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EX-32.2 - EXHIBIT 32.2 - V F CORPvfcq32017exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - V F CORPvfcq32017exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - V F CORPvfcq32017exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - V F CORPvfcq32017exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - V F CORPvfc2004midtermincentivepla.htm
 
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 September 30, 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 October 28, 2017, there were 395,149,073 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)
 
September 2017
 
December 2016
 
September 2016
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
$
1,546,128

 
$
1,227,862

 
$
737,825

Accounts receivable, less allowance for doubtful accounts of: September 2017 – $21,469; December 2016 – $20,539; September 2016 – $22,654
1,851,430

 
1,161,393

 
1,736,521

Inventories
1,909,563

 
1,471,300

 
1,897,546

Other current assets
319,991

 
296,698

 
293,904

Current assets of discontinued operations
315

 
135,845

 
153,227

Total current assets
5,627,427

 
4,293,098

 
4,819,023

Property, plant and equipment, net
921,217

 
926,010

 
935,015

Intangible assets, net
1,936,522

 
1,797,271

 
1,925,955

Goodwill
1,642,873

 
1,708,323

 
1,769,838

Other assets
746,882

 
929,190

 
904,742

Other assets of discontinued operations

 
85,395

 
88,536

Total assets
$
10,874,921

 
$
9,739,287

 
$
10,443,109

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term borrowings
$
1,985,287

 
$
26,029

 
$
737,660

Current portion of long-term debt
253,831

 
253,689

 
3,643

Accounts payable
554,107

 
642,970

 
550,427

Accrued liabilities
1,028,170

 
827,507

 
860,383

Current liabilities of discontinued operations

 
35,205

 
25,083

Total current liabilities
3,821,395

 
1,785,400

 
2,177,196

Long-term debt
2,144,221

 
2,039,180

 
2,347,122

Other liabilities
971,885

 
977,076

 
1,049,353

Other liabilities of discontinued operations

 
(3,290
)
 
(3,339
)
Commitments and contingencies

 

 

Total liabilities
6,937,501

 
4,798,366

 
5,570,332

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

 

 

Common Stock, stated value $0.25; shares authorized, 1,200,000,000; shares outstanding at September 2017 – 394,502,698; December 2016 – 414,012,954; September 2016 – 413,682,259
98,626

 
103,503

 
103,421

Additional paid-in capital
3,456,661

 
3,333,423

 
3,313,077

Accumulated other comprehensive loss
(914,896
)
 
(1,041,463
)
 
(998,020
)
Retained earnings
1,297,029

 
2,545,458

 
2,454,299

Total stockholders’ equity
3,937,420

 
4,940,921

 
4,872,777

Total liabilities and stockholders’ equity
$
10,874,921

 
$
9,739,287

 
$
10,443,109

See notes to consolidated financial statements.

3


VF CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
 
Three Months Ended September
 
Nine Months Ended September
 
2017
 
2016
 
2017
 
2016
Net sales
$
3,481,202

 
$
3,298,484

 
$
8,370,183

 
$
8,200,228

Royalty income
27,616

 
29,232

 
79,893

 
82,371

Total revenues
3,508,818

 
3,327,716

 
8,450,076

 
8,282,599

Costs and operating expenses
 
 
 
 
 
 
 
Cost of goods sold
1,751,748

 
1,693,071

 
4,225,444

 
4,229,018

Selling, general and administrative expenses
1,168,470

 
1,026,398

 
3,176,536

 
2,939,115

Impairment of goodwill
104,651

 

 
104,651

 

Total costs and operating expenses
3,024,869

 
2,719,469

 
7,506,631

 
7,168,133

Operating income
483,949

 
608,247

 
943,445

 
1,114,466

Interest income
4,571

 
2,215

 
11,672

 
6,459

Interest expense
(27,108
)
 
(24,783
)
 
(75,004
)
 
(70,441
)
Other income (expense), net
(332
)
 
(1,097
)
 
(2,052
)
 
1,696

Income from continuing operations before income taxes
461,080

 
584,582

 
878,061

 
1,052,180

Income taxes
74,316

 
99,358

 
161,753

 
188,528

Income from continuing operations
386,764

 
485,224

 
716,308

 
863,652

Income (loss) from discontinued operations, net of tax
(624
)
 
13,265

 
(11,116
)
 
(53,879
)
Net income
$
386,140

 
$
498,489

 
$
705,192

 
$
809,773

Earnings (loss) per common share - basic
 
 
 
 
 
 
 
Continuing operations
$
0.98

 
$
1.17

 
$
1.79

 
$
2.07

Discontinued operations

 
0.03

 
(0.03
)
 
(0.13
)
Total earnings per common share - basic
$
0.98

 
$
1.21

 
$
1.76

 
$
1.94

Earnings (loss) per common share - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.97

 
$
1.16

 
$
1.77

 
$
2.04

Discontinued operations

 
0.03

 
(0.03
)
 
(0.13
)
Total earnings per common share - diluted
$
0.97

 
$
1.19

 
$
1.74

 
$
1.91

Cash dividends per common share
$
0.42

 
$
0.37

 
$
1.26

 
$
1.11

See notes to consolidated financial statements.

