Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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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
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¨ | 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)
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| | |
Pennsylvania | | 23-1180120 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) |
105 Corporate Center BoulevardGreensboro, 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.
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Large accelerated filer | | x | | Accelerated filer | | ¨ |
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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
Part I — Financial Information
Item 1 — Financial Statements (Unaudited)
VF CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
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| | | | | | | | | | | |
| 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 |
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Other current assets | 356,147 |
| | 296,698 |
| | 304,612 |
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Current assets of discontinued operations | 315 |
| | 135,845 |
| | 298,194 |
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Total current assets | 3,897,650 |
| | 4,293,098 |
| | 4,068,016 |
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Property, plant and equipment, net | 918,975 |
| | 926,010 |
| | 927,058 |
|
Intangible assets, net | 1,895,287 |
| | 1,797,271 |
| | 1,921,151 |
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Goodwill | 1,736,407 |
| | 1,708,323 |
| | 1,767,525 |
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Other assets | 725,409 |
| | 929,190 |
| | 899,772 |
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Other assets of discontinued operations | — |
| | 85,395 |
| | 90,586 |
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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 |
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Accounts payable | 502,908 |
| | 642,970 |
| | 480,797 |
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Accrued liabilities | 753,343 |
| | 827,507 |
| | 720,374 |
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Current liabilities of discontinued operations | — |
| | 35,205 |
| | 51,403 |
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Total current liabilities | 2,431,143 |
| | 1,785,400 |
| | 2,660,633 |
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Long-term debt | 2,111,623 |
| | 2,039,180 |
| | 1,400,636 |
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Other liabilities | 986,623 |
| | 977,076 |
| | 967,729 |
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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 |
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Accumulated other comprehensive loss | (930,597 | ) | | (1,041,463 | ) | | (1,001,455 | ) |
Retained earnings | 1,077,708 |
| | 2,545,458 |
| | 2,276,398 |
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Total stockholders’ equity | 3,644,339 |
| | 4,940,921 |
| | 4,648,437 |
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Total liabilities and stockholders’ equity | $ | 9,173,728 |
| | $ | 9,739,287 |
| | $ | 9,674,108 |
|
See notes to consolidated financial statements.
VF CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
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| | | | | | | | | | | | | | | |
| 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 |
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Total revenues | 2,359,581 |
| | 2,320,466 |
| | 4,941,258 |
| | 4,954,883 |
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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 |
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Total costs and operating expenses | 2,191,559 |
| | 2,126,044 |
| | 4,481,762 |
| | 4,448,664 |
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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 |
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Income taxes | 30,897 |
| | 38,036 |
| | 87,437 |
| | 89,170 |
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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 |
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Earnings (loss) per common share - basic | | | | | | | |
Continuing operations | $ | 0.29 |
| | $ | 0.33 |
| | $ | 0.81 |
| | $ | 0.90 |
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Discontinued operations | (0.01 | ) | | (0.21 | ) | | (0.03 | ) | | (0.16 | ) |
Total earnings per common share - basic | $ | 0.28 |
| | $ | 0.12 |
| | $ | 0.79 |
| | $ | 0.74 |
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Earnings (loss) per common share - diluted | | | | | | | |
Continuing operations | $ | 0.29 |
| | $ | 0.32 |
| | $ | 0.81 |
| | $ | 0.89 |
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Discontinued operations | (0.01 | ) | | (0.20 | ) | | (0.03 | ) | | (0.16 | ) |
Total earnings per common share - diluted | $ | 0.27 |
| | $ | 0.12 |
| | $ | 0.78 |
| | $ | 0.73 |
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Cash dividends per common share | $ | 0.42 |
| | $ | 0.37 |
| | $ | 0.84 |
| | $ | 0.74 |
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See notes to consolidated financial statements.
VF CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
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| | | | | | | | | | | | | | | |
| 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 |
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Amortization of deferred prior service costs | 645 |
| | 645 |
| | 1,357 |
| | 1,292 |
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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 |
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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 |
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Other comprehensive income (loss) | 57,443 |
| | (51,170 | ) | | 110,866 |
| | 41,767 |
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Comprehensive income (loss) | $ | 167,332 |
| | $ | (155 | ) | | $ | 429,918 |
| | $ | 353,051 |
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See notes to consolidated financial statements.
VF CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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| | | | | | | |
| 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 |
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Provision for doubtful accounts | 6,483 |
| | 10,573 |
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Pension expense in excess of contributions | 12,987 |
| | 19,961 |
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Loss on sale of businesses | 5,186 |
| | 100,556 |
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Other, net | 30,836 |
| | (18,958 | ) |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 43,271 |
| | 124,934 |
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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 |
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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 |
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See notes to consolidated financial statements.
VF CORPORATION
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)
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| | | | | | | | | | | | | | | | | | |
| | | | | 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 |
| | — |
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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.
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.
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.
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.
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 2017, December 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.
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 | ) |
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 | ) |
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.
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.
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
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. |
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• | 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
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:
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| | | | | | | | | | | | | | | | | | | | | | | |
| 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:
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| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | ) |
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:
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| | | | | | | | | | | | | | | | | | |
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
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
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.
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: