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V F CORP - Quarter Report: 2016 October (Form 10-Q)

Form 10-Q
Table of Contents

 

 

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 October 1, 2016

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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   ¨

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 29, 2016, there were 413,711,255 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

VF CORPORATION

Table of Contents

 

     Page
No.
 

Part I — Financial Information

  

Item 1 — Financial Statements (Unaudited)

     3   

Consolidated Balance Sheets: September 2016,  December 2015 and September 2015

     3   

Consolidated Statements of Income: Three and nine months ended September 2016 and September 2015

     4   

Consolidated Statements of Comprehensive Income (Loss): Three and nine months ended September 2016 and September 2015

     5   

Consolidated Statements of Cash Flows: Nine months ended September 2016 and September 2015

     6   

Consolidated Statements of Stockholders’ Equity: Year ended December 2015 and nine months ended September 2016

     7   

Notes to Consolidated Financial Statements

     8   

Item  2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item  3 — Quantitative and Qualitative Disclosures about Market Risk

     33   

Item 4 — Controls and Procedures

     34   

Part II — Other Information

  

Item 1 — Legal Proceedings

     35   

Item 1A — Risk Factors

     35   

Item  2 — Unregistered Sales of Equity Securities and Use of Proceeds

     35   

Item 6 — Exhibits

     36   

Signatures

     37   


Table of Contents

Part I — Financial Information

Item 1 — Financial Statements (Unaudited)

VF CORPORATION

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share amounts)

 

     September 2016     December 2015     September 2015  

ASSETS

      

Current assets

      

Cash and equivalents

   $ 737,825      $ 944,423      $ 567,637   

Accounts receivable, less allowance for doubtful accounts of: September 2016 – $22,947; December 2015 – $23,275; September 2015 – $22,301

     1,785,289        1,289,962        1,840,673   

Inventories

     1,999,996        1,555,360        1,971,790   

Other current assets

     295,913        284,215        291,419   

Current assets of discontinued operations

     —          89,176        100,363   
  

 

 

   

 

 

   

 

 

 

Total current assets

     4,819,023        4,163,136        4,771,882   

Property, plant and equipment

     949,312        945,491        935,068   

Intangible assets

     1,970,788        1,948,611        2,001,010   

Goodwill

     1,798,474        1,788,407        1,800,008   

Other assets

     905,512        583,866        646,892   

Other assets of discontinued operations

     —          210,031        358,252   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 10,443,109      $ 9,639,542      $ 10,513,112   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities

      

Short-term borrowings

   $ 737,660      $ 449,590      $ 1,285,388   

Current portion of long-term debt

     3,643        3,351        3,214   

Accounts payable

     565,745        680,606        571,448   

Accrued liabilities

     870,148        782,148        890,574   

Current liabilities of discontinued operations

     —          26,018        26,904   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     2,177,196        1,941,713        2,777,528   

Long-term debt

     2,347,122        1,401,820        1,401,058   

Other liabilities

     1,046,014        900,256        962,083   

Other liabilities of discontinued operations

     —          10,915        11,246   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Total liabilities

     5,570,332        4,254,704        5,151,915   
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity

      

Preferred Stock, par value $1; shares authorized, 25,000,000; no shares outstanding at September 2016, December 2015 or September 2015

      

Common Stock, stated value $0.25; shares authorized, 1,200,000,000; shares outstanding at September 2016 – 413,682,259; December 2015 – 426,614,274; September 2015 – 426,250,097

     103,421        106,654        106,563   

Additional paid-in capital

     3,313,077        3,192,675        3,176,806   

Accumulated other comprehensive income (loss)

     (998,020     (1,043,222     (898,775

Retained earnings

     2,454,299        3,128,731        2,976,603   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     4,872,777        5,384,838        5,361,197   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 10,443,109      $ 9,639,542      $ 10,513,112   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

VF CORPORATION

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended September     Nine Months Ended September  
     2016     2015     2016     2015  

Net sales

   $ 3,457,570      $ 3,500,569      $ 8,611,419      $ 8,614,974   

Royalty income

     30,656        29,057        87,010        91,402   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     3,488,226        3,529,626        8,698,429        8,706,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses

        

Cost of goods sold

     1,800,748        1,844,441        4,505,930        4,513,331   

Selling, general and administrative expenses

     1,052,050        1,045,622        3,013,394        2,943,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     2,852,798        2,890,063        7,519,324        7,456,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     635,428        639,563        1,179,105        1,249,892   

Interest income

     2,195        1,506        6,393        5,499   

Interest expense

     (24,783     (22,163     (70,449     (66,713

Other income (expense), net

     (1,097     (1,278     1,696        217   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     611,743        617,628        1,116,745        1,188,895   

Income taxes

     108,709        159,993        208,551        280,293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     503,034        457,635        908,194        908,602   

Income (loss) from discontinued operations, net of tax

     (4,545     2,229        (98,421     10,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 498,489      $ 459,864      $ 809,773      $ 919,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share - basic

        

Continuing operations

   $ 1.22      $ 1.08      $ 2.18      $ 2.14   

Discontinued operations

     (0.01     —          (0.24     0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total earnings per common share - basic

   $ 1.21      $ 1.08      $ 1.94      $ 2.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share - diluted

        

Continuing operations

   $ 1.20      $ 1.06      $ 2.14      $ 2.10   

Discontinued operations

     (0.01     0.01        (0.23     0.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total earnings per common share - diluted

   $ 1.19      $ 1.07      $ 1.91      $ 2.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends per common share

   $ 0.37      $ 0.32      $ 1.11      $ 0.96   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

     Three Months Ended September     Nine Months Ended September  
     2016     2015     2016     2015  

Net income

   $ 498,489      $ 459,864      $ 809,773      $ 919,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Foreign currency translation and other

        

Gains (losses) arising during the period

     4,154        12,282        48,222        (232,829

Less income tax effect

     508        1,740        (604     4,495   

Defined benefit pension plans

        

Amortization of net deferred actuarial losses

     16,303        15,493        48,928        46,485   

Amortization of deferred prior service costs

     645        760        1,937        2,281   

Settlement charge

     —          2,400        —          3,992   

Less income tax effect

     (6,541     (7,065     (19,561     (24,161

Derivative financial instruments

        

Gains (losses) arising during the period

     9,571        5,634        32,837        52,068   

Less income tax effect

     (3,675     (2,178     (12,506     (20,143

Reclassification to net income for (gains) losses realized

     (28,458     (23,171     (87,777     (46,669

Less income tax effect

     10,928        8,956        33,726        18,392   

Marketable securities

        

Gains (losses) arising during the period

     —          —          —          495   

Less income tax effect

     —          —          —          (195

Reclassification to net income for (gains) losses realized

     —          —          —          (1,177

Less income tax effect

     —          —          —          463   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3,435        14,851        45,202        (196,503
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 501,924      $ 474,715      $ 854,975      $ 722,881   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Nine Months Ended September  
     2016     2015  

Operating activities

    

Net income

   $ 809,773      $ 919,384   

Adjustments to reconcile net income to cash provided (used) by operating activities

    

Depreciation and amortization

     205,491        198,304   

Stock-based compensation

     54,933        73,136   

Provision for doubtful accounts

     16,193        7,876   

Pension expense in excess of (less than) contributions

     33,866        (220,339

Loss on sale of businesses

     104,357        —     

Other, net

     22,466        604   

Changes in operating assets and liabilities:

    

Accounts receivable

     (501,186     (653,545

Inventories

     (443,115     (587,669

Accounts payable

     (116,800     (100,533

Income taxes

     (141,262     21,451   

Accrued liabilities

     56,055        74,845   

Other assets and liabilities

     (57,403     (13,725
  

 

 

   

 

 

 

Cash provided (used) by operating activities

     43,368        (280,211

Investing activities

    

Capital expenditures

     (129,947     (187,281

Proceeds from sale of businesses, net of cash sold

     115,983        —     

Software purchases

     (31,843     (53,053

Other, net

     (4,997     3,150   
  

 

 

   

 

 

 

Cash used by investing activities

     (50,804     (237,184

Financing activities

    

Net increase in short-term borrowings

     287,759        1,268,146   

Payments on long-term debt

     (12,385     (3,163

Payment of debt issuance costs

     (6,772     (1,475

Proceeds from long-term debt

     951,782        —     

Purchases of treasury stock

     (1,000,230     (731,936

Cash dividends paid

     (462,406     (407,684

Proceeds from issuance of Common Stock, net of shares withheld for taxes

     40,667        23,168   
  

 

 

   

 

 

 

Cash (used) provided by financing activities

     (201,585     147,056   

Effect of foreign currency rate changes on cash and equivalents

     1,241        (34,957
  

 

 

   

 

 

 

Net change in cash and equivalents

     (207,780     (405,296

Cash and equivalents – beginning of year (a)

     945,605        971,895   
  

 

 

   

 

 

 

Cash and equivalents – end of period (a)

   $ 737,825      $ 566,599   
  

 

 

   

 

 

 

 

(a)  The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations.”

See notes to consolidated financial statements.

 

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Table of Contents

VF CORPORATION

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

                        Accumulated        
                 Additional      Other        
     Common Stock     Paid-in      Comprehensive     Retained  
     Shares     Amounts     Capital      Income (Loss)     Earnings  

Balance, December 2014

     432,859,891      $ 108,215      $ 2,993,186       $ (702,272   $ 3,231,753   

Net income

     —          —          —           —          1,231,593   

Dividends on Common Stock

     —          —          —           —          (565,275

Purchase of treasury stock

     (10,036,100     (2,509     —           —          (730,114

Stock-based compensation, net

     3,790,483        948        199,489         —          (39,226

Foreign currency translation and other

     —          —          —           (361,228     —     

Defined benefit pension plans

     —          —          —           4,939        —     

Derivative financial instruments

     —          —          —           15,753        —     

Marketable securities

     —          —          —           (414     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, December 2015

     426,614,274        106,654        3,192,675         (1,043,222     3,128,731   

Net income

     —          —          —           —          809,773   

Dividends on Common Stock

     —          —          —           —          (462,406

Purchase of treasury stock

     (15,927,775     (3,982     —           —          (996,248

Stock-based compensation, net

     2,995,760        749        120,402         —          (25,551

Foreign currency translation and other

     —          —          —           47,618        —     

Defined benefit pension plans

     —          —          —           31,304        —     

Derivative financial instruments

     —          —          —           (33,720     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 2016

     413,682,259      $ 103,421      $ 3,313,077       $ (998,020   $ 2,454,299   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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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 2016, December 2015 and September 2015 relate to the fiscal periods ended on October 1, 2016, January 2, 2016 and October 3, 2015, respectively.

On August 26, 2016, VF completed the sale of its Contemporary Brands coalition. As a result, VF has reported the operating results of this coalition in the income (loss) from discontinued operations line in the Consolidated Statements of Income for all periods presented. In addition, the related assets and liabilities were reported as assets of discontinued operations and liabilities of discontinued operations in the Consolidated Balance Sheets through the date of sale. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. See Note B for additional information on discontinued operations.

The accompanying unaudited 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 2015 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 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 2016 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2016. 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 2015 (“2015 Form 10-K”).

Note B – Discontinued Operations

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 is included in the income (loss) from discontinued operations line in the Consolidated Statements of Income for the first nine months of 2016. The after-tax loss on sale included in income (loss) from discontinued operations for the third quarter of 2016 was $3.8 million.

Beginning in the second quarter of 2016, VF has reported the results of the Businesses in the income (loss) from discontinued operations line item in the Consolidated Statements of Income and excluded them from continuing operations and segment results. Prior to the sale, the assets and liabilities of the Businesses were recorded in the assets of discontinued operations and liabilities of discontinued operations line items, respectively, in the Consolidated Balance Sheets.

Certain corporate overhead costs and interest expense previously allocated to the Contemporary Brands coalition for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations. In addition, goodwill and intangible asset impairment charges related to the Contemporary Brands coalition, previously excluded from the calculation of coalition profit, were reallocated to discontinued operations. These changes were applied to all periods presented.

VF will provide certain support services under transition services agreements for a limited period of time.

 

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Table of Contents

The following table summarizes the major line items included in the income (loss) from discontinued operations for each of the periods presented.

 

     Three Months Ended September      Nine Months Ended September  
In thousands    2016      2015      2016      2015  

Revenues

   $ 43,186       $ 83,194       $ 187,821       $ 257,605   

Cost of goods sold

     20,199         39,169         85,303         117,172   

Selling, general and administrative expenses

     26,062         40,660         99,295         126,535   

Interest income (expense), net

     (1      (161      (109      (483

Other income (expense), net

     7         (2      3         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax income (loss) from discontinued operations

     (3,069      3,202         3,117         13,416   

Pre-tax loss on the disposal of discontinued operations

     (4,439      —           (154,275      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pre-tax income (loss) from discontinued operations

     (7,508      3,202         (151,158      13,416   

Income tax benefit (expense)

     2,963         (973      52,737         (2,634
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from discontinued operations

   $ (4,545    $ 2,229       $ (98,421    $ 10,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

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
2016
     December
2015
     September
2015
 

Accounts receivable, net

   $ —         $ 29,596       $ 29,857   

Inventories

     —           56,634         66,336   

Other current assets, including cash and equivalents

     —           2,946         4,170   

Property, plant and equipment

     —           42,668         46,490   

Intangible assets

     —           164,008         308,471   

Other assets

     —           3,355         3,291   
  

 

 

    

 

 

    

 

 

 

Total assets of discontinued operations(a)

   $ —         $ 299,207       $ 458,615   
  

 

 

    

 

 

    

 

 

 

Current portion of long-term debt

   $ —         $ 9,928       $ 9,983   

Accounts payable

     —           8,988         8,920   

Accrued liabilities

     —           7,102         8,001   

Other liabilities

     —           10,915         11,246   
  

 

 

    

 

 

    

 

 

 

Total liabilities of discontinued operations(a)

   $ —         $ 36,933       $ 38,150   
  

 

 

    

 

 

    

 

 

 

 

(a) Amounts at December 2015 and September 2015 have been classified as current and long-term in the Consolidated Balance Sheets.

Because the cash flows of the Businesses were not material for any of the periods presented, we have not segregated them in our Consolidated Statements of Cash Flows.

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. This agreement was amended in January 2016 to permit up to $367.5 million of VF’s accounts receivable to be sold to the financial institution and remain outstanding at any point in time, compared to the $237.5 million limit in place at December 2015 and September 2015. 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 2016, VF sold total accounts receivable of $983.5 million. As of September 2016, December 2015 and September 2015, $212.3 million, $144.9 million and $167.5 million, respectively, of the sold accounts

 

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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 other income (expense), net, and was $0.8 million and $2.5 million for the third quarter and first nine months of 2016, respectively, and $0.5 million and $1.4 million for the third quarter and first nine months of 2015, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.

Note D – Inventories

 

In thousands    September 2016      December 2015      September 2015  

Finished products

   $ 1,744,064       $ 1,313,646       $ 1,716,568   

Work-in-process

     98,686         94,355         93,198   

Raw materials

     157,246         147,359         162,024   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 1,999,996       $ 1,555,360       $ 1,971,790   
  

 

 

    

 

 

    

 

 

 

Note E – Property, Plant and Equipment

 

In thousands    September 2016      December 2015      September 2015  

Land and improvements

   $ 95,442       $ 93,923       $ 93,665   

Buildings and improvements

     1,026,266         983,666         963,647   

Machinery and equipment

     1,295,215         1,233,656         1,220,327   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, at cost

     2,416,923         2,311,245         2,277,639   

Less accumulated depreciation and amortization

     1,467,611         1,365,754         1,342,571   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

   $ 949,312       $ 945,491       $ 935,068   
  

 

 

    

 

 

    

 

 

 

Note F – Intangible Assets

 

                   September 2016      December 2015  
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       $ 280,909       $ 132,435       $ 148,474       $ 156,047   

License agreements

     24 years        
 
Accelerated and
straight-line
  
  
     179,488         99,228         80,260         86,540   

Trademark

     16 years         Straight-line         58,132         2,725         55,407         —     

Other

     10 years         Straight-line         6,358         2,678         3,680         3,443   
              

 

 

    

 

 

 

Amortizable intangible assets, net

  

              287,821         246,030   
              

 

 

    

 

 

 

Indefinite-lived intangible assets:

                 

Trademarks and trade names

                 1,682,967         1,702,581   
              

 

 

    

 

 

 

Intangible assets, net

               $ 1,970,788       $ 1,948,611   
              

 

 

    

 

 

 

In connection with the contract renewal during the first quarter of 2016, VF determined that the trademark intangible asset related to the Rock & Republic® brand has a finite life. Accordingly, we reclassified the $58.1 million trademark balance from indefinite-lived intangible assets to amortizable intangible assets, and commenced amortization of the trademark over its estimated useful life of 16 years.

Amortization expense for the third quarter and first nine months of 2016 was $6.9 million and $20.8 million, respectively. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the years 2016 through 2020 is $27.5 million, $26.5 million, $25.9 million, $25.2 million and $24.3 million, respectively.

 

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There were no impairment charges recorded in the third quarter or first nine months of 2016. Refer to Note O for discussion of the Company’s interim impairment testing of the Nautica® trademark during the third quarter of 2016.

Note G – Goodwill

Changes in goodwill are summarized by business segment as follows:

 

In thousands    Outdoor &
Action Sports
     Jeanswear      Imagewear      Sportswear      Total  

Balance, December 2015

   $ 1,359,475       $ 212,871       $ 58,747       $ 157,314       $ 1,788,407   

Currency translation

     8,443         1,624         —           —           10,067   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 2016

   $ 1,367,918       $ 214,495       $ 58,747       $ 157,314       $ 1,798,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated impairment charges were $43.4 million for the Outdoor & Action Sports coalition and $58.5 million for the Sportswear coalition as of the dates presented above.

There were no impairment charges recorded in the third quarter or first nine months of 2016. Refer to Note O for discussion of the Company’s interim impairment testing of the Nautica® reporting unit during the third quarter of 2016.

Note H Short-term Borrowings and Long-term Debt

In June 2016, VF entered an accession agreement to increase the existing $1.75 billion senior unsecured revolving line of credit to $2.25 billion. This line of credit supports VF’s commercial paper program which was also increased to $2.25 billion.

In September 2016, VF issued €850 million of 0.625% fixed-rate notes maturing in September 2023. The outstanding balance of the notes was $947.1 million at September 2016, which was net of unamortized original issue discount and debt issuance costs. Interest expense on these notes is recorded at an effective annual interest rate of 0.712% which includes amortization of original issue discount and debt issuance costs.

Note I – Pension Plans

The components of pension cost for VF’s defined benefit plans are as follows:

 

     Three Months Ended September      Nine Months Ended September  
In thousands    2016      2015      2016      2015  

Service cost – benefits earned during the period

   $ 6,478       $ 7,305       $ 19,434       $ 21,984   

Interest cost on projected benefit obligations

     16,991         19,415         51,066         58,229   

Expected return on plan assets

     (24,869      (27,784      (74,714      (83,334

Amortization of deferred amounts:

           

Net deferred actuarial losses

     16,303         15,493         48,928         46,485   

Deferred prior service costs

     645         760         1,937         2,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 15,548       $ 15,189       $ 46,651       $ 45,645   
  

 

 

    

 

 

    

 

 

    

 

 

 

VF contributed $12.8 million to its defined benefit plans during the first nine months of 2016, and intends to make approximately $2.4 million of additional contributions during the remainder of 2016.