4


VF CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
Three Months Ended September
 
Nine Months Ended September
 
2017
 
2016
 
2017
 
2016
Net income
$
386,140

 
$
498,489

 
$
705,192

 
$
809,773

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation and other
 
 
 
 
 
 
 
Gains (losses) arising during the period
53,481

 
4,154

 
188,649

 
48,222

Less income tax effect
11,764

 
508

 
37,966

 
(604
)
Defined benefit pension plans
 
 
 
 
 
 
 
Amortization of net deferred actuarial losses
10,030

 
16,303

 
31,414

 
48,928

Amortization of deferred prior service costs
643

 
645

 
2,000

 
1,937

Current year actuarial gains (losses) and curtailment loss

 

 
20,996

 

Less income tax effect
(3,743
)
 
(6,541
)
 
(19,872
)
 
(19,561
)
Derivative financial instruments
 
 
 
 
 
 
 
Gains (losses) arising during the period
(51,147
)
 
9,571

 
(117,580
)
 
32,837

Less income tax effect
(679
)
 
(3,675
)
 
9,744

 
(12,506
)
Reclassification to net income for (gains) losses realized
(4,609
)
 
(28,458
)
 
(32,419
)
 
(87,777
)
Less income tax effect
(39
)
 
10,928

 
5,669

 
33,726

Other comprehensive income (loss)
15,701

 
3,435

 
126,567

 
45,202

Comprehensive income
$
401,841

 
$
501,924

 
$
831,759

 
$
854,975

See notes to consolidated financial statements.


5


VF CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended September
 
2017
 
2016
Operating activities
 
 
 
Net income
$
705,192

 
$
809,773

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Impairment of goodwill
104,651

 

Depreciation and amortization
207,590

 
205,491

Stock-based compensation
57,709

 
54,933

Provision for doubtful accounts
11,396

 
16,193

Pension expense in excess of contributions
17,601

 
33,866

Loss on sale of businesses
4,936

 
104,357

Other, net
15,187

 
22,466

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(625,574
)
 
(501,186
)
Inventories
(390,419
)
 
(443,115
)
Accounts payable
(111,276
)
 
(116,800
)
Income taxes
(77,125
)
 
(141,262
)
Accrued liabilities
126,247

 
56,055

Other assets and liabilities
(39,432
)
 
(53,574
)
Cash provided by operating activities
6,683

 
47,197

Investing activities
 
 
 
Proceeds from sale of businesses, net of cash sold
213,494

 
115,983

Capital expenditures
(124,393
)
 
(129,947
)
Software purchases
(53,451
)
 
(31,843
)
Other, net
(10,558
)
 
(4,997
)
Cash provided (used) by investing activities
25,092

 
(50,804
)
Financing activities
 
 
 
Net increase in short-term borrowings
1,959,335

 
287,759

Payments on long-term debt
(2,749
)
 
(12,385
)
Payment of debt issuance costs

 
(6,772
)
Proceeds from long-term debt

 
951,782

Purchases of treasury stock
(1,200,356
)
 
(1,000,230
)
Cash dividends paid
(502,993
)
 
(462,406
)
Proceeds from issuance of Common Stock, net of shares withheld for taxes
48,144

 
40,667

Cash provided (used) by financing activities
301,381

 
(201,585
)
Effect of foreign currency rate changes on cash, cash equivalents and restricted cash
(13,914
)
 
1,018

Net change in cash, cash equivalents and restricted cash
319,242

 
(204,174
)
Cash, cash equivalents and restricted cash – beginning of year
1,231,026

 
946,396

Cash, cash equivalents and restricted cash – end of period
$
1,550,268

 
$
742,222

 
 
 
 
Balances per Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
$
1,546,128

 
$
737,825

Other current assets
3,309

 
3,686

Other assets
831

 
711

Total cash, cash equivalents and restricted cash
$
1,550,268

 
$
742,222

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

 

 

 

 
705,192

Dividends on Common Stock

 

 

 

 
(502,993
)
Purchase of treasury stock
(22,213,162
)
 
(5,553
)
 

 

 
(1,194,803
)
Stock-based compensation, net
2,702,906

 
676

 
123,238

 

 
(18,061
)
Foreign currency translation and other

 

 

 
226,615

 

Defined benefit pension plans

 

 

 
34,538

 

Derivative financial instruments

 

 

 
(134,586
)
 

Balance, September 2017
394,502,698

 
$
98,626

 
$
3,456,661

 
$
(914,896
)
 
$
1,297,029

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 September 2017, December 2016 and September 2016 relate to the fiscal periods ended on September 30, 2017, December 31, 2016 and October 1, 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 reported the operating results for this business in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for all periods presented. In addition, the related assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets through the date of sale. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business and has included the JanSport® brand collegiate business as discontinued operations in our Consolidated Statements of Income and Consolidated Balance Sheets 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 income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three and nine months ended September 2016. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note C 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 nine months ended September 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 – Acquisition
On August 11, 2017, VF entered into a definitive merger agreement to acquire 100% of the outstanding shares of Williamson-Dickie Mfg. Co. (“Williamson-Dickie”). The acquisition was completed on October 2, 2017 for $800.7 million in cash, subject to working capital and other adjustments. The purchase price was primarily funded with short-term borrowings. Williamson-Dickie is a privately held company based in Ft. Worth, TX, and is one of the largest companies in the workwear sector with a portfolio of brands including Dickies®, Workrite®, Kodiak®, Terra® and Walls®. The Company believes the acquisition brings together complementary assets and capabilities, and creates a workwear business that will now serve an even broader set of consumers and industries around the world. The Company is still in the process of aligning accounting policies and valuing the assets acquired and liabilities assumed, and as such, certain disclosures regarding this transaction have not been included herein.
The Company recognized $4.9 million of transaction and deal-related expenses in the three and nine months ended September 2017.

8


Note C – 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. The Company received net proceeds of $213.5 million and recorded an after-tax loss on sale of $4.1 million, which is included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for the first nine months of 2017. The final adjustment to the after-tax loss on sale was $0.3 million in the third quarter of 2017.
LSG included the Majestic® brand, which supplied 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 is providing 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.
Beginning in the first quarter of 2017, VF reported the results of LSG in the income (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 loss on sale, recorded in the income (loss) from discontinued operations, net of tax line item were income of $0.3 million and losses of $4.6 million for the third quarter and first nine months of 2017, respectively, and income of $18.1 million and $45.1 million for the third quarter and first nine 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 September 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 income (loss) from discontinued operations, net of tax line item were losses of $0.9 million and $6.5 million for the third quarter and first nine months of 2017, respectively, and losses of $0.3 million and $0.6 million for the third quarter and first nine 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 which was included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for the first nine months of 2016. The after-tax loss on sale included in the income (loss) from discontinued operations, net of tax line item for the third quarter of 2016 was $3.8 million.
VF reported the results of the Businesses as discontinued operations for the third quarter and first nine 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 income (loss) from discontinued operations, net of tax line item for the third quarter and first nine months of 2016 were losses of $4.5 million and $98.4 million, respectively.
VF provided certain support services under transition services agreements and completed these services during the third quarter of 2017. These services did not have a material impact on VF’s Consolidated Statement of Income for the nine months ended September 2017.

9


Summarized Discontinued Operations Financial Information
The following table summarizes the major line items included in the income (loss) from discontinued operations for the divestitures of the licensing business and Contemporary Brands coalition:
 
Three Months Ended September
 
Nine Months Ended September
In thousands
2017
 
2016
 
2017
 
2016
Revenues
$
6,498

 
$
203,696

 
$
160,323

 
$
603,651

Cost of goods sold
6,580

 
127,876

 
121,172

 
362,215

Selling, general and administrative expenses
1,341

 
51,714

 
36,059

 
173,574

Interest expense, net
(1
)
 
(21
)
 
(26
)
 
(183
)
Other income (expense), net

 
7

 

 
3

Income (loss) from discontinued operations before income taxes
(1,424
)
 
24,092

 
3,066

 
67,682

Gain (loss) on the sale of discontinued operations before income taxes
411

 
(4,439
)
 
(9,506
)
 
(154,275
)
Total income (loss) from discontinued operations before income taxes
(1,013
)
 
19,653

 
(6,440
)
 
(86,593
)
Income tax (expense) benefit(a)
389

 
(6,388
)
 
(4,676
)
 
32,714

Income (loss) from discontinued operations, net of tax
$
(624
)
 
$
13,265

 
$
(11,116
)
 
$
(53,879
)
(a) 
Income tax (expense) benefit for the nine months ended September 2017 includes $8.6 million 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
September 2017
 
December 2016
 
September 2016
Accounts receivable, net
$

 
$
36,285

 
$
48,768

Inventories

 
98,025

 
102,450

Other current assets

 
1,535

 
2,009

Property, plant and equipment, net
315

 
13,640

 
14,297

Intangible assets

 
42,427

 
44,833

Goodwill

 
28,636

 
28,636

Other assets

 
692

 
770

Total assets of discontinued operations(a)
$
315

 
$
221,240

 
$
241,763

Accounts payable
$

 
$
21,674

 
$
15,318

Accrued liabilities

 
13,531

 
9,765

Other liabilities

 
791

 
801

Deferred income tax liabilities(b)

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

 
$
31,915

 
$
21,744

(a) 
Amounts at December 2016 and September 2016 have been classified as current and long-term in the Consolidated Balance Sheets.
(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 $10.9 million for the nine months ended September 2017 and 2016, respectively.

10


Note D – 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 nine months of 2017, VF sold total accounts receivable of $871.6 million. As of September 2017December 2016 and September 2016, $191.4 million, $209.5 million and $212.3 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 $0.8 million and $2.7 million for the third quarter and first nine months of 2017, respectively, and $0.8 million and $2.5 million for the third quarter and first nine months of 2016, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
Note E – Inventories
In thousands
September 2017
 
December 2016
 
September 2016
Finished products
$
1,717,516

 
$
1,278,504

 
$
1,706,612

Work-in-process
106,120

 
97,725

 
96,727

Raw materials
85,927

 
95,071

 
94,207

Total inventories
$
1,909,563

 
$
1,471,300

 
$
1,897,546

Note F – Intangible Assets
 
 
 
 
 
 
September 2017
 
December 2016
In thousands
 
Weighted
Average
Amortization
Period
 
Amortization
Method
 
Cost
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Net
Carrying
Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
20 years
 
Accelerated
 
$
265,725

 
$
134,246

 
$
131,479

 
$
128,422

License agreements
 
28 years
 
Accelerated
 
109,370

 
62,278

 
47,092

 
49,682

Trademark
 
16 years
 
Straight-line
 
58,132

 
6,358

 
51,774

 
54,499

Other
 
9 years
 
Straight-line
 
9,658

 
3,846

 
5,812

 
3,297

Amortizable intangible assets, net
 
 
 
 
 
 
 
236,157

 
235,900

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
 
 
 
1,700,365

 
1,561,371

Intangible assets, net
 
 
 
 
 
 
 
 
 
$
1,936,522

 
$
1,797,271

Amortization expense for the third quarter and first nine months of 2017 was $5.6 million and $16.3 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 $21.9 million, $21.9 million, $21.3 million, $20.4 million and $19.4 million, respectively.

11


Note G – 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

Impairment charge

 

 

 
(104,651
)
 
(104,651
)
Currency translation
32,260

 
6,941

 

 

 
39,201

Balance, September 2017
$
1,342,393

 
$
217,706

 
$
30,111

 
$
52,663

 
$
1,642,873

During the third quarter of 2017, VF performed an interim impairment analysis of the Nautica® reporting unit and recorded an impairment charge of $104.7 million. Nautica® is part of the Sportswear coalition. Refer to Note N for additional information on fair value measurements.
As of September 2017, accumulated impairment charges for the Outdoor & Action Sports and Sportswear coalitions were $82.7 million and $163.2 million, respectively. As of December 2016, accumulated impairment charges for the Outdoor & Action Sports and Sportswear coalitions were $82.7 million and $58.5 million, respectively.
Note H – Pension Plans
The components of pension cost for VF’s defined benefit plans were as follows:
 
Three Months Ended September
 
Nine Months Ended September
In thousands
2017
 
2016
 
2017
 
2016
Service cost – benefits earned during the period
$
6,202

 
$
6,478

 
$
18,733

 
$
19,434

Interest cost on projected benefit obligations
14,730

 
16,991

 
44,254

 
51,066

Expected return on plan assets
(23,825
)
 
(24,869
)
 
(70,977
)
 
(74,714
)
Amortization of deferred amounts:
 
 
 
 
 
 
 
Net deferred actuarial losses
10,030

 
16,303

 
31,414

 
48,928

Deferred prior service costs
643

 
645

 
2,000

 
1,937

Net periodic pension cost
$
7,780

 
$
15,548

 
$
25,424

 
$
46,651

VF contributed $7.8 million to its defined benefit plans during the first nine months of 2017, and intends to make approximately $7.2 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 income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Income in the first nine months of 2017.
Note I – Capital and Accumulated Other Comprehensive Loss
During the first nine 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 nine 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 September 2017 or December 2016, and 2,600 shares held in treasury at the end of September 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 nine months of 2017, the Company purchased 6,540 shares of Common Stock in open market transactions for $0.4 million. Balances related to shares held for deferred compensation plans were as follows:
In thousands, except share amounts
September 2017
 
December 2016
 
September 2016
Shares held for deferred compensation plans
320,615

 
439,667

 
450,067

Cost of shares held for deferred compensation plans
$
3,973

 
$
5,464

 
$
5,434


12


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. The deferred components of OCI are reported, net of related income taxes, in accumulated OCI in stockholders’ equity, as follows:
In thousands
September 2017
 
December 2016
 
September 2016
Foreign currency translation and other
$
(567,964
)
 
$
(794,579
)
 
$
(670,551
)
Defined benefit pension plans
(268,159
)
 
(302,697
)
 
(340,891
)
Derivative financial instruments
(78,773
)
 
55,813

 
13,422

Accumulated other comprehensive loss
$
(914,896
)
 
$
(1,041,463
)
 
$
(998,020
)
The changes in accumulated OCI, net of related taxes, are as follows:
 
Three Months Ended September 2017
In thousands
Foreign Currency Translation and Other
 
Defined Benefit Pension Plans
 
Derivative Financial Instruments
 
Total
Balance, June 2017
$
(633,209
)
 
$
(275,089
)
 
$
(22,299
)
 
$
(930,597
)
Other comprehensive income (loss) before reclassifications
65,245

 

 
(51,826
)
 
13,419

Amounts reclassified from accumulated other comprehensive income (loss)

 
6,930

 
(4,648
)
 
2,282

Net other comprehensive income (loss)
65,245

 
6,930

 
(56,474
)
 
15,701

Balance, September 2017
$
(567,964
)
 
$
(268,159
)
 
$
(78,773
)
 
$
(914,896
)
 
 
Three Months Ended September 2016
In thousands
Foreign Currency Translation and Other
 
Defined Benefit Pension Plans
 
Derivative Financial Instruments
 
Total
Balance, June 2016
$
(675,213
)
 
$
(351,298
)
 
$
25,056

 
$
(1,001,455
)
Other comprehensive income (loss) before reclassifications
4,662

 

 
5,896

 
10,558

Amounts reclassified from accumulated other comprehensive income (loss)

 
10,407

 
(17,530
)
 
(7,123
)
Net other comprehensive income (loss)
4,662

 
10,407

 
(11,634
)
 
3,435

Balance, September 2016
$
(670,551
)
 
$
(340,891
)
 
$
13,422

 
$
(998,020
)
 
 
Nine Months Ended September 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
226,615

 
12,253

 
(107,836
)
 
131,032

Amounts reclassified from accumulated other comprehensive income (loss)

 
22,285

 
(26,750
)
 
(4,465
)
Net other comprehensive income (loss)
226,615

 
34,538

 
(134,586
)
 
126,567

Balance, September 2017
$
(567,964
)
 
$
(268,159
)
 
$
(78,773
)
 
$
(914,896
)

13


 
Nine Months Ended September 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
47,618

 

 
20,331

 
67,949

Amounts reclassified from accumulated other comprehensive income (loss)

 
31,304

 
(54,051
)
 
(22,747
)
Net other comprehensive income (loss)
47,618

 
31,304

 
(33,720
)
 
45,202

Balance, September 2016
$
(670,551
)
 
$
(340,891
)
 
$
13,422

 
$
(998,020
)
Reclassifications out of accumulated OCI are as follows:
In thousands
 
Affected Line Item in the Consolidated Statements of Income
 
Three Months Ended September
 
Nine Months Ended September
Details About Accumulated Other Comprehensive Income (Loss) Components
 
 
2017
 
2016
 
2017
 
2016
Amortization of defined benefit pension plans:
 
 
 
 
 
 
 
 
Net deferred actuarial losses
 
(a) 
 
$
(10,030
)
 
$
(16,303
)
 
$
(31,414
)
 
$
(48,928
)
Deferred prior service costs
 
(a) 
 
(643
)
 
(645
)
 
(2,000
)
 
(1,937
)
Pension curtailment loss
 
Income (loss) from discontinued operations, net of tax
 

 

 
(1,105
)
 

 
 
Total before tax
 
(10,673
)
 
(16,948
)
 
(34,519
)
 
(50,865
)
 
 
Tax benefit
 
3,743

 
6,541

 
12,234

 
19,561

 
 
Net of tax
 
(6,930
)
 
(10,407
)
 
(22,285
)
 
(31,304
)
Gains (losses) on derivative financial instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net sales
 
11,614

 
14,676

 
25,074

 
11,997

Foreign exchange contracts
 
Cost of goods sold
 
(4,164
)
 
15,485

 
12,763

 
80,094

Foreign exchange contracts
 
Selling, general and administrative expenses
 
(882
)
 
(1,098
)
 
(1,212
)
 
(3,611
)
Foreign exchange contracts
 
Other income (expense), net
 
(774
)
 
526

 
(688
)
 
2,653

Interest rate contracts
 
Interest expense
 
(1,185
)
 
(1,131
)
 
(3,518
)
 
(3,356
)
 
 
Total before tax
 
4,609

 
28,458

 
32,419

 
87,777

 
 
Tax benefit (expense)
 
39

 
(10,928
)
 
(5,669
)
 
(33,726
)
 
 
Net of tax
 
4,648

 
17,530

 
26,750

 
54,051

Total reclassifications for the period
 
Net of tax
 
$
(2,282
)
 
$
7,123

 
$
4,465

 
$
22,747

(a) 
These accumulated OCI components are included in the computation of net periodic pension cost (refer to Note H for additional details).

14


Note J – Stock-based Compensation
During the first nine months of 2017, VF granted stock options to employees and nonemployee members of VF’s Board of Directors to purchase 3,508,940 shares of its Common Stock at a weighted average exercise price of $53.68 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 30%
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
$9.90
Also during the first nine months of 2017, VF granted 615,937 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 weighted average fair market value of VF Common Stock at the date the units were granted was $53.69 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 186,447 nonperformance-based RSUs to certain key employees in international jurisdictions during the first nine months of 2017. These units vest over periods of up to four years from the date of grant and each unit entitles the holder to one share of VF Common Stock. The weighted average fair market value of VF Common Stock at the date the units were granted was $57.70.
VF granted 385,915 restricted shares of VF Common Stock to certain members of management during the first nine months of 2017. These shares vest over periods of up to five years from the date of grant. The weighted average fair market value of VF Common Stock at the date the shares were granted was $55.74 per share.

15


Note K – Income Taxes
The effective income tax rate for the first nine months of 2017 was 18.4% compared to 17.9% in the first nine months of 2016. The first nine months of 2017 included a net discrete tax benefit of $14.4 million, which included a $12.5 million tax benefit related to stock compensation, $4.1 million of net tax benefits related to the realization of previously unrecognized tax benefits and interest, and $1.9 million of discrete tax expense related to the effects of tax rate changes. The $14.4 million net discrete tax benefit in 2017 reduced the effective income tax rate by 1.6%. The first nine months of 2016 included a net discrete tax benefit of $40.3 million, which included a $26.3 million tax benefit related to the early adoption of the accounting standards update on stock compensation, $15.6 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 $40.3 million net discrete tax benefit in 2016 reduced the effective income tax rate by 3.8%. Without discrete items, the effective income tax rate for the first nine months 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, partially offset by the impact of goodwill impairment recorded in the quarter.
VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. In the U.S., the Internal Revenue Service (“IRS”) examinations for tax years through 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 nine months of 2017, the amount of net unrecognized tax benefits and associated interest increased by $2.6 million to $153.1 million. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits and interest may decrease during the next 12 months by approximately $19.1 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $16.9 million would reduce income tax expense.

16


Note L – 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 September
 
Nine Months Ended September
In thousands
2017
 
2016
 
2017
 
2016
Coalition revenues:
 
 
 
 
 
 
 
Outdoor & Action Sports
$
2,502,590

 
$
2,326,436

 
$
5,647,587

 
$
5,378,272

Jeanswear
697,701

 
701,416

 
1,945,950

 
2,041,186

Imagewear
138,885

 
127,992

 
423,859

 
404,633

Sportswear
140,272

 
140,705

 
352,848

 
373,977

Other
29,370

 
31,167

 
79,832

 
84,531

Total coalition revenues
$
3,508,818

 
$
3,327,716

 
$
8,450,076

 
$
8,282,599

Coalition profit: (a)
 
 
 
 
 
 
 
Outdoor & Action Sports
$
524,489

 
$
491,015

 
$
877,206

 
$
842,378

Jeanswear
121,218

 
142,427

 
323,994

 
388,564

Imagewear
22,377

 
23,981

 
72,349

 
74,497

Sportswear
17,488

 
15,080

 
27,764

 
26,156

Other
(737
)
 
(341
)
 
(3,225
)
 
(3,523
)
Total coalition profit
684,835

 
672,162

 
1,298,088

 
1,328,072

Impairment of goodwill (b)
(104,651
)
 

 
(104,651
)
 

Corporate and other expenses (a)
(96,567
)
 
(65,012
)
 
(252,044
)
 
(211,910
)
Interest expense, net
(22,537
)
 
(22,568
)
 
(63,332
)
 
(63,982
)
Income from continuing operations before income taxes
$
461,080

 
$
584,582

 
$
878,061

 
$
1,052,180

 
(a) 
Certain corporate overhead and other costs of $6.0 million and $18.2 million for the three and nine-month periods ended September 2016, respectively, previously allocated to the Imagewear and Outdoor & Action Sports coalitions for segment reporting purposes, have been reallocated to continuing operations as discussed in Note C.
(b) 
Represents goodwill impairment charge in 2017 related to the Sportswear coalition as discussed in Notes G and N. The impairment charge was excluded from the profit of the Sportswear coalition since it is not part of the ongoing operations of the business.
Note M – Earnings Per Share
 
Three Months Ended September
 
Nine Months Ended September
In thousands, except per share amounts
2017
 
2016
 
2017
 
2016
Earnings per share – basic:
 
 
 
 
 
 
 
Income from continuing operations
$
386,764

 
$
485,224

 
$
716,308

 
$
863,652

Weighted average common shares outstanding
393,258

 
413,461

 
400,771

 
417,067

Earnings per share from continuing operations
$
0.98

 
$
1.17

 
$
1.79

 
$
2.07

Earnings per share – diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
386,764

 
$
485,224

 
$
716,308

 
$
863,652

Weighted average common shares outstanding
393,258

 
413,461

 
400,771

 
417,067

Incremental shares from stock options and other dilutive securities
4,126

 
5,779

 
3,848

 
6,410

Adjusted weighted average common shares outstanding
397,384

 
419,240

 
404,619

 
423,477

Earnings per share from continuing operations
$
0.97

 
$
1.16

 
$
1.77

 
$
2.04

Outstanding options to purchase 4.9 million and 8.6 million shares of Common Stock were excluded from the calculations of diluted earnings per share for the three and nine-month periods ended September 2017, respectively, and options to purchase 5.2

17


million and 5.3 million shares were excluded from the calculations of diluted earnings per share for the three and nine-month periods ended September 2016, respectively, 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 nine-month periods ended September 2017, and 1.0 million shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for both the three and nine-month periods ended September 2016 because these units were not considered to be contingent outstanding shares in those periods.
Note N – 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
September 2017
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
405,045

 
$
405,045

 
$

 
$

Time deposits
8,307

 
8,307

 

 

Derivative financial instruments
26,658

 

 
26,658

 

Investment securities
202,721

 
189,744

 
12,977

 

Financial liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
89,212

 

 
89,212

 

Deferred compensation
233,151

 

 
233,151

 

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 nine months 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

18


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 September 2017 and December 2016, their carrying values approximated their fair values. Additionally, at September 2017 and December 2016, the carrying values of VF’s long-term debt, including the current portion, were $2,398.1 million and $2,292.9 million, respectively, compared with fair values of $2,614.6 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.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant and equipment, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event an impairment is required, the asset is adjusted to estimated fair value, using market-based assumptions.
The Company recorded $8.6 million of fixed asset impairments in the third quarter and first nine months of 2017, and the charges are recorded in the selling, general and administrative expenses line item in the Consolidated Statements of Income. There were no significant impairment charges related to property, plant and equipment in the third quarter and first nine months of 2016.
Subsequent to our annual impairment testing completed in the fourth quarter of 2016, the Company continued to monitor the actual performance of the Nautica® brand reporting unit and determined that there were no triggering events in the first and second quarters of fiscal 2017. On August 26, 2017, management commenced a strategic assessment of the Nautica® brand which was considered a triggering event for the reporting unit and trademark intangible asset.
The Nautica® brand was acquired in 2003 and sells sportswear in the U.S. through department stores, specialty stores, VF-operated stores and online. It also has significant global licensing arrangements. The Nautica® brand is part of the Sportswear coalition and represents substantially all of the coalition’s goodwill value. As part of the 2009 annual impairment analysis,VF recorded an impairment charge of $58.5 million to write the goodwill down to its estimated fair value. The remaining book values of the goodwill and trademark intangible asset at the 2017 testing date were $153.7 million and $217.4 million, respectively. 
The impairment testing of goodwill and the trademark intangible asset utilized significant unobservable inputs (Level 3) to determine the estimated fair value. As a result of the interim impairment testing performed, VF recognized a goodwill impairment charge of $104.7 million in the Consolidated Statements of Income for the three and nine months ended September 2017. VF early adopted the recently issued accounting guidance that simplifies the subsequent measurement of goodwill and calculated the impairment charge as the difference between the carrying value of the reporting unit and the estimated fair value. The estimated fair value of the trademark intangible asset exceeded its carrying value by a substantial amount and thus the asset was not impaired.
The estimated fair value of the Nautica® reporting unit for goodwill impairment testing was determined using a combination of two valuation methods: an income approach and a market approach. The income approach was based on projected future (debt-free) cash flows that were discounted to present value and assumed a terminal growth value. The discount rate was based on the reporting unit’s weighted average cost of capital (“WACC”) that takes market participant assumptions into consideration. For the market approach, management used both the guideline company and similar transaction methods. The guideline company method analyzed market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation were based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples were calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.
Management used the income-based relief-from-royalty method to value the Nautica® trademark intangible asset. Under this method, revenues expected to be generated by the trademark were multiplied by a selected royalty rate. The royalty rate was selected based on consideration of i) royalty rates included in active license agreements, ii) royalty rates received by market participants in the apparel industry, and iii) the current performance of the reporting unit. The estimated after-tax royalty revenue

