365.4 million and $2,292.9 million, respectively, compared with fair values of $2,572.0 million and $2,486.6 million at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
Note N – Derivative Financial Instruments and Hedging Activities
Summary of Derivative Financial Instruments
All of VF’s outstanding derivative financial instruments are forward foreign currency exchange contracts. Although derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. The notional amounts of outstanding derivative contracts were $2.4 billion at June 2017, $2.2 billion at December 2016 and $2.4 billion at June 2016, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Japanese yen, Swedish krona, Polish zloty and Turkish lira. Derivative contracts have maturities up to 24 months.
The following table presents outstanding derivatives on an individual contract basis:
 
Fair Value of Derivatives
with Unrealized Gains
 
Fair Value of Derivatives
with Unrealized Losses
In thousands
June 2017
 
December 2016
 
June 2016
 
June 2017
 
December 2016
 
June 2016
Foreign currency exchange contracts designated as hedging instruments
$
36,265

 
$
103,340

 
$
91,691

 
$
(52,447
)
 
$
(25,292
)
 
$
(33,171
)
Foreign currency exchange contracts not designated as hedging instruments

 

 

 
(187
)
 
(282
)
 
(280
)
Total derivatives
$
36,265

 
$
103,340

 
$
91,691

 
$
(52,634
)
 
$
(25,574
)
 
$
(33,451
)
VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. However, if VF were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current gross presentation to the net amounts as detailed in the following table:
 
June 2017
 
December 2016
 
June 2016
In thousands
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
Gross amounts presented in the Consolidated Balance Sheets
$
36,265

 
$
(52,634
)
 
$
103,340

 
$
(25,574
)
 
$
91,691

 
$
(33,451
)
Gross amounts not offset in the Consolidated Balance Sheets
(31,054
)
 
31,054

 
(22,341
)
 
22,341

 
(20,145
)
 
20,145

Net amounts
$
5,211

 
$
(21,580
)
 
$
80,999

 
$
(3,233
)
 
$
71,546

 
$
(13,306
)
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
In thousands
June 2017
 
December 2016
 
June 2016
Other current assets
$
30,780

 
$
84,519

 
$
78,021

Accrued liabilities
(32,299
)
 
(18,574
)
 
(27,329
)
Other assets
5,485

 
18,821

 
13,670

Other liabilities
(20,335
)
 
(7,000
)
 
(6,122
)

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Cash Flow Hedges
VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:
In thousands
Gain (Loss) on Derivatives
Recognized in OCI
Three Months Ended June
 
Gain (Loss) on Derivatives
Recognized in OCI
Six Months Ended June
Cash Flow Hedging Relationships
2017
 
2016
 
2017
 
2016
Foreign currency exchange
$
(56,339
)
 
$
39,049

 
$
(66,433
)
 
$
23,266

In thousands
Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended June
 
Gain (Loss) Reclassified from
Accumulated OCI into Income
Six Months Ended June
Location of Gain (Loss)
2017
 
2016
 
2017
 
2016
Net sales
$
7,047

 
$
2,284

 
$
13,460

 
$
(2,679
)
Cost of goods sold
5,653

 
20,772

 
16,927

 
64,609

Selling, general and administrative expenses
(243
)
 
(1,535
)
 
(330
)
 
(2,513
)
Other income (expense), net
37

 
624

 
86

 
2,127

Interest expense
(1,175
)
 
(1,121
)
 
(2,333
)
 
(2,225
)
Total
$
11,319

 
$
21,024

 
$
27,810

 
$
59,319

Derivative Contracts Not Designated as Hedges
VF uses derivative contracts to manage foreign currency exchange risk on third-party accounts receivable and payable, as well as intercompany borrowings. These contracts are not designated as hedges and are recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net transaction gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:
In thousands
Derivatives Not Designated as Hedges
 
Location of Gain (Loss)
on Derivatives
Recognized in Income
 
Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended June
 
Gain (Loss) on Derivatives
Recognized in Income
Six Months Ended June
2017
 
2016
 
2017
 
2016
Foreign currency exchange
 
Cost of goods sold
 
$
359

 
$
(769
)
 
$
633

 
$
735

Foreign currency exchange
 
Other income (expense), net
 
(1,270
)
 
199

 
(1,739
)
 
(1,086
)
Total
 
 
 
$
(911
)
 
$
(570
)
 
$
(1,106
)
 
$
(351
)
Other Derivative Information
There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and six-month periods ended June 2017 and June 2016.
At June 2017, accumulated OCI included $6.6 million of pre-tax net deferred gains for foreign currency exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in 2021 and 2033, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pre-tax net deferred loss in accumulated OCI was $20.3 million at June 2017, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. VF reclassified $1.2 million and $2.3 million of net deferred losses from accumulated OCI into interest expense for the three and six-month periods ended June 2017 and June 2016, respectively. VF expects to reclassify $4.8 million to interest expense during the next 12 months.
Net Investment Hedge
The Company has designated its €850.0 million of euro-denominated fixed-rate notes as a net investment hedge of VF’s investment in certain foreign operations. Because this debt qualified as a nonderivative hedging instrument, foreign currency transaction gains or losses of the debt are deferred in the foreign currency translation and other component of accumulated OCI as an offset to the

19


foreign currency translation adjustments on the hedged investments. During the three and six-month periods ended June 2017, the Company recognized an after-tax loss of $37.3 million and $45.1 million, respectively, in OCI related to the net investment hedge. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated. The Company recorded no ineffectiveness from its net investment hedge during the three and six-month periods ended June 2017.
Note O – Recently Adopted and Issued Accounting Standards
Recently Adopted Accounting Standards
In July 2015, the FASB issued an update to their accounting guidance related to inventory that changes the measurement principle from lower of cost or market to lower of cost or net realizable value. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on equity method accounting. The guidance eliminates the requirement to retroactively apply the equity method when an entity obtains significant influence over a previously held investment. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on derivative financial instruments when there is a change in the counterparty to a derivative contract (novation). The new guidance clarifies that the novation of a derivative contract that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on derivative financial instruments that clarifies the steps required to determine bifurcation of an embedded derivative. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In October 2016, the FASB issued an update to their accounting guidance on the recognition of current and deferred income taxes for intra-entity asset transfers. The new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company early adopted this guidance in the first quarter of 2017 using the modified retrospective method, which requires a cumulative adjustment to retained earnings as of the beginning of the period of adoption. The cumulative adjustment to the January 1, 2017 Consolidated Balance Sheet was a reduction in both the other assets and retained earnings line items of $237.8 million.
In October 2016, the FASB issued an update to their accounting guidance that changes how a single decision maker will consider its indirect interests when performing the primary beneficiary analysis under the variable interest entity model. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In November 2016, the FASB issued an update that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The Company early adopted this guidance in the first quarter of 2017 on a retrospective basis and the Consolidated Statements of Cash Flows included herein reflect $4.4 million and $5.5 million of restricted cash for June 2017 and June 2016, respectively. The Company’s restricted cash is generally held as collateral for certain transactions.
Recently Issued Accounting Standards
In May 2014, the FASB issued a new accounting standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. The standard prescribes a five-step approach to revenue recognition: (1) identify the contracts with the customer; (2) identify the separate performance obligations in the contracts; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when, or as, each performance obligation is satisfied. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. A cross-functional implementation team has completed VF’s impact analysis and is commencing the disclosure assessment phase of the project. The new guidance is not expected to have a material impact on VF’s significant revenue streams within the wholesale, direct-to-consumer and royalty channels. VF is in the process of concluding on the impact on less significant revenue streams within those channels. The Company expects to adopt the new standard utilizing the modified retrospective method in the first quarter of fiscal 2019.
In January 2016, the FASB issued an update to their accounting guidance related to the recognition and measurement of certain financial instruments. This guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This guidance will be effective for VF in the first

20


quarter of fiscal 2019 with early adoption permitted. The Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In February 2016, the FASB issued a new accounting standard on leasing. This new standard will require companies to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The Company has formed a cross-functional implementation team to address the standard and has started the design and assessment phase of the project. This guidance will be effective for VF in the first quarter of fiscal 2020 with early adoption permitted. The standard requires use of the modified retrospective transition approach. Given the Company’s significant number of leases, VF expects this standard will have a material impact on VF’s Consolidated Balance Sheets but does not expect it to have a material impact on the Consolidated Statements of Income. The Company expects to adopt the new standard in the first quarter of fiscal 2020.
In March 2016, the FASB issued an update to their accounting guidance on extinguishments of financial liabilities that exempts prepaid stored-value products, or gift cards, from the existing guidance. The updated guidance requires that gift card liabilities be subject to breakage accounting, consistent with the new revenue recognition standard discussed above. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In June 2016, the FASB issued an update to their accounting guidance on the measurement of credit losses on financial instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This guidance will be effective for VF in the first quarter of fiscal 2021 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.
In August 2016, the FASB issued an update to their accounting guidance addressing how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on VF’s consolidated financial statements.
In January 2017, the FASB issued an update that provides a more narrow framework to be used in evaluating whether a set of assets and activities constitutes a business. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company will apply this guidance to any transactions after adoption but does not expect it to have a significant impact on VF’s consolidated financial statements.
In January 2017, the FASB issued an update that simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. The single quantitative step test requires companies to compare the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. VF will continue to have the option of first performing a qualitative assessment to determine whether it is necessary to complete the quantitative goodwill impairment test. This guidance will be effective for VF in the first quarter of fiscal 2021 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will apply this guidance on any impairment analyses after adoption, which may have a significant impact on the calculated impairment charges, if any are required.
In March 2017, the FASB issued an update which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest cost, expected return on plan assets, amortization of prior service costs or credits and actuarial gains and losses) separately and outside of operating income. The amendments in this update specify that only the service cost component is eligible for capitalization, which is consistent with VF’s current practice. The presentation change in the Consolidated Statements of Income will be applied on a retrospective basis. This guidance will be effective for VF beginning in the first quarter of fiscal 2019. Upon adoption, VF will reclassify the other components of net periodic benefit costs from the selling, general and administrative expenses line item in the Consolidated Statements of Income. Except for the reclassification within the Consolidated Statements of Income noted above, the Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In May 2017, the FASB issued an update that amends the scope of modification accounting for share-based payment arrangements. This update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. This guidance will be effective for VF beginning in the first quarter of fiscal 2019 with early adoption permitted. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company will apply this guidance to any future changes made to the terms or conditions of share-based payment awards after adoption but does not expect it to have a significant impact on VF’s consolidated financial statements.

21


Note P — Restructuring
In the fourth quarter of 2016, VF leadership approved restructuring charges related to cost alignment initiatives, and recognized $58.1 million of restructuring charges. The Company did not recognize additional costs associated with these actions in the first six months of 2017 and does not expect to recognize significant additional costs relating to these actions for the remainder of 2017. The Company expects a substantial amount of the restructuring activities to be completed by the end of 2017.
The activity in the restructuring accrual for the six-month period ended June 2017 is as follows:
In thousands
Severance