VF incurred $2.4 million and $4.0 million in settlement charges during the third quarter and first nine months of 2015, respectively, related to the recognition of deferred actuarial losses resulting from lump sum payments of retirement benefits to participants in VF’s supplemental defined benefit pension plan. No settlement charges were incurred during the first nine months of 2016.

 

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Note J – Capital and Accumulated Other Comprehensive Income (Loss)

During the first nine months of 2016, the Company purchased 15.9 million shares of Common Stock in open market transactions for $1.0 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 2016, VF restored 16.0 million treasury shares to an unissued status, after which they were no longer recognized as shares held in treasury. There were 2,600 shares held in treasury at the end of September 2016, no shares held in treasury at the end of December 2015, and 1,900 shares held in treasury at the end of September 2015. 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 2016, the Company purchased 4,000 shares of Common Stock in open market transactions for $0.2 million. Balances related to shares held for deferred compensation plans were as follows:

 

In thousands, except share amounts    September 2016      December 2015      September 2015  

Shares held for deferred compensation plans

     450,067         562,649         560,049   

Cost of shares held for deferred compensation plans

   $ 5,434       $ 6,823       $ 6,651   

Accumulated Other Comprehensive Income (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 2016      December 2015      September 2015  

Foreign currency translation and other

   $ (670,551    $ (718,169    $ (585,275

Defined benefit pension plans

     (340,891      (372,195      (348,537

Derivative financial instruments

     13,422         47,142         35,037   
  

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income (loss)

   $ (998,020    $ (1,043,222    $ (898,775
  

 

 

    

 

 

    

 

 

 

 

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The changes in accumulated OCI, net of related taxes, are as follows:

 

     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

    reclassification

     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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 2015  
In thousands    Foreign
Currency
Translation
and Other
    Defined
Benefit
Pension Plans
    Derivative
Financial
Instruments
    Total  

Balance, June 2015

   $ (599,297   $ (360,125   $ 45,796      $ (913,626
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before

    reclassification

     14,022        —          3,456        17,478   

Amounts reclassified from accumulated other

    comprehensive income (loss)

     —          11,588        (14,215     (2,627
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     14,022        11,588        (10,759     14,851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 2015

   $ (585,275   $ (348,537   $ 35,037      $ (898,775
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     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

    reclassification

     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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 2015  
In thousands    Foreign
Currency
Translation
and Other
    Defined
Benefit
Pension Plans
    Derivative
Financial
Instruments
    Marketable
Securities
    Total  

Balance, December 2014

   $ (356,941   $ (377,134   $ 31,389      $ 414      $ (702,272
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before

    reclassification

     (228,334     —          31,925        300        (196,109

Amounts reclassified from accumulated other comprehensive income (loss)

     —          28,597        (28,277     (714     (394
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (228,334     28,597        3,648        (414     (196,503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 2015

   $ (585,275   $ (348,537   $ 35,037      $ —        $ (898,775
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

    2016     2015     2016     2015  

Amortization of defined benefit pension plans:

         

Net deferred actuarial losses

  (a)   $ (16,303   $ (15,493   $ (48,928   $ (46,485

Deferred prior service costs

  (a)     (645     (760     (1,937     (2,281

Pension settlement charges

  Selling, general and administrative expenses     —          (2,400     —          (3,992
   

 

 

   

 

 

   

 

 

   

 

 

 
  Total before tax     (16,948     (18,653     (50,865     (52,758
  Tax benefit     6,541        7,065        19,561        24,161   
   

 

 

   

 

 

   

 

 

   

 

 

 
  Net of tax     (10,407     (11,588     (31,304     (28,597
   

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative financial instruments:

         

Foreign exchange contracts

  Net sales     14,676        (22,434     11,997        (51,279

Foreign exchange contracts

  Cost of goods sold     15,485        39,142        80,094        80,633   

Foreign exchange contracts

  Selling, general and administrative expenses     (1,098     —          (3,611     —     

Foreign exchange contracts

  Other income (expense), net     526        7,541        2,653        20,515   

Interest rate contracts

  Interest expense     (1,131     (1,078     (3,356     (3,200
   

 

 

   

 

 

   

 

 

   

 

 

 
  Total before tax     28,458        23,171        87,777        46,669   
  Tax expense     (10,928     (8,956     (33,726     (18,392
   

 

 

   

 

 

   

 

 

   

 

 

 
  Net of tax     17,530        14,215        54,051        28,277   

Gains (losses) on sales of marketable securities

  Other income (expense), net     —          —          —          1,177   
  Tax expense     —          —          —          (463
   

 

 

   

 

 

   

 

 

   

 

 

 
  Net of tax     —          —          —          714   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications for the period

  Net of tax   $ 7,123      $ 2,627      $ 22,747      $ 394   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Note K – Stock-based Compensation

During the first nine months of 2016, VF granted stock options to employees and nonemployee members of VF’s Board of Directors to purchase 3,132,609 shares of its Common Stock at a weighted exercise price of $61.31 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:

 

     2016

Expected volatility

   21% to 29%

Weighted average expected volatility

   24%

Expected term (in years)

   6.3 to 7.6

Weighted average dividend yield

   2.2%

Risk-free interest rate

   0.4% to 1.7%

Weighted average fair value at date of grant

   $12.08

Also, during the first nine months of 2016, VF granted 605,658 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 $61.31 per share.

 

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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 2016 performance-based RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was $4.48 per share.

VF granted 13,013 nonperformance-based RSUs to nonemployee members of the Board of Directors during the first quarter of 2016. 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 $61.29 per share.

VF granted 69,100 nonperformance-based RSUs to certain key employees in international jurisdictions during the first nine months of 2016. These units vest 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 $61.93.

VF granted 128,737 restricted shares of VF Common Stock to certain members of management during the first nine months of 2016. 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 $61.66 per share.

Note L – Income Taxes

The effective income tax rate for the first nine months of 2016 was 18.7% compared to 23.6% in the first nine months of 2015. The first nine months of 2016 included a net discrete tax benefit of $40.6 million, which included a $26.5 million tax benefit related to the early adoption of the accounting standards update on stock compensation (see Note Q), $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 $40.6 million net discrete tax benefit in 2016 reduced the effective income tax rate by 3.6%. The first nine months of 2015 included a net discrete tax benefit of $29.0 million, which included $33.7 million of tax benefits related to the settlement of tax audits and $5.0 million of discrete tax expense related to the effects of tax rate changes. The $29.0 million net discrete tax benefit in 2015 reduced the effective income tax rate by 2.4%. Without discrete items, the effective income tax rate for the first nine months of 2016 decreased by 3.7% compared to the 2015 period primarily due to a higher percentage of income in lower tax rate jurisdictions and the impact of tax law changes in the U.S.

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 2011 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 and, during 2015, VF filed a petition to the U.S. Tax Court to begin the process of resolving this matter. 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.

In February 2015, the European Union Commission (“EU”) opened a state aid investigation into rulings granted to companies under Belgium’s excess profit tax regime. On January 11, 2016, the EU announced its decision that these rulings granted by the Belgian government were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF. In March 2016, the Belgian government filed an appeal seeking annulment of the EU state aid decision. During the second quarter of 2016, the Company filed a separate appeal to the EU seeking annulment of the state aid decision.

During the second quarter of 2016, the Company received an assessment from the Belgian government regarding the amount of tax and interest due as a result of the excess profits ruling. The Company has not paid the assessed tax and interest as of the third quarter of 2016. The Company has evaluated all available information, including the technical merits of the excess profits ruling, and has concluded the amount of benefit previously recognized by the Company is the amount more likely than not to be sustained. As such, the Company has not made any additional accruals regarding the EU state aid decision. The Company does not expect the outcome of the appeals to have a material impact on the Company’s financial statements in future periods.

During the first nine months of 2016, the amount of net unrecognized tax benefits and associated interest increased by $96.4 million to $169.5 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 $18.8 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $16.6 million would reduce income tax expense.

 

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Note M – 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    2016      2015      2016      2015  

Coalition revenues:

           

Outdoor & Action Sports

   $ 2,335,993       $ 2,296,551       $ 5,399,916       $ 5,299,784   

Jeanswear

     701,416         747,869         2,041,186         2,055,725   

Imagewear

     281,542         291,540         805,892         823,224   

Sportswear

     140,705         161,697         373,977         439,545   

Other

     28,570         31,969         77,458         88,098   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total coalition revenues

   $ 3,488,226       $ 3,529,626       $ 8,698,429       $ 8,706,376   
  

 

 

    

 

 

    

 

 

    

 

 

 

Coalition profit:

           

Outdoor & Action Sports

   $ 490,470       $ 487,929       $ 841,413       $ 883,674   

Jeanswear

     142,427         158,603         388,564         395,103   

Imagewear

     46,634         41,830         124,546         118,627   

Sportswear

     15,080         23,194         26,156         50,468   

Other (a)

     (272      354         (3,134      15,478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total coalition profit

     694,339         711,910         1,377,545         1,463,350   

Corporate and other expenses (b)

     (60,008      (73,625      (196,744      (213,241

Interest expense, net (b)

     (22,588      (20,657      (64,056      (61,214
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

   $ 611,743       $ 617,628       $ 1,116,745       $ 1,188,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes a $16.6 million gain recognized on the sale of a VF Outlet® location in the first quarter of 2015.
(b) Certain corporate overhead costs and interest expense previously allocated to the Contemporary Brands coalition for segment reporting purposes have been reallocated to continuing operations as discussed in Note B.

Note N – Earnings Per Share

 

     Three Months Ended September      Nine Months Ended September  
In thousands, except per share amounts    2016      2015      2016      2015  

Earnings per share – basic:

           

Income from continuing operations

   $ 503,034       $ 457,635       $ 908,194       $ 908,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     413,461         425,208         417,067         425,273   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share from continuing operations

   $ 1.22       $ 1.08       $ 2.18       $ 2.14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share – diluted:

           

Income from continuing operations

   $ 503,034       $ 457,635       $ 908,194       $ 908,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     413,461         425,208         417,067         425,273   

Incremental shares from stock options and other dilutive securities

     5,779         6,252         6,410         6,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average common shares outstanding

     419,240         431,460         423,477         432,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share from continuing operations

   $ 1.20       $ 1.06       $ 2.14       $ 2.10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding options to purchase 5.2 million and 5.3 million shares of Common Stock were excluded from the calculations of diluted earnings per share for the three and nine-month periods ended September 2016, respectively, and options to purchase 2.4 million shares were excluded from the calculations of diluted earnings per share for both the three and nine-month periods ended September 2015, because the effect of their inclusion would have been antidilutive to those periods. In addition, 1.0 million shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for all periods presented because these units were not considered to be contingent outstanding shares in those periods.

 

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Note O – 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. 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 Measurement Using (a)  
In thousands    Fair Value      Level 1      Level 2      Level 3  

September 2016

           

Financial assets:

           

Cash equivalents:

           

Money market funds

   $ 460,504       $ 460,504       $ —         $ —     

Time deposits

     32,987         32,987         —           —     

Derivative financial instruments

     75,497         —           75,497         —     

Investment securities

     204,384         186,176         18,208         —     

Financial liabilities:

           

Derivative financial instruments

     32,181         —           32,181         —     

Deferred compensation

     237,175         —           237,175         —     

December 2015

           

Financial assets:

           

Cash equivalents:

           

Money market funds

   $ 495,264       $ 495,264       $ —         $ —     

Time deposits

     39,813         39,813         —           —     

Derivative financial instruments

     105,791         —           105,791         —     

Investment securities

     203,797         190,792         13,005         —     

Financial liabilities:

           

Derivative financial instruments

     28,032         —           28,032         —     

Deferred compensation

     252,723         —           252,723         —     

 

(a) There were no transfers among the levels within the fair value hierarchy during the first nine months of 2016 or the year ended December 2015.

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.

 

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Prior to the second quarter of 2015, other marketable securities consisted of common stock investments classified as available-for-sale, the fair value of which was based on quoted prices in active markets. During the second quarter of 2015, VF sold all of its available-for-sale securities for $5.9 million in cash proceeds and recognized a gain of $1.5 million, which is included in other income (expense), net, in the 2015 Consolidated Statement of Income.

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 2016 and December 2015, their carrying values approximated their fair values. Additionally, at September 2016 and December 2015, the carrying values of VF’s long-term debt, including the current portion, were $2,350.8 million and $1,405.2 million, respectively, compared with fair values of $2,647.0 million and $1,582.5 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

During the third quarter of 2016, management determined that the continued revenue and profitability decline in the Nautica® brand, combined with a downward revision to the forecast for the remainder of the year, was a triggering event that required an interim impairment analysis of the goodwill and trademark intangible assets. The Nautica® brand is part of the Sportswear coalition and represents primarily all of the coalition’s goodwill value. Based on the quantitative impairment analysis performed, VF determined the goodwill and trademark intangible assets of Nautica® were not impaired. For goodwill, the fair value of the reporting unit exceeded the carrying value by 45%. The fair value of the trademark intangible asset exceeded its carrying value by a significant amount.

The impairment testing of goodwill and trademark intangible assets utilized significant unobservable inputs (Level 3) to determine fair value.

The 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. The discount rate was based on the reporting unit’s calculated weighted average cost of capital (“WACC”), which takes into consideration the characteristics of relevant peer companies, market observable data, and company-specific risk factors. 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.

VF used the income-based relief-from-royalty method to value the Nautica® trademark intangible asset. In applying 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, if applicable, 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 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 performance and trends, strategic initiatives and negative 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:

 

    Long-term growth in revenues primarily due to expanded distribution channels, including conversion of licensing arrangements in key international markets.

 

    A gradual return to historical profitability rates over the remaining forecast period.

 

    Royalty rates based on active license agreements of the brand.

 

    Market-based discount rates.

 

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Management performed sensitivity analyses on the goodwill impairment model and determined that neither a 100 basis point decrease in the compounded annual growth rate for EBITDA nor a 100 basis point increase in the discount rate caused the estimated fair value of the reporting unit to decline below its carrying value.

It is possible VF’s conclusions regarding impairment of the Nautica® reporting unit goodwill or intangible assets 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 2016 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 P – 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 $2.2 billion at September 2016, $2.4 billion at December 2015 and $2.4 billion at September 2015, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Swedish krona, Japanese yen and Polish zloty. Derivative contracts have maturities up to 24 months.

The following table presents outstanding derivatives on an individual contract basis:

 

    Fair Value of Derivatives
with Unrealized Gains
    Fair Value of Derivatives
with Unrealized Losses
 
In thousands   September 2016     December 2015     September 2015     September 2016     December 2015     September 2015  

Foreign currency exchange contracts designated as hedging instruments

  $ 75,497      $ 105,536      $ 94,113      $ (31,996   $ (27,896   $ (46,808

Foreign currency exchange contracts not designated as hedging instruments

    —          255        112        (185     (136     (373
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

  $ 75,497      $ 105,791      $ 94,225      $ (32,181   $ (28,032   $ (47,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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. 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:

 

     September 2016     December 2015     September 2015  
In thousands    Derivative
Asset
    Derivative
Liability
    Derivative
Asset
    Derivative
Liability
    Derivative
Asset
    Derivative
Liability
 

Gross amounts presented in the

            

Consolidated Balance Sheets

   $ 75,497      $ (32,181   $ 105,791      $ (28,032   $ 94,225      $ (47,181

Gross amounts not offset in the

            

Consolidated Balance Sheets

     (19,328     19,328        (22,213     22,213        (36,597     36,597   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts

   $ 56,169      $ (12,853   $ 83,578      $ (5,819   $ 57,628      $ (10,584
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives are classified as current or noncurrent based on maturity dates, as follows:

 

In thousands    September 2016      December 2015      September 2015  

Other current assets

   $ 66,231       $ 92,796       $ 85,405   

Accrued liabilities

     (28,852      (25,776      (40,969

Other assets

     9,266         12,995         8,820   

Other liabilities

     (3,329      (2,256      (6,212

 

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Cash Flow Hedges

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:

 

In thousands    Gain (Loss) on Derivatives
Recognized in OCI
Three Months Ended September
     Gain (Loss) on Derivatives
Recognized in OCI
Nine Months Ended September
 

Cash Flow Hedging Relationships

   2016      2015      2016      2015  

Foreign currency exchange

   $ 9,571       $ 5,634       $ 32,837       $ 52,068   
In thousands    Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended September
     Gain (Loss) Reclassified from
Accumulated OCI into Income
Nine Months Ended September
 

Location of Gain (Loss)

   2016      2015      2016      2015  

Net sales

   $ 14,676       $ (22,434    $ 11,997       $ (51,279

Cost of goods sold

     15,485         39,142         80,094         80,633   

Selling, general and administrative expenses

     (1,098      —           (3,611      —     

Other income (expense), net

     526         7,541         2,653         20,515   

Interest expense

     (1,131      (1,078      (3,356      (3,200
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,458       $ 23,171       $ 87,777       $ 46,669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Contracts Not Designated as Hedges

VF uses derivative contracts to manage foreign currency exchange risk on third-party accounts receivable and payable, as well as intercompany borrowings. These contracts are not designated as hedges, and are recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net transaction gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:

 

In thousands

Derivatives Not Designated as Hedges

   Location of Gain (Loss)
on Derivatives
Recognized in Income
     Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended September
     Gain (Loss) on Derivatives
Recognized in Income
Nine Months Ended September
 
      2016     2015      2016     2015  

Foreign currency exchange

     Cost of goods sold       $ (510   $ —         $ 225      $ —     

Foreign currency exchange

     Other income (expense), net         (110     836         (1,196     (1,625
     

 

 

   

 

 

    

 

 

   

 

 

 

Total

      $ (620   $ 836       $ (971   $ (1,625
     

 

 

   

 

 

    

 

 

   

 

 

 

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and nine-month periods ended September 2016 and September 2015.

 

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At September 2016, accumulated OCI included $42.8 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 $23.8 million at September 2016, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. VF reclassified $1.1 million and $3.4 million of net deferred losses from accumulated OCI into interest expense for the three and nine-month periods ended September 2016, respectively, and $1.1 million and $3.2 million for the three and nine-month periods ended September 2015, respectively. VF expects to reclassify $4.7 million to interest expense during the next 12 months.

Net Investment Hedge

The Company has designated its €850 million of euro-denominated bonds 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 recorded in the cumulative translation adjustment component of accumulated OCI as an offset to the foreign currency translation adjustments on the hedged investments. During the third quarter of 2016, the Company recognized $1.7 million of gains in accumulated OCI related to the net investment hedge transaction. The amount will remain in OCI until the hedged investment is sold or substantially liquidated. The Company recorded no ineffectiveness from its net investment hedge in the third quarter of 2016.

Note Q – Recently Adopted and Issued Accounting Standards

Recently Adopted Accounting Standards

In June 2014, the FASB issued an update to their accounting guidance related to stock-based compensation. The guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. This guidance became effective in the first quarter of 2016, but did not impact VF’s consolidated financial statements.

In February 2015, the FASB issued an update to their existing consolidation model that changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance became effective in the first quarter of 2016, but did not impact VF’s consolidated financial statements.

In April 2015, the FASB issued new guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. The guidance provides clarification on whether a cloud computing arrangement should be treated as a software license or a service contract. This guidance became effective in the first quarter of 2016, but did not impact VF’s consolidated financial statements.

In April 2015, the FASB issued an update to their accounting guidance related to debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. The Company early adopted this guidance as of December 2015 on a retrospective basis. The impact of adopting this guidance on VF’s September 2015 Consolidated Balance Sheet is presented in the table below.

In May 2015, the FASB issued an update to their accounting guidance related to fair value measurements. The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and requires separate disclosure instead. The Company early adopted this guidance as of December 2015 on a retrospective basis. The new guidance did not impact disclosures related to VF’s investments, but did impact disclosures related to the Company’s defined benefit pension plan assets as of December 2015.

In September 2015, the FASB issued an update to their accounting guidance related to business combinations that simplifies the accounting for measurement-period adjustments. The guidance requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, thus eliminating the requirement to restate prior period financial statements for measurement-period adjustments. This guidance became effective in the first quarter of 2016, but did not impact VF’s consolidated financial statements.

In November 2015, the FASB issued an update to their accounting guidance on income taxes that eliminates the requirement for companies to present deferred income tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, companies are required to classify all deferred tax assets and liabilities as noncurrent. The Company early adopted this guidance as of December 2015 on a retrospective basis. The impact of adopting this guidance on VF’s September 2015 Consolidated Balance Sheet is presented in the table below.

 

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The impact of adopting the new accounting guidance on classification of debt issuance costs and deferred income taxes on VF’s September 2015 Consolidated Balance Sheet is as follows:

 

In thousands

Balance Sheet Line Item

   September 2015
Consolidated
Balance Sheet
(As Previously Reported)(a)
     Reclassification of Debt
Issuance Costs

Increase (Decrease)
     Reclassification of
Deferred Income Taxes
Increase (Decrease)
     September 2015
Consolidated
Balance Sheet
(Reclassified)
 

Other current assets

   $ 455,354       $ —         $ (163,935    $ 291,419   

Other assets

     621,767         (10,388      35,513         646,892   

Accrued liabilities

     896,666         —           (6,092      890,574   

Long-term debt

     1,411,446         (10,388      —           1,401,058   

Other liabilities

     1,084,413         —           (122,330      962,083   

 

(a) Excludes assets and liabilities previously reported in the Contemporary Brands coalition.

In March 2016, the FASB issued an update to their accounting guidance on stock compensation that intends to simplify and improve the accounting and statement of cash flow presentation for income taxes at settlement, forfeitures, and net settlements for withholding tax. The new standard is effective in the first quarter of 2017 with early adoption permitted. The Company early adopted this guidance as of the beginning of the first quarter of 2016. Accordingly, VF recognized $8.9 million and $26.5 million of excess tax benefits in our provision for income taxes, rather than paid-in capital, for the third quarter and first nine months of 2016, respectively. Also starting in the first quarter of 2016, the Company changed its earnings per share calculation to exclude excess tax benefits previously assumed under the treasury stock method, which had a minimal impact on diluted shares. The Company has elected to continue its existing practice of estimating expected forfeitures in determining compensation cost. VF did not have any awards that were subject to the amendment regarding employee shares eligible for tax withholding, and no changes were required related to the classification of employee taxes paid for withheld shares in the Consolidated Statements of Cash Flows since VF has historically classified these within financing cash flows.

The Company began to present excess tax benefits as an operating cash flow in the first quarter of 2016 as required by the updated guidance, and elected to retrospectively adjust its first nine months of 2015 operating and financing cash flows, as follows:

 

In thousands

Statement of Cash Flows

   September 2015
Consolidated Statement of
Cash Flows
(As Previously Reported)
     Reclassification of Tax
Benefits of  Stock-based
Compensation
Increase (Decrease)
     September 2015
Consolidated Statement of
Cash Flows (Reclassified)
 

Cash used by operating activities

   $ (330,961    $ 50,750       $ (280,211

Cash provided by financing activities

     197,806         (50,750      147,056   

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. Additional updates have been issued. This guidance will be effective in the first quarter of 2018 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

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 will be effective in the first quarter of 2017 with early adoption permitted, but will not impact VF’s consolidated financial statements.

In January 2016, the FASB issued an update to their accounting guidance related to the recognition and measurement of certain financial instruments. The 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 in the first quarter of 2018 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.

 

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In February 2016, the FASB issued a new accounting standard on leasing. The new standard will require companies to record most leased assets and liabilities on their balance sheet, and also proposes a dual model for recognizing expense. This guidance will be effective in the first quarter of 2019 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

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 in the first quarter of 2018 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 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 will be effective in the first quarter of 2017 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 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, or 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 will be effective in the first quarter of 2017 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on 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 will be effective in the first quarter of 2017 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 in the first quarter of 2020 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 in the first quarter of 2018 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 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. This guidance will be effective in the first quarter of 2018 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.

Note R – Subsequent Events

On October 20, 2016, VF’s Board of Directors declared a quarterly cash dividend of $0.42 per share, payable on December 19, 2016 to stockholders of record on December 9, 2016.

 

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

All per share amounts are presented on a diluted basis and all percentages shown in the tables below and the following discussion have been calculated using unrounded numbers. All references to foreign currency amounts below reflect the changes in foreign exchange rates from the 2015 comparable periods and their impact on both translating foreign currencies into U.S. dollars and on transactions denominated in a foreign currency.

On August 26, 2016, VF completed the sale of its Contemporary Brands coalition, which included the 7 For All Mankind®, Splendid® and Ella Moss® brands. Accordingly, the Company removed the related assets and liabilities from the Consolidated Balance Sheets as of that date and included the results of those businesses in discontinued operations for all periods presented. See Note B to VF’s consolidated financial statements for additional information on discontinued operations.

Unless otherwise noted, amounts and percentages for all periods discussed below reflect the results of operations and financial condition from VF’s continuing operations.

Highlights of the Third Quarter of 2016

 

    Revenues were down 1% to $3.5 billion compared to the third quarter of 2015.

 

    Outdoor & Action Sports coalition revenues increased 2% to $2.3 billion compared to the third quarter of 2015.

 

    Direct-to-consumer revenues were up 6% over the 2015 quarter and accounted for 23% of total revenues in the quarter.

 

    International revenues increased 5% compared to the 2015 quarter, including a 1% negative impact from foreign currency, and represented 41% of total revenues in the quarter.

 

    Gross margin increased 70 basis points in the third quarter to 48.4%, including 60 basis points of negative impact from changes in foreign currency.

 

    Earnings per share increased 13% to $1.20 from $1.06 in the 2015 quarter, including a negative 3% impact from foreign currency. The third quarter of 2016 benefited from a lower tax rate due to a higher mix of international profits and about $0.06 per share due to net tax discrete items relative to 2015.

Analysis of Results of Operations

Consolidated Statements of Income

The following table presents a summary of the changes in total revenues from the comparable periods in 2015:

 

In millions    Third Quarter      Nine Months  

Total revenues – 2015

   $ 3,529.6       $ 8,706.4   

Operations

     (32.5      60.2   

Impact of foreign currency

     (8.9      (68.2
  

 

 

    

 

 

 

Total revenues – 2016

   $ 3,488.2       $ 8,698.4   
  

 

 

    

 

 

 

VF reported a 1% decline in revenues for the third quarter while revenues were flat for the first nine months of 2016, compared to the 2015 periods. The revenue results for the third quarter and first nine months of 2016 were driven by strength in the Outdoor & Action Sports coalition and our direct-to-consumer and international businesses, offset by negative impacts from foreign currency and operational declines in the Imagewear and Sportswear coalitions. Additionally, from an operational perspective, the Jeanswear coalition declined in the third quarter but grew in the first nine months of 2016, compared to 2015. Excluding the negative impact from foreign currency, international sales grew in every region around the world in both the third quarter and first nine months of 2016. Refer to the section titled “Information by Business Segment” for additional details on revenues by coalition.

VF’s most significant foreign currency exposure relates to business conducted in euro-based countries. Additionally, VF conducts business in other developed and emerging markets around the world with exposure to foreign currencies other than the euro. Changes in foreign currency exchange rates minimally impacted the revenue decline in the third quarter of 2016 and had a negative 1% impact on growth in the first nine months of 2016, compared to the 2015 periods.

 

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The following table presents the percentage relationships to total revenues for components of the Consolidated Statements of Income:

 

     Third Quarter     Nine Months  
     2016     2015     2016     2015  

Gross margin (total revenues less cost of goods sold)

     48.4     47.7     48.2     48.2

Selling, general and administrative expenses

     30.2     29.6     34.6     33.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     18.2     18.1     13.6     14.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin was up 70 basis points in the third quarter of 2016 and was flat at 48.2% for the first nine months of 2016, compared to the 2015 periods. Foreign currency negatively impacted gross margin by approximately 60 and 70 basis points in the third quarter and first nine months of 2016, respectively. Excluding this impact, gross margin improved in the third quarter and first nine months of 2016, primarily due to pricing, lower product costs and business mix, partially offset by proactive efforts to manage inventory levels.

Selling, general and administrative expenses as a percentage of total revenues increased 60 and 80 basis points during the third quarter and first nine months of 2016, respectively, compared to the 2015 periods. The increases in both periods were primarily due to increased investments in our key growth priorities, which include direct-to-consumer and product innovation. In addition, selling, general and administrative expenses as a percentage of total revenues in the first nine months of 2016 compared to the first nine months of 2015 was negatively impacted by a $16.6 million gain recognized on the sale of a VF Outlet® location in the first quarter of 2015.

Net interest expense increased $1.9 million and $2.8 million in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods, primarily due to higher interest rates on short-term borrowings, partially offset by increased levels of capitalized interest. Total outstanding debt averaged $2.6 billion in the first nine months of 2016 and $2.4 billion for the same period in 2015, with a weighted average interest rate of 3.6% in the first nine months of both 2016 and 2015.

The effective income tax rate for the first nine months of 2016 was 18.7% compared to 23.6% in the first nine months of 2015. The first nine months of 2016 included a net discrete tax benefit of $40.6 million, which included a $26.5 million tax benefit related to the early adoption of the accounting standards update on stock compensation (see Note Q to the consolidated financial statements), $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 $40.6 million net discrete tax benefit in 2016 reduced the effective income tax rate by 3.6%. The first nine months of 2015 included a net discrete tax benefit of $29.0 million, which included $33.7 million of tax benefits related to the settlement of tax audits and $5.0 million of discrete tax expense related to the effect of tax rate changes. The $29.0 million net discrete tax benefit in 2015 reduced the effective income tax rate by 2.4%. Without discrete items, the effective income tax rate for the first nine months of 2016 decreased by 3.7% compared to the 2015 period primarily due to a higher percentage of income in lower tax rate jurisdictions and the impact of tax law changes in the U.S.

As a result of the above, net income in the third quarter of 2016 was $503.0 million ($1.20 per share) compared to $457.6 million ($1.06 per share) in the 2015 period, and net income in the first nine months of 2016 was $908.2 million ($2.14 per share) compared to $908.6 million ($2.10 per share) in the first nine months of 2015. Refer to additional discussion in the “Information by Business Segment” section below.

Information by Business Segment

VF’s businesses are grouped into product categories, and by brands within those product categories, for management and internal financial reporting purposes. These groupings of businesses within VF are referred to as “coalitions.” These coalitions are the basis for VF’s reportable business segments.

See Note M to the consolidated financial statements for a summary of results of operations by coalition, along with a reconciliation of coalition profit to income before income taxes.

 

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The following tables present a summary of the changes in coalition revenues and profit for the third quarter and first nine months of 2016 from the comparable periods in 2015:

Coalition revenues

 

     Third Quarter  
In millions    Outdoor &
Action Sports
    Jeanswear     Imagewear     Sportswear     Other     Total  

Revenues – 2015

   $ 2,296.6      $ 747.9      $ 291.5      $ 161.7      $ 31.9      $ 3,529.6   

Operations

     35.6        (33.3     (10.5     (21.0     (3.3     (32.5

Impact of foreign currency

     3.8        (13.2     0.5        —          —          (8.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues – 2016

   $ 2,336.0      $ 701.4      $ 281.5      $ 140.7      $ 28.6      $ 3,488.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months  
In millions    Outdoor &
Action Sports
    Jeanswear     Imagewear     Sportswear     Other     Total  

Revenues – 2015

   $ 5,299.8      $ 2,055.7      $ 823.2      $ 439.5      $ 88.2      $ 8,706.4   

Operations

     122.7        30.8        (17.0     (65.5     (10.8     60.2   

Impact of foreign currency

     (22.6     (45.3     (0.3     —          —          (68.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues – 2016

   $ 5,399.9      $ 2,041.2      $ 805.9      $ 374.0      $ 77.4      $ 8,698.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Coalition profit

 

     Third Quarter  
In millions    Outdoor &
Action Sports
    Jeanswear     Imagewear      Sportswear     Other     Total  

Profit – 2015

   $ 487.9      $ 158.6      $ 41.8       $ 23.2      $ 0.4      $ 711.9   

Operations

     16.5        (14.9     3.6         (8.1     (0.7     (3.6

Impact of foreign currency

     (13.9     (1.3     1.2         —          —          (14.0
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Profit (loss) – 2016

   $ 490.5      $ 142.4      $ 46.6       $ 15.1      $ (0.3   $ 694.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Nine Months  
In millions    Outdoor &
Action Sports
    Jeanswear     Imagewear      Sportswear     Other     Total  

Profit – 2015

   $ 883.7      $ 395.1      $ 118.6       $ 50.5      $ 15.4      $ 1,463.3   

Operations

     9.6        (2.5     1.8         (24.3     (18.6     (34.0

Impact of foreign currency

     (51.9     (4.0     4.1         —          —          (51.8
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Profit (loss) – 2016

   $ 841.4      $ 388.6      $ 124.5       $ 26.2      $ (3.2   $ 1,377.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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The following section discusses the changes in revenues and profitability by coalition:

Outdoor & Action Sports

 

     Third Quarter     Nine Months  
Dollars in millions    2016     2015     Percent
Change
    2016     2015     Percent
Change
 

Coalition revenues

   $ 2,336.0      $ 2,296.6        1.7   $ 5,399.9      $ 5,299.8        1.9

Coalition profit

     490.5        487.9        0.5     841.4        883.7        (4.8 %) 

Operating margin

     21.0     21.2       15.6     16.7  

Global revenues for Outdoor & Action Sports increased 2% in the third quarter of 2016 compared to 2015 due to operational growth. Revenues in the Americas region declined 1% in the third quarter of 2016. Revenues in the Asia-Pacific region increased 3% despite a 1% negative impact from foreign currency. European revenues increased 7% in the third quarter of 2016, benefitting from a 1% favorable impact from foreign currency.

Global revenues for Outdoor & Action Sports increased 2% in the first nine months of 2016 compared to 2015, reflecting operational growth. Revenues in the Americas were flat in the first nine months of 2016, reflecting a negative 1% impact from foreign currency. Revenues in the Asia-Pacific region increased 3% despite a 2% negative impact from foreign currency. European revenues increased 4% in the first nine months of 2016 compared to the 2015 period, benefitting from a positive 1% impact from foreign currency.

Global revenues for The North Face® brand decreased 1% in the third quarter of 2016 due to a negative 1% impact from foreign currency, and increased 2% in the first nine months of 2016, compared to the 2015 periods. The results for both periods were driven by strong growth in the direct-to-consumer channel and by declines in the wholesale channel. Vans® brand global revenues were up 7% and 4% in the third quarter and first nine months of 2016, respectively. Negative impacts from foreign currency reduced Vans® brand global revenues by 1% in both the third quarter and first nine months of 2016. Both periods reflected growth in the direct-to-consumer channel. Wholesale revenues were flat for the third quarter and down for the first nine months of 2016. Global revenues for the Timberland® brand were flat in the third quarter of 2016, including a negative 1% impact from foreign currency, due to increases in the wholesale channel, partially offset by declines in the direct-to-consumer channel. For the first nine months of 2016, Timberland® revenues decreased 1% due to declines in the wholesale channel.

Global direct-to-consumer revenues for Outdoor & Action Sports grew 11% in the third quarter and 12% in first nine months of 2016 compared to the 2015 periods, driven by new store openings and an expanding e-commerce business. Wholesale revenues were down 1%, caused by a negative 1% impact from foreign currency in the third quarter, and down 2% in the first nine months of 2016. The decrease in the first nine months of 2016 was due to elevated inventory levels at customers in our key channels of distribution in North America and Europe, which particularly impacted our Timberland® and Vans® brands. Additionally, customer bankruptcies have negatively impacted the wholesale performance of The North Face® and Timberland® brands during 2016.

Operating margin declined 20 and 110 basis points in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods, primarily due to negative impacts from foreign currency and increased investments in direct-to-consumer, product development and innovation.

Jeanswear

 

     Third Quarter     Nine Months  
Dollars in millions    2016     2015     Percent
Change
    2016     2015     Percent
Change
 

Coalition revenues

   $ 701.4      $ 747.9        (6.2 %)    $ 2,041.2      $ 2,055.7        (0.7 %) 

Coalition profit

     142.4        158.6        (10.2 %)      388.6        395.1        (1.7 %) 

Operating margin

     20.3     21.2       19.0     19.2  

Global Jeanswear revenues decreased 6% in the third quarter of 2016 compared to 2015, reflecting a 4% reduction in operational results, further reduced by a negative 2% impact from foreign currency. Revenues in the Americas region decreased 8% in the third

 

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quarter of 2016, including a 1% negative impact from foreign currency. The Asia-Pacific region’s revenues decreased 4%, driven by a negative 4% impact from foreign currency. European revenues increased 4% in the third quarter of 2016.

Global Jeanswear revenues decreased 1% in the first nine months of 2016 compared to 2015, reflecting 1% operational growth offset by a negative 2% impact from foreign currency. Revenues in the Americas region decreased 1% in the first nine months of 2016, including a 2% negative impact from foreign currency. The Asia-Pacific region’s revenues decreased 3%, as 2% operational growth was offset by a negative 5% impact from foreign currency. European revenues increased 3% in the first nine months of 2016, reflecting a negative 2% impact from foreign currency.

Global revenues for the Wrangler® brand decreased 6% in the third quarter and 1% in the first nine months of 2016, compared to the 2015 periods. From an operational perspective, third quarter revenues were lower due to a shift in the timing of order deliveries and declines in the Western Specialty business. Foreign currency negatively impacted revenues in both periods by 2%. Global revenues for the Lee® brand decreased 6% in the third quarter due to a shift in the timing of order deliveries, and were flat for the first nine months of 2016. Foreign currency negatively impacted Lee® brand revenue by 2% and 3% in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods.

Operating margin decreased 90 and 20 basis points in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods. Lower volume contributed to the operating margin decline for the third quarter of 2016. Also, increased investments in product development and innovation contributed to the operating margin decline in both periods.

Imagewear

 

     Third Quarter     Nine Months  
Dollars in millions    2016     2015     Percent
Change
    2016     2015     Percent
Change
 

Coalition revenues

   $ 281.5      $ 291.5        (3.4 %)    $ 805.9      $ 823.2        (2.1 %) 

Coalition profit

     46.6        41.8        11.5     124.5        118.6        5.0

Operating margin

     16.6     14.3       15.5     14.4  

Imagewear revenues decreased 3% in the third quarter and 2% in the first nine months of 2016, compared to the 2015 periods. The Image business (occupational apparel and uniforms) revenues decreased 8% in both the third quarter and first nine months of 2016, primarily due to continued weakness in the industrial manufacturing and energy sectors, which negatively impacted sales of the Bulwark® and Red Kap® brands in both periods. Revenues for the Licensed Sports Group (“LSG”) business (licensed athletic apparel) increased 1% and 4% in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods, primarily due to strong Major League Baseball sales.

Operating margin increased 230 and 110 basis points in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods. The increases in both periods were driven by lower product costs and improved gross margin in our LSG business primarily due to favorable product mix and pricing.

Sportswear

 

     Third Quarter     Nine Months  
Dollars in millions    2016     2015     Percent
Change
    2016     2015     Percent
Change
 

Coalition revenues

   $ 140.7      $ 161.7        (13.0 %)    $ 374.0      $ 439.5        (14.9 %) 

Coalition profit

     15.1        23.2        (35.0 %)      26.2        50.5        (48.2 %) 

Operating margin

     10.7     14.3       7.0     11.5  

Sportswear revenues decreased 13% and 15% in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods. Nautica® brand revenues decreased 15% and 16% in the third quarter and first nine months of 2016, respectively, due to continued challenges in the U.S. department store channel, reduced in-store traffic and management’s decision to close underperforming stores. In addition, management made a strategic decision to transition the women’s sleepwear and men’s underwear businesses to a licensed model, which negatively impacted Nautica® brand revenues by 8% and 5% in the third quarter and first nine

 

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months of 2016, respectively. Kipling® brand revenues in North America decreased 6% in the third quarter due to declines in the wholesale channel, and revenues decreased 10% in the first nine months of 2016 due to declines in both the wholesale and direct-to-consumer channels.

Operating margin decreased 360 and 450 basis points in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods. The decreases in both periods were primarily due to increased promotional activity and reduced expense leverage on a lower revenue base.

During the third quarter of 2016, management determined that the continued revenue and profitability decline in the Nautica® brand, combined with a downward revision to the forecast for the remainder of the year, was a triggering event that required us to perform an interim impairment analysis of the goodwill and trademark intangible assets. Based on the quantitative impairment analysis performed, VF determined the goodwill and trademark intangible assets of Nautica® were not impaired. For goodwill, the fair value of the reporting unit exceeded the carrying value by 45%. The fair value of the trademark intangible asset exceeded its carrying value by a significant amount. See Note O to the consolidated financial statements for a discussion of the analysis performed.

Other

 

     Third Quarter     Nine Months  
Dollars in millions    2016     2015     Percent
Change
    2016     2015     Percent
Change
 

Coalition revenues

   $ 28.6      $ 31.9        (10.6 %)    $ 77.4      $ 88.2        (12.1 %) 

Coalition (loss) profit

     (0.3     0.4        (176.8 %)      (3.2     15.4        (120.2 %) 

Operating margin

     (1.0 %)      1.1       (4.0 %)      17.6  

VF Outlet® stores in the U.S. sell both VF and non-VF products. Revenues and profits of VF products sold in these stores are reported as part of the operating results of the applicable coalition, while revenues and profits of non-VF products are reported in this “other” category. The decrease in profit and operating margin in the first nine months of 2016 was primarily due to a $16.6 million gain recognized on the sale of a VF Outlet® location during the first quarter of 2015.

Reconciliation of Coalition Profit to Income Before Income Taxes

There are two types of costs necessary to reconcile total coalition profit, as discussed in the preceding paragraphs, to consolidated income before income taxes. These costs are (i) corporate and other expenses, discussed below, and (ii) interest expense, net, which was discussed in the “Consolidated Statements of Income” section.

 

     Third Quarter     Nine Months  
Dollars in millions    2016      2015      Percent
Change
    2016      2015      Percent
Change
 

Corporate and other expenses

   $ 60.0       $ 73.6         (18.5 %)      196.7       $ 213.2         (7.7 %) 

Interest expense, net

     22.6         20.7         9.3     64.1         61.2         4.6

Corporate and other expenses are those that have not been allocated to the coalitions for internal management reporting, including (i) information systems and shared service costs, (ii) corporate headquarter costs and (iii) certain other income and expenses. The decreases in corporate and other expenses in the third quarter and first nine months of 2016 compared to the 2015 periods resulted primarily from lower compensation expense. Certain corporate overhead costs and interest expense previously allocated to the Contemporary Brands coalition for segment reporting purposes have been reallocated to continuing operations as discussed in Note B to the consolidated financial statements.

International Operations

International revenues increased 5% and 4% in the third quarter and first nine months of 2016, respectively, compared to the 2015 periods. Foreign currency negatively impacted international revenue growth by 1% and 2% in the third quarter and first nine months of 2016, respectively. Revenues in Europe increased 7% and 4% in the third quarter and first nine months of 2016, respectively. Foreign currency positively impacted revenue growth in Europe by 1% in the third quarter of 2016 and minimally impacted revenue growth in the first nine months of 2016. In the Asia-Pacific region, revenues increased 2% and 3% in the third quarter and first nine

 

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months of 2016, respectively. Foreign currency negatively impacted revenue growth in the Asia-Pacific region by 2% in both the third quarter and first nine months of 2016. Revenue growth in the Americas (non-U.S.) region increased 3% in both the third quarter and first nine months of 2016. Sales in both periods were tempered by weakening currencies in the region relative to the U.S. dollar, which negatively impacted revenue growth by 6% in the third quarter and 10% in the first nine months of 2016. International revenues were 41% and 38% of total revenues in the third quarter of 2016 and 2015, respectively, and 39% and 38% of total revenues in the first nine months of 2016 and 2015, respectively.

Direct-to-consumer Operations

Direct-to-consumer revenues grew 6% in the third quarter and 7% in the first nine months of 2016, as both periods reflected growth in all regions and in nearly every brand with a retail format. The increases in direct-to-consumer revenues in both periods were due to strength in the Outdoor & Action Sports coalition, new store openings and an expanding e-commerce business, partially offset by declines in the Sportswear coalition. There were 1,475 VF-owned retail stores at the end of September 2016 compared to 1,363 at the end of September 2015. Direct-to-consumer revenues were 23% and 21% of total revenues in the third quarter of 2016 and 2015, respectively, and 25% and 23% of total revenues in the first nine months of 2016 and 2015, respectively.

Analysis of Financial Condition

Consolidated Balance Sheets

The following discussion refers to significant changes in balances at September 2016 compared to December 2015:

 

    Increase in accounts receivable — due to the seasonality of the business.

 

    Increase in inventories — due to the seasonality of the business.

 

    Increase in other assets — primarily due to a deferred taxable gain related to an intercompany transaction.

 

    Increase in short-term borrowings — due to commercial paper borrowings needed to support general corporate purposes and share repurchases.

 

    Decrease in accounts payable — driven by timing of inventory purchases and payments to vendors.

 

    Increase in accrued liabilities — primarily due to higher accrued taxes.

 

    Increase in long-term debt — issuance of €850.0 million of euro-denominated debt in the third quarter of 2016, of which $947.1 million is recorded on the Consolidated Balance Sheet at September 2016, net of unamortized original issue discount and debt issuance costs.

 

    Increase in other liabilities — primarily due to higher deferred and accrued income taxes.

The following discussion refers to significant changes in balances at September 2016 compared to September 2015:

 

    Increase in other assets — primarily due to a deferred taxable gain related to an intercompany transaction.

 

    Decrease in short-term borrowings — due to repayment of commercial paper using proceeds from the euro-denominated debt issued during the third quarter of 2016.

 

    Increase in long-term debt — issuance of €850.0 million of euro-denominated debt in the third quarter of 2016, of which $947.1 million is recorded on the Consolidated Balance Sheet at September 2016, net of unamortized original issue discount and debt issuance costs.

 

    Increase in other liabilities — primarily due to higher deferred and accrued income taxes.

 

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Liquidity and Capital Resources

The financial condition of VF is reflected in the following:

 

     September     December     September  
Dollars in millions    2016     2015     2015  

Working capital

   $ 2,641.8      $ 2,221.4      $ 1,994.4   

Current ratio

     2.2 to 1        2.1 to 1        1.7 to 1   

Debt-to-total capital

     38.8     25.6     33.4

For the ratio of debt-to-total capital, debt is defined as short-term and long-term borrowings, and total capital is defined as debt plus stockholders’ equity. The increase in the debt-to-total capital ratio at September 2016 compared to both December 2015 and September 2015 was due to the issuance of long-term debt as explained above, reductions in stockholders’ equity due to dividends, purchases of treasury stock and the loss on discontinued operations recorded in the first nine months of 2016. In addition, the increase in the debt-to-total capital ratio at September 2016 compared to December 2015 was impacted by the increase in short-term borrowings as explained above, and the increase at September 2016 compared to September 2015 was impacted by the intangible asset impairment charges recorded during the fourth quarter of 2015.

VF’s primary source of liquidity is the strong annual cash flow from operating activities. Cash from operations is typically lower in the first half of the year as inventory builds to support peak sales periods in the second half of the year. Cash provided by operating activities in the second half of the year is substantially higher as inventories are sold and accounts receivable are collected. Additionally, direct-to-consumer sales are highest in the fourth quarter of the year.

In summary, our cash flows were as follows:

 

     Nine Months  
In thousands    2016      2015  

Cash provided (used) by operating activities

   $ 43,368       $ (280,211

Cash used by investing activities

     (50,804      (237,184

Cash (used) provided by financing activities

     (201,585      147,056   

Cash Provided (Used) by Operating Activities

Cash flow from operating activities is dependent on net income and changes in working capital. The increase in cash flows in the first nine months of 2016 is primarily due to a $250 million discretionary contribution to the domestic qualified pension plan in the first quarter of 2015 that did not recur in 2016, and favorable changes in working capital for the first nine months of 2016 compared to the first nine months of 2015.

Cash Used by Investing Activities

VF’s investing activities in the first nine months of 2016 related primarily to capital expenditures of $129.9 million, software purchases of $31.8 million and $116.0 million of proceeds from the sale of the Contemporary Brands coalition. Capital expenditures decreased $57.3 million compared to the 2015 period primarily due to the purchase of a headquarters building in the Outdoor & Action Sports coalition in 2015. Software purchases decreased $21.2 million compared to the 2015 period primarily due to the completion of a system implementation that incurred significant costs through the middle of 2015. In addition, cash flows from investing activities in the first nine months of 2015 benefitted from $16.7 million of proceeds from the sale of a VF Outlet® location.

Cash (Used) Provided by Financing Activities

The decrease in cash flow from financing activities during the first nine months of 2016 compared to the 2015 period was driven by i) $951.8 million of proceeds from issuance of long-term debt, ii) a $980.4 million decrease in net cash generated by short-term borrowings, iii) $268.3 million of incremental open market purchases of Common Stock, and iv) $54.7 million of incremental cash dividends paid. Short-term borrowings support general corporate purposes and share repurchases, and outstanding balances may vary from period to period depending on the level of corporate requirements.

 

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During the first nine months of 2016, VF purchased 15.9 million shares of its Common Stock in open market transactions at a total cost of $1.0 billion (average price per share of $62.80). During the first nine months of 2015, VF purchased 10.0 million shares of its Common Stock in open market transactions at a total cost of $731.9 million (average price per share of $73.01).

As of the end of the third quarter of 2016, the Company had 14.8 million shares remaining under its current share repurchase program authorized by VF’s Board of Directors. VF will continue to evaluate its use of capital, giving first priority to business acquisitions and then to direct shareholder return in the form of dividends and share repurchases.

VF relies on continued strong cash generation to finance its ongoing operations. In addition, VF has significant liquidity from its available cash balances and credit facilities. In June 2016, VF entered an accession agreement to increase the existing $1.75 billion senior unsecured revolving line of credit (the “Global Credit Facility”) to $2.25 billion. The Global Credit Facility expires in April 2020 and VF may request two extensions of one year each, subject to stated terms and conditions. The Global Credit Facility may be used to borrow funds in both U.S. dollar and non-U.S. dollar currencies, and has a $50.0 million letter of credit sublimit. In addition, the Global Credit Facility supports VF’s U.S. commercial paper program for short-term, seasonal working capital requirements and general corporate purposes. This program, which was also increased to $2.25 billion, allows for VF to issue commercial paper to the extent that borrowing capacity is available under the Global Credit Facility.

Commercial paper borrowings and standby letters of credit issued as of September 2016 were $700.0 million and $16.1 million, respectively, leaving $1.5 billion available for borrowing against the Global Credit Facility at September 2016.

VF has $136.0 million of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either VF or the banks. Total outstanding balances under these arrangements were $37.7 million and $26.9 million at September 2016 and September 2015, respectively.

On September 20, 2016, VF issued €850 million of 0.625% fixed rate notes maturing in September 2023, which were used for working capital and general corporate purposes, including repayment of outstanding indebtedness under its existing commercial paper program. The cash proceeds from the notes were $951.8 million, net of original issue discount. Interest expense on these notes is recorded at an effective annual interest rate of 0.712%, which includes amortization of original issue discount and debt issuance costs.

VF’s favorable credit agency ratings allow for access to additional liquidity at competitive rates. At the end of September 2016, VF’s long-term debt ratings were ‘A’ by Standard & Poor’s Ratings Services and ‘A3’ by Moody’s Investors Service, and commercial paper ratings by those rating agencies were ‘A-1’ and ‘Prime-2’, respectively.

None of VF’s long-term debt agreements contain acceleration of maturity clauses based solely on changes in credit ratings. However, if there were a change in control of VF and, as a result of the change in control, the 2017, 2021 and 2037 notes were rated below investment grade by recognized rating agencies, VF would be obligated to repurchase the notes at 101% of the aggregate principal amount, plus any accrued and unpaid interest.

Management’s Discussion and Analysis in the 2015 Form 10-K provided a table summarizing VF’s contractual obligations and commercial commitments at the end of 2015 that would require the use of funds. As of October 1, 2016, there have been no material changes in the amounts disclosed in the 2015 Form 10-K, except as noted below:

 

    Inventory purchase obligations increased by approximately $138.9 million at the end of September 2016 due to the seasonality of VF’s businesses.

 

    Other obligations increased by approximately $118.6 million at the end of September 2016 due to increased service and maintenance agreement obligations.

 

    Long-term debt increased by approximately $947.1 million due to the issuance of €850 million of 0.625% fixed rate euro-denominated notes maturing in September 2023.

Management believes that VF’s cash balances and funds provided by operating activities, as well as its Global Credit Facility, additional borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures and to maintain the planned dividend payout rate, and (iii) flexibility to meet investment opportunities that may arise.

 

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Recent Accounting Pronouncements

See Note Q to VF’s consolidated financial statements for information on recently issued and adopted accounting standards, including reclassifications made to 2015 amounts.

Critical Accounting Policies and Estimates

Management has chosen accounting policies that it considers to be appropriate to accurately and fairly report VF’s operating results and financial position in conformity with generally accepted accounting principles in the United States of America. Our critical accounting policies are applied in a consistent manner. Significant accounting policies are summarized in Note A to the consolidated financial statements included in the 2015 Form 10-K.

The application of these accounting policies requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. Management evaluates these estimates and assumptions and may retain outside consultants to assist in the evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known.

The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis in the 2015 Form 10-K. There have been no material changes in these policies. See Note O to VF’s consolidated financial statements for discussion of significant estimates used in the impairment testing of goodwill and trademark intangible assets during the third quarter of 2016.

Cautionary Statement on Forward-looking Statements

From time to time, VF may make oral or written statements, including statements in this quarterly report that constitute “forward-looking statements” within the meaning of the federal securities laws. These include statements concerning plans, objectives, projections and expectations relating to VF’s operations or economic performance, and assumptions related thereto. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. Forward-looking statements are not guarantees, and actual results could differ materially from those expressed or implied in the forward-looking statements.

Potential risks and uncertainties that could cause the actual results of operations or financial condition of VF to differ materially from those expressed or implied by forward-looking statements in this quarterly report on Form 10-Q include,

but are not limited to: foreign currency fluctuations; the level of consumer demand for apparel, footwear and accessories; disruption to VF’s distribution system; VF’s reliance on a small number of large customers; the financial strength of VF’s customers; fluctuations in the price, availability and quality of raw materials and contracted products; disruption and volatility in the global capital and credit markets; VF’s response to changing fashion trends; increasing pressure on margins; VF’s ability to implement its business strategy; VF’s ability to grow its international and direct-to-consumer businesses; VF’s and its customers’ and vendors’ ability to maintain the strength and security of information technology systems; stability of VF’s manufacturing facilities and foreign suppliers; continued use by VF’s suppliers of ethical business practices; VF’s ability to accurately forecast demand for products; continuity of members of VF’s management; VF’s ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment; maintenance by VF’s licensees and distributors of the value of VF’s brands; changes in tax liabilities; legal, regulatory, political and economic risks; and adverse or unexpected weather conditions. More information on potential factors that could affect VF’s financial results is included from time to time in VF’s public reports filed with the Securities and Exchange Commission, including VF’s Annual Report on Form 10-K.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in VF’s market risk exposures from what was disclosed in Item 7A in the 2015 Form 10-K.

 

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Item 4 — Controls and Procedures

Disclosure controls and procedures:

Under the supervision of the Chief Executive Officer and Chief Financial Officer, a Disclosure Committee comprising various members of management has evaluated the effectiveness of the disclosure controls and procedures at VF and its subsidiaries as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of the Evaluation Date that such controls and procedures were effective.

Changes in internal control over financial reporting:

There have been no changes during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, VF’s internal control over financial reporting.

 

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Part II — Other Information

Item 1 — Legal Proceedings

Information on VF’s legal proceedings is set forth under Part I, Item 3, “Legal Proceedings,” in the 2015 Form 10-K. There have been no material changes to the legal proceedings from those described in the 2015 Form 10-K.

Item 1A — Risk Factors

You should carefully consider the risk factors set forth under Part I, Item 1A, “Risk Factors,” in the 2015 Form 10-K. There have been no material changes to the risk factors from those disclosed in the 2015 Form 10-K.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

 

(c) Issuer purchases of equity securities:

 

Third Quarter 2016    Total
Number of
Shares
Purchased (1)
     Weighted
Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Programs (1)
     Maximum Number
of Shares that May
Yet be Purchased
Under the Program
 

July 3 – July 30, 2016

     750,000       $ 61.74         750,000         16,714,947   

July 31 – August 27, 2016

     1,952,646         61.47         1,952,646         14,762,301   

August 28 – October 1, 2016

     1,100         56.51         1,100         14,761,201   
  

 

 

       

 

 

    

Total

     2,703,746            2,703,746      
  

 

 

       

 

 

    

 

(1)  Includes 1,100 shares of Common Stock that were purchased during the quarter in connection with VF’s deferred compensation plans. VF will continue to evaluate future share repurchases – considering funding required for business acquisitions, VF’s Common Stock price and levels of stock option exercises.

 

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Item 6 — Exhibits

 

  31.1    Certification of Eric C. Wiseman, Chairman and Chief Executive Officer, pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Scott A. Roe, Vice President and Chief Financial Officer, pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Eric C. Wiseman, Chairman and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Scott A. Roe, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    V.F. CORPORATION
           (Registrant)
    By:  

/s/ Scott A. Roe

      Scott A. Roe
     

Vice President and Chief Financial Officer

(Chief Financial Officer)

Date: November 3, 2016     By:  

/s/ Bryan H. McNeill

      Bryan H. McNeill
      Vice President—Controller (Chief Accounting Officer)

 

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