19


stream was then discounted to present value using the reporting unit’s WACC plus a spread that factors in the risk of the intangible asset.
Management’s revenue and profitability forecasts used in the Nautica® reporting unit and intangible asset valuations considered recent and historical Nautica® performance, strategic initiatives for the Nautica® reporting unit and industry trends. Assumptions used in the valuations were similar to those that would be used by market participants performing independent valuations of these businesses.
Key assumptions developed by VF management and used in the quantitative analysis include:
Near-term revenue declines with later-term improvements over the projection period.
Improved profitability over the projection period, trending consistent with revenues.
Royalty rates based on active license agreements of the brand.
Market-based discount rates.
It is possible VF’s conclusions regarding impairment of the Nautica® reporting unit goodwill or trademark intangible asset could change in future periods. There can be no assurance the estimates and assumptions used in our goodwill and intangible asset impairment testing performed in the third quarter of 2017 will prove to be accurate predictions of the future. For example, variations in our assumptions related to discount rates, comparable company market approach inputs, business performance and execution of planned growth strategies could impact future conclusions. A future impairment charge for goodwill or intangible assets could have a material effect on VF’s consolidated financial position and results of operations.
Note O – 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 September 2017, and $2.2 billion at both December 2016 and September 2016, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Swedish krona, Japanese yen, Polish zloty and Turkish lira. Derivative contracts have maturities up to 20 months.
The following table presents outstanding derivatives on an individual contract basis:
 
Fair Value of Derivatives
with Unrealized Gains
 
Fair Value of Derivatives
with Unrealized Losses
In thousands
September 2017
 
December 2016
 
September 2016
 
September 2017
 
December 2016
 
September 2016
Foreign currency exchange contracts designated as hedging instruments
$
26,451

 
$
103,340

 
$
75,497

 
$
(88,593
)
 
$
(25,292
)
 
$
(31,996
)
Foreign currency exchange contracts not designated as hedging instruments
207

 

 

 
(619
)
 
(282
)
 
(185
)
Total derivatives
$
26,658

 
$
103,340

 
$
75,497

 
$
(89,212
)
 
$
(25,574
)
 
$
(32,181
)
VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. If VF were to offset and record the asset and liability balances of its 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:
 
September 2017
 
December 2016
 
September 2016
In thousands
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
Gross amounts presented in the Consolidated Balance Sheets
$
26,658

 
$
(89,212
)
 
$
103,340

 
$
(25,574
)
 
$
75,497

 
$
(32,181
)
Gross amounts not offset in the Consolidated Balance Sheets
(26,001
)
 
26,001

 
(22,341
)
 
22,341

 
(19,328
)
 
19,328

Net amounts
$
657

 
$
(63,211
)
 
$
80,999

 
$
(3,233
)
 
$
56,169

 
$
(12,853
)

20


Derivatives are classified as current or noncurrent based on maturity dates, as follows:
In thousands
September 2017
 
December 2016
 
September 2016
Other current assets
$
23,387

 
$
84,519

 
$
66,231

Accrued liabilities
(75,266
)
 
(18,574
)
 
(28,852
)
Other assets
3,271

 
18,821

 
9,266

Other liabilities
(13,946
)
 
(7,000
)
 
(3,329
)
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 September
 
Gain (Loss) on Derivatives
Recognized in OCI
Nine Months Ended September
Cash Flow Hedging Relationships
2017
 
2016
 
2017
 
2016
Foreign currency exchange
$
(51,147
)
 
$
9,571

 
$
(117,580
)
 
$
32,837

In thousands
Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended September