VF CORPORATION OVERVIEW
VF Corporation (together with its subsidiaries, collectively known as "VF" or the "Company") is a global leader in the design, procurement, production, marketing and distribution of branded lifestyle apparel, footwear and related products. VF's diverse portfolio meets consumer needs across a broad spectrum of activities and lifestyles. Our long-term growth strategy is focused on four drivers - drive and optimize our portfolio, distort investments toAsia , elevate direct channels and accelerate our consumer-minded, retail-centric, hyper-digital business model transformation. VF is diversified across brands, product categories, channels of distribution, geographies and consumer demographics. We own a broad portfolio of brands in the outerwear, footwear, apparel, backpack, luggage and accessories categories. Our products are marketed to consumers through our wholesale channel, primarily in specialty stores, department stores, national chains, mass merchants, independently-operated partnership stores and with strategic digital partners. Our products are also marketed to consumers through our own direct-to-consumer operations, which include VF-operated stores, concession retail stores, brand e-commerce sites and other digital platforms. VF is organized by groupings of businesses represented by its reportable segments for financial reporting purposes. The three reportable segments are Outdoor, Active and Work. BASIS OF PRESENTATION VF changed to a 52/53 week fiscal year ending on the Saturday closest toMarch 31 of each year. VF previously used a 52/53 week fiscal year ending on the Saturday closest toDecember 31 of each year. All references to the years endedMarch 2020 ("2020"),March 2019 ("2019") andDecember 2017 ("2017") relate to the 52-week fiscal years endedMarch 28, 2020 ,March 30, 2019 andDecember 30, 2017 , respectively. All references to the three months endedMarch 2018 relate to the 13-week transition period endedMarch 31, 2018 . All per share amounts are presented on a diluted basis. All percentages shown in the tables below and the discussion that follows have been calculated using unrounded numbers. References to the year endedMarch 2020 foreign currency amounts below reflect the changes in foreign exchange rates from the year endedMarch 2019 and their impact on translating foreign currencies intoU.S. dollars. All references to foreign currency amounts also reflect the impact of foreign currency-denominated transactions in countries with highly inflationary economies. 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, such asArgentina , which is a highly inflationary economy. OnOctober 2, 2017 , VF acquired 100% of the outstanding shares ofWilliamson-Dickie Mfg. Co. ("Williamson-Dickie") and the business results have been included in the Work segment. OnApril 3, 2018 , VF acquired 100% of the stock ofIcebreaker Holdings Limited ("Icebreaker"). OnJune 1, 2018 , VF acquired 100% of the stock ofIcon-Altra LLC , plus certain assets inEurope ("Altra"). The business results for Icebreaker and Altra have been included in the Outdoor segment. All references to contributions from acquisition below represent the operating results of Altra for the two months endedMay 2019 , which reflects the one-year anniversary of the acquisition. Refer to Note 3 to VF's consolidated financial statements for additional information on acquisitions. The Nautica® brand business sold onApril 30, 2018 and the Licensing Business (which comprised theLicensed Sports Group and JanSport® brand collegiate businesses) sold during the year endedDecember 2017 have been reported as discontinued operations in our Consolidated Statements of Income and Consolidated Statements of Cash Flows. These changes have been applied to all periods presented. OnOctober 5, 2018 , VF completed the sale of theVan Moer business, which was included in the Work segment. OnOctober 26, 2018 , VF completed the sale of the Reef® brand business, which was included in the Active segment. All references to dispositions below represent the impact of operating results of the Reef® brand andVan Moer businesses through their dates of disposition for the year endedMarch 2019 . OnMay 22, 2019 , VF completed the spin-off of its Jeans business, which included the Wrangler®, Lee® and Rock & Republic® brands, as well as the VF OutletTM business, into an independent, publicly traded company now operating under the name Kontoor Brands, Inc. ("Kontoor Brands"). As a result, VF reported the operating results for the Jeans business in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income and the related cash flows have been reported as discontinued operations in the Consolidated Statements of Cash Flows, for all periods presented. In addition, the related assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, through the date the spin-off was completed. OnJanuary 21, 2020 , VF announced its decision to explore the divestiture of its Occupational Workwear business. The Occupational Workwear business is comprised primarily of the following brands and businesses: Red Kap®, VF Solutions®, Bulwark®, Workrite®, Walls®, Terra®, Kodiak®, Work Authority® and Horace Small®. The business also includes certain Dickies® occupational workwear products that have historically been sold through the business-to-business channel. During the three months endedMarch 2020 , the Company determined that the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria and expects to divest this business in the next twelve months. Accordingly, the Company began to report the results of the Occupational Workwear business and the related cash flows as discontinued operations in the Consolidated Statements of Income and Consolidated Statements of Cash Flows, respectively. The related held-for-sale assets and liabilities have been reported as assets and liabilities of VF Corporation Fiscal 2020 Form 10-K 23 --------------------------------------------------------------------------------
Table of Contents
discontinued operations in the Consolidated Balance Sheets. These changes have been applied for all periods presented. Unless otherwise noted, amounts, percentages and discussion for all periods included below reflect the results of operations and financial condition from VF's continuing operations. Refer to Note 4 for additional information on discontinued operations and other divestitures. RECENT DEVELOPMENTS Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") a pandemic. As the global spread of COVID-19 continues, VF remains first and foremost focused on a people-first approach that prioritizes the health and well-being of its employees, customers, trade partners and consumers around the world. To help mitigate the spread of COVID-19, VF has modified its business practices, including in response to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, "COVID-19 Directives"). These directives include the temporary closing of offices and retail stores, instituting travel bans and restrictions and implementing health and safety measures including social distancing and quarantines. As a result of COVID-19 Directives, retail stores inAsia-Pacific ,Europe and theAmericas , whether operated by VF or our customers, were or are now closed. Currently, the majority of VF-operated retail stores have reopened inAsia-Pacific , including all in Mainland China, and while store traffic has improved recently, it remains down significantly when compared with the prior year. VF has started a phased reopening of its retail stores inEurope andNorth America in accordance with guidance from government entities and healthcare authorities, to allow proper training and preparation of the retail environment. VF currently expects most of its retail stores to be open by mid-calendar year 2020. While many of VF's wholesale customers inNorth America andEurope remain closed, most have announced reopening plans starting in the coming weeks. Consistent with VF's long-term strategy, the Company's digital platform remains a high priority through which its brands stay connected with consumer communities while providing experiential content. In accordance with local government guidelines and in consultation with the guidance of global health professionals, VF has implemented measures designed to ensure the health, safety and well-being of associates employed in its distribution and fulfillment centers around the world. Many of these facilities remain operational and support digital consumer engagement with its brands and to service retail partners as needed. COVID-19 has also impacted some of VF's suppliers, including third-party manufacturers, logistics providers and other vendors. At this time, many of VF's facilities continue to manufacture and distribute products globally in a reduced capacity. VF is actively monitoring our supply chain and implementing mitigation plans. The COVID-19 pandemic is ongoing and dynamic in nature, and continues to drive global uncertainty and disruption. As a result, COVID-19 is having a significant negative impact on the Company's business, including the consolidated financial condition, results of operations and cash flows during the fourth quarter of Fiscal 2020. While we are not able to determine the ultimate length and severity of the COVID-19 pandemic, we expect store closures, both VF-operated and our customers, an anticipated reduction in traffic once stores initially reopen and a highly promotional marketplace will have a significant negative impact on our Fiscal 2021 financial performance including a decrease in revenues of approximately 50% in the first quarter. Enterprise Protection Strategy VF has taken a number of proactive actions to advance its Enterprise Protection Strategy in response to the COVID-19 outbreak. To enhance VF's financial flexibility and liquidity in the current unprecedented period of uncertainty, including the unknown duration and overall impact of the COVID-19 outbreak, onMarch 23, 2020 , VF elected to draw down$1.0 billion available from its$2.25 billion senior unsecured revolving credit facility (the "Global Credit Facility") that expires inDecember 2023 . OnApril 9, 2020 , VF elected to draw down an additional$1.0 billion available from the Global Credit Facility. OnApril 23, 2020 , VF closed its sale of senior unsecured notes including$1.0 billion of 2.050% notes dueApril 2022 ,$750.0 million of 2.400% notes dueApril 2025 ,$500.0 million of 2.800% notes dueApril 2027 and$750.0 million of 2.950% notes dueApril 2030 . The net proceeds received by the Company were approximately$2.98 billion . A portion of the net proceeds was used to repay the$2.0 billion of borrowings under the Global Credit Facility noted above and the remaining net proceeds will be used for general corporate purposes. Following the notes issuance and repayment, VF has approximately$2.2 billion available for borrowing against the Global Credit Facility and approximately$3.0 billion of cash and equivalents on hand. Other actions VF has taken to support its business in response to the COVID-19 pandemic include the Company's decision to temporarily pause its share repurchase program. The Company currently has$2.8 billion remaining under its current share repurchase authorization. Subject to approval by its Board of Directors, VF intends to continue to pay its regularly scheduled dividend and is currently not contemplating the suspension of its dividend program. VF's planned divestiture of the Occupational Workwear business would provide an additional source of cash. Other actions taken by VF also include the temporary reduction of CEOSteve Rendle's base salary by 50 percent and the base salaries of VF's Executive Leadership Team by 25 percent. In addition, VF's Board of Directors will temporarily forgo their cash retainer. These 24 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Table of Contents
reductions will continue to be assessed as the situation progresses. VF has implemented cost controls to reduce discretionary spending to help mitigate the loss of sales and to conserve cash while continuing to support employees. VF is also assessing its forward inventory purchase commitments to ensure proper matching of supply and demand, which will result in an overall reduction in future commitments. As VF continues to actively monitor the situation, we may take further actions that affect our operations. We believe the Company has sufficient liquidity and flexibility to operate during the disruptions caused by the COVID-19 pandemic and related governmental actions and regulations and health authority advisories and meet its obligations as they become due. However, due to the uncertainty of the duration and severity of the COVID-19 pandemic, governmental actions in response to the pandemic, and the impact on us and our consumers, customers and suppliers, there is no certainty that the measures we take will be sufficient to mitigate the risks posed by COVID-19. See "Item 1A. Risk Factors." for additional discussion. HIGHLIGHTS OF THE YEAR ENDEDMARCH 2020
• Year ended
year ended
organic growth, including a 2% unfavorable impact from foreign currency.
• Active segment revenues increased 4% to
ended
• Outdoor segment revenues remained flat at
• Direct-to-consumer revenues were up 5% compared to the year ended March
2019, including a 1% unfavorable impact from foreign currency.
Direct-to-consumer revenues accounted for 41% of VF's total revenues in the
year ended
2020. E-commerce revenues increased 15% in the year ended
compared to the year ended
from foreign currency.
• International revenues increased 1% over the year ended March 2019 ,
including a 3% unfavorable impact from foreign currency. Internationalrevenues represented 47% of VF's total revenues in the year ended March
2020.
• Gross margin increased 70 basis points to 55.3% in the year ended
compared to the year ended
primarily driven by a mix-shift to higher margin businesses and a favorable net foreign currency transaction impact. • Operating cash flow from continuing operations was$800.4 million in the
year ended
• Earnings per share decreased 28% to
impact from a goodwill impairment charge. The decrease was also attributed
to the impact from debt extinguishment, a pension settlement charge,
specified strategic business decisions in
investments in our key strategic growth initiatives and the unfavorable
impacts from foreign currency. These decreases were partially offset by a
$0.23 positive transitional impact from the enactment ofSwitzerland's Federal Act of Tax Reform and AHV Financing ("Swiss Tax Act"), organic growth in the Active segment, and continued strength in our direct-to-consumer and international businesses.
• All financial performance measures were negatively impacted by the COVID-19
pandemic during the fourth quarter of the year ended
• VF repurchased
cash dividends, returning
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated Statements of Income
The following table presents a summary of the changes in net revenues for the
year ended
Year Ended March 2020
Compared to Year Ended March
(In millions) 2019
Net revenues - prior period $ 10,266.9
Organic 462.4
Acquisition 11.8
Dispositions (96.3 )
Impact of foreign currency (156.2 )
Net revenues - current period $ 10,488.6
VF Corporation Fiscal 2020 Form 10-K 25--------------------------------------------------------------------------------
Table of Contents
Year Ended
VF reported a 2% increase in revenues in 2020. The revenue increase was attributable to organic growth in all segments and continued strength in our direct-to-consumer and international businesses. The increase was partially offset by lower revenues due to the Reef® brand andVan Moer business dispositions and an unfavorable impact from foreign currency. The overall increase was also impacted by lower revenues in the fourth quarter of Fiscal 2020, primarily driven by the COVID-19 outbreak, which resulted in an 11% decrease in revenues over the fourth quarter of Fiscal 2019. Excluding the impact of foreign currency, international sales grew in every region in 2020. There is significant uncertainty about the duration and extent of the impact of COVID-19; however, due to store closures and an expected reduction in initial traffic once stores reopen, we anticipate there will be a significant negative impact to our Fiscal 2021 revenues including a decrease of approximately 50% in the first quarter. Additional details on revenues are provided in the section titled "Information by Reportable Segment". The following table presents the percentage relationship to net revenues for components of the Consolidated Statements of Income: Year EndedMarch 2020 2019
Gross margin (net revenues less cost of goods sold) 55.3 % 54.6 % Selling, general and administrative expenses
43.4 43.1
Impairment of goodwill 3.1 -
Operating margin 8.8 % 11.6 %
Year Ended March 2020 Compared to Year Ended March 2019
Gross margin increased 70 basis points to 55.3% in 2020 compared to 54.6% in
2019. Gross margin in 2020 was positively impacted by a mix-shift to higher
margin businesses and a favorable net foreign currency transaction impact.
Selling, general and administrative expenses as a percentage of total revenues
increased 30 basis points in 2020 compared to 2019. This increase was primarily
due to continued investments in our key strategic growth initiatives, which
include direct-to-consumer, demand creation, product innovation and technology.
These costs were partially offset by leverage of operating expenses on higher
revenues, decreased compensation costs and lower transaction and deal-related
costs in 2020.
VF recorded a $323.2 million noncash impairment charge related to the Timberland
reporting unit during the fourth quarter of 2020. For additional information,
refer to Notes 9 and 23 to the consolidated financial statements and the
"Critical Accounting Policies and Estimates" section below.
In 2020, operating margin decreased 280 basis points, to 8.8% from 11.6% in
2019, primarily due to the items described above.
Net interest expense decreased $20.6 million to $72.2 million in 2020. The
decrease in net interest expense was due to lower rates on decreased borrowings
of short-term debt, partially due to repayment activity funded by the cash
received from Kontoor Brands, and higher international cash balances in higher
yielding currencies. The decrease was partially offset by a deferred loss on an
interest rate hedging contract of $8.5 million recognized in net interest
expense in 2020 in connection with the full redemption of the aggregate
principal amount of the outstanding 2021 notes.
Outstanding interest-bearing debt averaged $2.6 billion and $3.4 billion for
2020 and 2019, respectively, with short-term borrowings representing 15.2% and
35.3% of average debt outstanding for the respective years. The weighted average
interest rate on outstanding debt was 3.0% in 2020 and 3.1% in 2019.
Loss on debt extinguishment of $59.8 million was recorded in 2020 as a result of
the premiums, amortization and fees associated with cash tender offers for VF's
outstanding 2033 and 2037 notes, and the full redemption of VF's outstanding
2021 notes.
Other income (expense), net primarily consists of foreign currency gains and
losses, other components of net periodic pension cost (excluding the service
cost component) and non-operating gains and losses. Other income (expense)
netted to $(68.7) million and $(59.1) million in 2020 and 2019, respectively.
Included in other income (expense), net in 2020 is $48.3 million expense related
to the release of currency translation amounts associated with the substantial
liquidation of foreign entities in certain countries in South America and $27.4
million expense related to pension settlement charges. Included in other income
(expense), net in 2019 is the loss on sale of the Reef® brand of $14.4 million
and loss on sale of $22.4 million related to the divestiture of the Van Moer
business.
The effective income tax rate was 13.5% in 2020 compared to 16.2% in 2019. The
effective income tax rate is lower in 2020 when compared to 2019 primarily due
to the discrete tax benefit associated with the transitional impact of the Swiss
Tax Act. The 2020 effective income tax rate included a net discrete tax benefit
of $92.5 million , which primarily related to the $93.6 million net tax benefit
recognized due to the transitional impact from the enactment of the Swiss Tax
Act. The $92.5 million net discrete tax benefit in 2020 reduced the effective
income tax rate by 12.7% compared to an unfavorable 2.0% impact of discrete
items for 2019. Excluding discrete items, the effective tax rate during 2020
increased by approximately 12.0% primarily due to nondeductible goodwill
impairment charges and a lower percentage of income in lower tax rate
jurisdictions. The international effective tax rate was 15.6% for 2020.
As a result of the above, income from continuing operations in 2020 was $629.1
million ($1.57 per diluted share), compared to $870.4 million ($2.17 per diluted
share) in 2019.
There is significant uncertainty about the duration and extent of the impact of
COVID-19; however, due to expected lower revenues, the adverse impact to gross
margin due to higher promotional activity and higher net interest expense
resulting from recent debt issuances, we anticipate there will be a significant
negative impact to our Fiscal 2021 income from continuing operations.
Refer to additional discussion in the "Information by Reportable Segment"
section below.
26 VF Corporation Fiscal 2020 Form 10-K
--------------------------------------------------------------------------------Table of Contents
Information by Reportable Segment
VF's reportable segments are: Outdoor, Active and Work. We have included an Other category in the tables below for purposes of reconciliation of revenues and profit, but it is not considered a reportable segment. Included in this Other category are results related to the sale of non-VF products and transition services primarily related to the sale of the Nautica® brand business. The primary financial measures used by management to evaluate the financial results of VF's reportable segments are segment revenues and segment profit. Segment profit comprises the operating income and other income (expense), net line items of each segment. Refer to Note 20 to the consolidated financial statements for a summary of results of operations by segment, along with a reconciliation of segment profit to income before income taxes. Year EndedMarch 2020 Compared to Year EndedMarch 2019 The following tables present a summary of the changes in segment revenues and profit in the year endedMarch 2020 compared to the year endedMarch 2019 : Segment Revenues: Year Ended March 2020 Compared to Year Ended March 2019 (In millions) Outdoor Active Work Other (a) Total Segment revenues - Year Ended March 2019$ 4,649.0 $ 4,721.8 $ 885.7 $ 10.4 $ 10,266.9 Organic 53.0 345.1 32.2 32.1 462.4 Acquisition 11.8 - - - 11.8 Dispositions - (71.3 ) (25.0 ) - (96.3 ) Impact of foreign currency (69.8 ) (76.2 ) (6.5 ) (3.7 ) (156.2 ) Segment revenues - Year Ended March 2020$ 4,644.0 $ 4,919.4 $ 886.4 $ 38.8 $ 10,488.6 Segment Profit: Year Ended March 2020 Compared to Year Ended March 2019 (In millions) Outdoor Active Work Other (a) Total Segment profit - Year Ended March 2019$ 544.4 $ 1,125.7 $ 67.4 $ 3.3 $ 1,740.8 Organic (22.2 ) 35.2 (15.8 ) (13.8 ) (16.6 ) Acquisition (0.2 ) - - - (0.2 ) Dispositions - (6.6 ) (0.9 ) - (7.5 ) Impact of foreign currency (5.9 ) (17.5 ) (0.3 ) 4.0 (19.7 ) Segment profit - Year Ended March 2020$ 516.1 $ 1,136.8 $
50.4
(a) Included in the Other category for the year ended
primarily related to the sale of non-VF products. The year ended
reflect results primarily from transition services related to the sale of the
Nautica® brand business. Differences in the results as compared to the prior
year, other than the impact of foreign currency, are reflected within the
'organic' activity.
VF Corporation Fiscal 2020 Form 10-K 27--------------------------------------------------------------------------------
Table of Contents
The following sections discuss the changes in revenues and profitability by
segment. For purposes of this analysis, royalty revenues have been included in
the wholesale channel for all periods.
Outdoor
Year Ended March
(Dollars in millions) 2020 2019 Percent Change
Segment revenues $ 4,644.0 $ 4,649.0 (0.1 )%
Segment profit 516.1 544.4 (5.2 )%
Operating margin 11.1 % 11.7 %
The Outdoor segment includes the following brands: The North Face®, Timberland®, Icebreaker®, Smartwool® and Altra®.
Year EndedMarch 2020 Compared to Year EndedMarch 2019 Global revenues for Outdoor were flat in 2020 compared to 2019, including a 1% unfavorable impact due to foreign currency. Full year 2020 global revenues for Outdoor included a 15% decline in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Revenues in theAmericas region increased 2% in 2020. Revenues in theEurope region decreased 2%, including a 3% unfavorable impact from foreign currency. Revenues in theAsia-Pacific region decreased 3% in 2020, with a 2% unfavorable impact from foreign currency. Global revenues for The North Face® brand increased 3% in 2020, including a 2% unfavorable impact from foreign currency. The increase was due to operational growth across all channels and regions, including strong performance in the wholesale channel and growth in the direct-to-consumer channel driven by an expanding e-commerce business. Full year 2020 global revenues for The North Face® brand included a 14% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Global revenues for the Timberland® brand decreased 8% in 2020. The decrease reflects overall declines in the wholesale and direct-to-consumer channels and an overall 2% unfavorable impact from foreign currency, which were partially offset by e-commerce growth and increases inChina . Full year 2020 global revenues for the Timberland® brand included a 23% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Global direct-to-consumer revenues for Outdoor were flat in 2020, including a 2% unfavorable impact from foreign currency. Declines in retail store sales were offset by a growing e-commerce business across all regions. Full year 2020 global direct-to-consumer revenues for Outdoor included a 12% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Global wholesale revenues for Outdoor were flat, including a 1% unfavorable impact from foreign currency and reflected global growth in The North Face® brand. Full year 2020 global wholesale revenues for Outdoor included an 18% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Operating margin decreased 60 basis points in 2020 compared to the 2019 period due to higher product costs and increased investments in product innovation, demand creation and technology. The decline was partially offset by increased pricing, a mix-shift to higher margin businesses, lower relocation costs and a favorable net foreign currency transaction impact. The decrease was also partially offset by a gain of approximately$11 million on the sale of office real estate and related assets in connection with the relocation of VF's global headquarters and certain brands toDenver, Colorado during the first quarter of 2020. As discussed above, there is significant uncertainty about the duration and extent of the impact of COVID-19; however, we anticipate there will be a significant negative impact to our Outdoor Fiscal 2021 segment revenues and segment profit. 28 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Table of Contents
Active
Year Ended March
(Dollars in millions) 2020 2019 Percent Change
Segment revenues $ 4,919.4 $ 4,721.8 4.2 %
Segment profit 1,136.8 1,125.7 1.0 %
Operating margin 23.1 % 23.8 %
The Active segment includes the following brands: Vans®, Kipling®, Napapijri®, Eastpak®, JanSport®, Reef® (through the date of sale) and Eagle Creek®.
Year EndedMarch 2020 Compared to Year EndedMarch 2019 Global revenues for Active increased 4% in 2020 compared to 2019, including a 2% unfavorable impact from foreign currency, driven by growth across all channels and regions (excluding the impact of foreign currency). Full year 2020 global revenues for Active included a 9% decline in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Revenues in theAmericas region increased 5% in 2020. Revenues in theEurope region decreased 1%, including a 4% unfavorable impact from foreign currency. Revenues in theAsia-Pacific region increased 11% in 2020, including a 4% unfavorable impact from foreign currency. The year endedMarch 2020 was also negatively impacted by the sale of the Reef® brand business inOctober 2018 , which resulted in lower revenues of$71.3 million . Excluding the impact of the disposition, global revenues for Active increased 6% compared to the 2019 period, including a 1% unfavorable impact from foreign currency. Vans® brand global revenues increased 10% in 2020, including a 1% unfavorable impact from foreign currency. The increase was due to strong operational growth across all channels and regions, including strong wholesale performance and direct-to-consumer growth driven by an expanding e-commerce business and new store openings. Full year 2020 global revenues for the Vans® brand included a 7% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Global direct-to-consumer revenues for Active grew 8% in 2020, including a 1% unfavorable impact from foreign currency. Growth in the direct-to-consumer channel was driven by a growing e-commerce business and new store openings for the Vans® brand. Full year 2020 global direct-to-consumer revenues for Active included an 11% decrease in the fourth quarter, primarily due to the impact of COVID-19. Global wholesale revenues for Active increased 1% in 2020, driven by global growth in the Vans® brand, and included a 2% unfavorable impact from foreign currency. Full year 2020 global wholesale revenues for Active included an 8% decrease in the fourth quarter (including a 2% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Excluding the impact of the Reef® brand disposition, global wholesale revenues for Active increased 3% in 2020 compared to 2019, including a 2% unfavorable impact from foreign currency. Operating margin decreased 70 basis points in 2020, reflecting increased investments in direct-to-consumer, demand creation, product innovation and technology, partially offset by leverage of operating expenses on higher revenues, a mix-shift to higher margin businesses and a favorable net foreign currency transaction impact. As discussed above, there is significant uncertainty about the duration and extent of the impact of COVID-19; however, we anticipate there will be a significant negative impact to our Active Fiscal 2021 segment revenues and segment profit. VF Corporation Fiscal 2020 Form 10-K 29
--------------------------------------------------------------------------------
Table of Contents
Work
Year Ended March
(Dollars in millions) 2020 2019 Percent Change
Segment revenues $ 886.4 $ 885.7 0.1 %
Segment profit 50.4 67.4 (25.2 )%
Operating margin 5.7 % 7.6 %
The Work segment includes the following brands: Dickies® and Timberland PRO®.
Year EndedMarch 2020 Compared to Year EndedMarch 2019 Global Work revenues were flat in 2020 compared to 2019, including a 1% unfavorable impact from foreign currency. Full year 2020 global revenues for Work included a 1% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), which was impacted by COVID-19. The year endedMarch 2020 was also negatively impacted by the sale of theVan Moer business inOctober 2018 , which resulted in lower revenues of$25.0 million . Excluding the impact of the disposition, global revenues for Work increased 3% compared to the 2019 period, including a 1% unfavorable impact from foreign currency. The revenue increase was due to growth in both the Dickies® and Timberland PRO® brands. Revenues in theAmericas increased 3% in 2020. Revenues in theEurope region were flat, including a 3% unfavorable impact from foreign currency. Revenues in theAsia-Pacific region increased 7%, including a 3% unfavorable impact from foreign currency. Dickies® brand global revenues increased 3% in 2020, including a 1% unfavorable impact from foreign currency. The increase was primarily due to growth in theAsia-Pacific region , specifically inChina , and reflects increases in the wholesale and direct-to-consumer channels. Full year 2020 global revenues for the Dickies® brand included a 3% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Operating margin decreased 190 basis points in 2020 compared to 2019. The decrease reflects certain higher product costs and increased investments in direct-to-consumer, demand creation and product innovation, partially offset by increased pricing and lower transaction and deal-related costs from the acquisition of the Williamson-Dickie business. As discussed above, there is significant uncertainty about the duration and extent of the impact of COVID-19; however, we anticipate there will be a significant negative impact to our Work Fiscal 2021 segment revenues and segment profit. Reconciliation of Segment Profit to Consolidated Income Before Income Taxes There are three types of costs necessary to reconcile total segment profit to consolidated income before income taxes. These costs are (i) impairment of goodwill and intangible assets, which is excluded from segment profit because these costs are not part of the ongoing operations of the respective businesses, (ii) interest expense, net, and loss on debt extinguishment which are excluded from segment profit because substantially all financing costs are managed at the corporate office and are not under the control of segment management, and (iii) corporate and other expenses, which are excluded from segment profit to the extent they are not allocated to the segments. Impairment of goodwill and net interest expense are discussed in the "Consolidated Statements of Income" section, and corporate and other expenses are discussed below. Following is a summary of VF's corporate and other expenses: Year Ended March (In millions) 2020 2019 Information systems and shared services$ 365.9 $ 418.1 Less costs allocated to segments (212.0 ) (255.6 ) Information systems and shared services retained at corporate 153.9
162.5
Corporate headquarters' costs 292.5
257.3
Other 68.0
189.9
Corporate and other expenses$ 514.4
Information Systems and Shared Services These costs include management information systems and the centralized finance, supply chain, human resources, direct-to-consumer and customer management functions that support worldwide operations. Operating costs of information systems and shared services are charged to the segments based on utilization of those services. Costs to develop new computer applications are generally not allocated to the segments. Included in information systems and shared services costs in the year endedMarch 2020 and 2019 are costs associated with software system implementations and upgrades and other strategic projects. Corporate Headquarters' Costs Headquarters' costs include compensation and benefits of corporate management and staff, legal and professional fees, and general and administrative expenses that have not been allocated to the segments. The increase in corporate headquarters' 30 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Table of Contents
costs in 2020 compared to 2019 is primarily attributed to expenses associated with the acquisition, integration and separation of businesses, certain costs related to the relocation of VF's global headquarters toDenver, Colorado , and other strategic project costs. Other This category includes (i) costs of corporate programs or corporate-managed decisions that are not allocated to the segments, (ii) costs of registering, maintaining and enforcing certain of VF's trademarks, and (iii) miscellaneous consolidated costs, the most significant of which is related to the expense of VF's centrally-managedU.S. defined benefit pension plans. Included in other expense in 2020 is$48.3 million related to the release of currency translation amounts associated with the substantial liquidation of foreign entities in certain countries inSouth America . Included in both 2020 and 2019 are certain corporate overhead and other costs previously included in the Work and former Jeans segments, which have been reallocated to continuing operations. The costs in 2020 associated with the former Jeans segment have been largely offset by reimbursements from Kontoor Brands related to transition services, which is the primary driver of the overall decrease when compared to costs in 2019. Also included in other expense in the year endedMarch 2019 is the loss on sale of the Reef® brand business of$14.4 million and loss on sale of$22.4 million related to the divestiture of theVan Moer business. International Operations International revenues increased 1% in the year endedMarch 2020 over the year endedMarch 2019 . Foreign currency negatively impacted international revenue growth by 3% in the year endedMarch 2020 . Full year 2020 international revenues included an 11% decrease in the fourth quarter (including a 2% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. Revenues in theEurope region decreased 2% in the year endedMarch 2020 , including a 4% unfavorable impact from foreign currency. In theAsia-Pacific region , revenues increased 4% in the year endedMarch 2020 over the year endedMarch 2019 , driven by growth inChina . Foreign currency negatively impacted revenues in theAsia-Pacific region by 3%. Revenues in theAmericas (non-U.S. ) region grew 6% in the year endedMarch 2020 , reflecting operational growth, partially offset by a 2% unfavorable impact from foreign currencies. Excluding the impact of dispositions, international revenues increased 2% in the year endedMarch 2020 , including a 3% unfavorable impact from foreign currency. International revenues were 47% and 48% of total VF revenues in the year endedMarch 2020 and 2019, respectively. Direct-to-Consumer Operations Direct-to-consumer revenues grew 5% in the year endedMarch 2020 over the year endedMarch 2019 , reflecting growth in all regions. Foreign currency negatively impacted direct-to-consumer revenue growth by 1% in the year endedMarch 2020 . The increase in direct-to-consumer revenues was due to an expanding e-commerce business which grew 15% in the year endedMarch 2020 , including a 2% unfavorable impact from foreign currency. Full year 2020 direct-to-consumer revenues included an 11% decrease in the fourth quarter (including a 1% unfavorable impact from foreign currency), primarily due to the impact of COVID-19. VF opened 102 stores in the year endedMarch 2020 , bringing the total number of VF-owned retail stores to 1,379 atMarch 2020 . There were 1,382 VF-owned retail stores atMarch 2019 . Direct-to-consumer revenues were 41% of total VF revenues in the year endedMarch 2020 compared to 40% in the year endedMarch 2019 . VF Corporation Fiscal 2020 Form 10-K 31 --------------------------------------------------------------------------------
Table of Contents
YEAR ENDED
Consolidated Statement of Income
VF reported$10.3 billion in revenues for the year endedMarch 2019 . Revenues were driven by strength in all segments, the direct-to-consumer channel, international businesses and recent acquisitions, including Williamson-Dickie, Icebreaker and Altra. Direct-to-consumer revenues were 40% of total revenues in 2019, driven by an expanding e-commerce business. There were 1,382 total VF-owned retail stores at the end ofMarch 2019 . International revenues were 48% of total revenues in 2019, driven by theEurope andAsia-Pacific regions. Gross margin was 54.6% in 2019, which was driven by VF's higher margin businesses and increased pricing, partially offset by costs related to the relocation of our global headquarters and certain brands toDenver, Colorado and costs related to the acquisition, integration and separation of businesses. Selling, general and administrative expenses as a percentage of total revenues was 43.1% during 2019. This includes$81.0 million of expenses related to the relocation of our global headquarters and certain brands toDenver, Colorado and expenses related to the acquisition, integration and separation of businesses. The year endedMarch 2019 also included continued investments in our key strategic growth initiatives, which include direct-to-consumer, demand creation, product innovation and technology. Operating margin in 2019 was 11.6% due to the items described above. Net interest expense was$92.7 million in 2019. This was driven by interest on short-term borrowings, offset by international bank balances in high yielding currencies. Total outstanding debt averaged$3.4 billion in 2019, with a weighted average interest rate of 3.1%. Other income (expense), net primarily consists of foreign currency gains and losses, other components of net periodic pension cost (excluding the service cost component) and non-operating gains and losses. Other income (expense) netted to$(59.1) million in 2019 and included the loss on sale of the Reef® brand of$14.4 million and loss on sale of$22.4 million related to the divestiture of theVan Moer business. The effective income tax rate for the year endedMarch 2019 was 16.2%. The year endedMarch 2019 included a net discrete tax expense of$21.0 million , which included$37.3 million net tax expense related to adjustments to provisional amounts recorded in 2017 under the Tax Cuts and Jobs Act ("U.S. Tax Act"),$26.2 million of tax benefit related to stock compensation,$5.9 million of net tax expense related to return to accrual adjustments and$4.5 million of net tax expense related to unrecognized tax benefits and interest. The$21.0 million net discrete tax expense in 2019 increased the effective income tax rate by 2.0%. Without discrete items, the effective income tax rate for 2019 was 14.2%. As a result of the above, income from continuing operations in 2019 was$870.4 million ($2.17 per diluted share). Information by Reportable Segment Global revenues for Outdoor were$4.6 billion in 2019, driven by The North Face® brand and both the wholesale and the direct-to-consumer channels, including e-commerce. Global revenues for Outdoor were also driven by the Icebreaker and Altra acquisitions. Segment profit for Outdoor was$544.4 million inMarch 2019 and operating margin was 11.7%, which includes high levels of selling, general and administrative costs related to the relocation of certain brands toDenver, Colorado . Global revenues for Active were$4.7 billion in 2019, driven by strength in the Vans® brand across both the direct-to-consumer and wholesale channels and strong performance across all regions. Direct-to-consumer performance was driven by an expanding e-commerce business and retail store openings. Segment profit for Active was$1.1 billion in 2019 and operating margin was 23.8%, due to a mix-shift to higher margin businesses and leverage of operating expenses on higher revenues. Global revenues for Work were$885.7 million in 2019, which includes the Williamson-Dickie acquisition. Segment profit for Work was$67.4 million in 2019 and operating margin was 7.6%, driven by costs related to the acquisition, integration and operating results of the Williamson-Dickie acquisition. Corporate and other expenses in 2019 were$609.7 million and were driven by costs related to information systems and shared services, compensation, and strategic projects. The corporate and other expenses in 2019 also reflect corporate overhead and other costs previously included in the Work and former Jeans segments that have been reallocated to continuing operations, and the losses on sale of the Reef® brand andVan Moer businesses. 32 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Table of Contents
TRANSITION PERIOD THREE MONTHS ENDED
Consolidated Statement of Income
VF reported$2.2 billion in revenues for the three months endedMarch 2018 . Revenues were driven by strength in the Active segment, the direct-to-consumer channel, international businesses and the Williamson-Dickie acquisition. Direct-to-consumer revenues were 40% of total revenues in the three months endedMarch 2018 , driven by an expanding e-commerce business. There were 1,313 total VF-owned retail stores at the end ofMarch 2018 . International revenues were 53% of total revenues in the three months endedMarch 2018 , driven by theEurope andAsia-Pacific regions. Gross margin was 53.8% in the three months endedMarch 2018 , which was due to favorable pricing and a mix-shift to higher margin businesses in the Active and Outdoor segments, partially offset by lower margins attributable to the Williamson-Dickie acquisition and product costs. Selling, general and administrative expenses as a percentage of total revenues was 47.0% during the three months endedMarch 2018 . This includes expenses related to the acquisition and integration of businesses and investments in our key growth priorities, which include demand creation, customer fulfillment, direct-to-consumer and product innovation. Compensation costs also impacted the three months endedMarch 2018 . Operating margin in the three months endedMarch 2018 was 6.8% due to the items described above. Net interest expense was$22.6 million in the three months endedMarch 2018 . This was driven by interest on short-term borrowings and reflects lower interest on long-term debt due to the payoff of the$250.0 million of 5.95% fixed-rate notes onNovember 1, 2017 . Total outstanding debt averaged$3.2 billion in the three months endedMarch 2018 , with a weighted average interest rate of 2.9%. The effective income tax rate for the three months endedMarch 2018 was 1.8%. The three months endedMarch 2018 included a net discrete tax benefit of$14.7 million , which included a$10.7 million tax benefit related to stock compensation, a$7.3 million net tax benefit related to the realization of previously unrecognized tax benefits and interest, an$8.4 million tax expense related to the change of a prior estimate of taxes payable, and a$5.1 million net tax benefit related to adjustments to provisional amounts recorded in 2017 under theU.S. Tax Act. The$14.7 million net discrete tax benefit in the three months endedMarch 2018 reduced the effective income tax rate by 11.2%. Without discrete items, the effective income tax rate for the three months endedMarch 2018 was 13.0%. As a result of the above, income from continuing operations in the three months endedMarch 2018 was$129.0 million ($0.32 per diluted share). Information by Reportable Segment Global revenues for Outdoor were$888.0 million in the three months endedMarch 2018 , driven by The North Face® brand, the direct-to-consumer channel, including e-commerce, and theEurope region. Segment profit for Outdoor was$44.7 million in the three months endedMarch 2018 and operating margin was 5.0%, which reflects high levels of selling, general and administrative investments in direct-to-consumer and demand creation initiatives and product costs, partially offset by VF's higher margin businesses. Global revenues for Active were$1.1 billion in the three months endedMarch 2018 , driven by strength in the Vans® brand across both the direct-to-consumer and wholesale channels and strong performance across all regions. Direct-to-consumer performance was driven by an expanding e-commerce business and retail store openings. Segment profit for Active was$237.6 million in the three months endedMarch 2018 and operating margin was 22.2%, due to a mix-shift to higher margin businesses, increased pricing and lower product costs, partially offset by selling, general and administrative investments in direct-to-consumer and demand creation initiatives. Global revenues for Work were$221.9 million in the three months endedMarch 2018 , which includes the Williamson-Dickie acquisition. Segment profit for Work was$11.5 million in the three months endedMarch 2018 and operating margin was 5.2%, driven by increased selling, general and administrative expenses and higher product costs, partially offset by a mix-shift to higher margin businesses. Corporate and other expenses in the three months endedMarch 2018 were$139.9 million and were driven by compensation costs and investments in our key strategic growth initiatives, including expenses related to the acquisition and integration of businesses. VF Corporation Fiscal 2020 Form 10-K 33
--------------------------------------------------------------------------------
Table of Contents
YEAR ENDED
Consolidated Statement of Income
VF reported$8.4 billion in revenues for the year endedDecember 2017 . Revenues were driven by strength in the Active and Outdoor segments, the direct-to-consumer, international businesses and the Williamson-Dickie acquisition. Direct-to-consumer revenues were 40% of total revenues in 2017, driven by an expanding e-commerce business. There were 1,344 total VF-owned retail stores at the end ofDecember 2017 . International revenues were 49% of total revenues in 2017, driven by theEurope andAsia-Pacific regions. Gross margin was 54.1% in 2017, which was due to favorable pricing and a mix-shift to higher margin businesses. Selling, general and administrative expenses as a percentage of total revenues was 43.6% during 2017. This was due to investments in our key growth priorities, which include direct-to-consumer, product innovations, demand creation and technology initiatives. Operating margin in 2017 was 10.5% due to the items described above. Net interest expense was$89.0 million in 2017. This was driven by interest on short-term borrowings and higher interest on long-term debt balances due to a full year of interest on the €850.0 million euro-denominated 0.625% fixed-rate notes issued inSeptember 2016 , which were partially offset by the payoff of the$250.0 million of 5.95% fixed-rate notes onNovember 1, 2017 and higher international short-term investment rates. Outstanding interest-bearing debt averaged$3.2 billion for 2017, with short-term borrowings representing 27% of average debt outstanding. The weighted average interest rate on outstanding debt was 3.1% in 2017. Other income (expense), net primarily consists of foreign currency gains and losses, other components of net periodic pension cost (excluding the service cost component) and non-operating gains and losses. Other income (expense) netted to$(6.5) million in 2017. The effective income tax rate was 66.0% in 2017. The effective income tax rate was substantially higher in 2017 primarily due to discrete tax expense associated with theU.S. Tax Act. TheU.S. Tax Act reduced the federal tax rate onU.S. earnings to 21% and moved from a global taxation regime to a modified territorial regime. As part of the legislation,U.S. companies were required to pay a tax on historical earnings generated offshore that have not been repatriated to theU.S. Additionally, revaluation of deferred tax asset and liability positions at the lower federal base rate of 21% was also required. The transitional impact of theU.S. Tax Act resulted in a provisional net charge of$465.5 million , or$1.15 per share, during the three months endedDecember 2017 . This amount, which is included in the income taxes line item in the Consolidated Statements of Income, is primarily comprised of approximately$512.4 million related to the transition tax and approximately$89.5 million tax benefit related to revaluingU.S. deferred tax assets and liabilities using the newU.S. corporate tax rate of 21%. Other provisional charges of$42.6 million were primarily related toU.S. federal and state tax on foreign income and dividends and establishing a deferred tax liability for foreign withholding taxes as the Company is not asserting indefinite reinvestment on short-term liquid assets of certain foreign subsidiaries. All other foreign earnings, including basis differences of certain foreign subsidiaries, continue to be considered indefinitely reinvested. The 2017 effective income tax rate included a net discrete tax expense of$441.9 million , which included the provisional net charge of$465.5 million related to theU.S. Tax Act and$22.0 million of tax benefits related to stock compensation. The$441.9 million net discrete tax expense in 2017 increased the effective income tax rate by 56.1%. Without discrete items, the effective tax rate during 2017 was 9.9%. As a result of the above, income from continuing operations in 2017 was$268.1 million ($0.66 per diluted share). Information by Reportable Segment Global revenues for Outdoor were$4.2 billion in 2017, driven by strength in The North Face® brand and the direct-to-consumer channel. Segment profit for Outdoor was$537.5 million in 2017 and operating margin was 12.8%, due to increased levels of investments in direct-to-consumer, product and innovation, demand creation and technology, partially offset by gross margin expansion driven by a mix-shift to higher margin businesses, lower product costs and pricing. Global revenues for Active were$3.8 billion in 2017, driven by strength in the Vans® brand across both the direct-to-consumer and wholesale channels. Segment profit for Active was$805.8 million in 2017 and operating margin was 21.3%, due to gross margin expansion driven by a mix-shift to higher margin businesses, pricing and lower product costs, partially offset by increased investments in direct-to-consumer, product and innovation, demand creation and technology. Global revenues for Work were$394.0 million in 2017, which includes Williamson-Dickie beginning at theOctober 2, 2017 acquisition date. Segment profit for Work was$42.6 million in 2017 and operating margin was 10.8%, due to the impact of amounts related to the acquisition, integration and operating results of Williamson-Dickie and a mix-shift to higher margin businesses. Corporate and other expenses in 2017 were$509.1 million and were driven by software system implementations and upgrades, strategic project costs and cash and stock-based compensation expense. 34 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Table of Contents
ANALYSIS OF FINANCIAL CONDITION
Balance Sheets
The following discussion refers to significant changes in balances for
continuing operations at
decreased consumer demand due to the impact of COVID-19.
• Increase in property, plant and equipment - primarily related to capital
spending associated with the construction of distribution centers.
• Decrease in goodwill - primarily due to a
charge related to the Timberland reporting unit.
• Increase in operating lease right-of-use assets - due to amounts recorded in
connection with the adoption of
Accounting Standards Codification Topic 842, Leases ("ASC 842").
• Increase in other assets - primarily due to an increase in deferred tax
assets associated with the transitional impact from the enactment of the
Swiss Tax Act.
• Increase in short-term borrowings - primarily due to a
down from VF's
March 2020 , in response to the COVID-19 pandemic, partially offset by repayment of
commercial paper borrowings including the use of funds provided by the cash received from Kontoor Brands. • Decrease in accounts payable - driven by the timing of payments to vendors.
• Increase in accrued liabilities - primarily due to amounts recorded for
operating lease liabilities in connection with the adoption of ASC 842,
partially offset by lower accrued compensation.
• Increase in long-term debt - due to the issuance of €500.0 million
euro-denominated 0.250% fixed rate notes and €500.0 million euro-denominated
0.625% fixed rate notes in 2020, partially offset by cash tender offers for
respectively, and the full redemption of
2021 notes in 2020.
• Increase in operating lease liabilities - due to amounts recorded for
operating lease liabilities in connection with the adoption of ASC 842.
• Decrease in other liabilities - primarily due to the reclassification of
deferred rent credits from other liabilities to operating lease right-of-use
assets in connection with the adoption of ASC 842.
Liquidity and Cash Flows
The financial condition of VF is reflected in the following:
March March
(Dollars in millions) 2020 2019
Working capital $1,518.8 $1,094.4
Current ratio 1.5 to 1 1.5 to 1
Debt to total capital 60.8% 39.3%
The current ratio remained flat at March 2020 compared to March 2019 , as
increases in current assets driven by higher cash balances primarily due to debt
issuances, as discussed in the "Cash Provided (Used) by Financing Activities"
section below, and higher inventory balances, as discussed in the "Balance
Sheets" section above, were offset by increases in current liabilities driven by
higher short-term borrowings and accrued liabilities, as discussed in the
"Balance Sheets" section above. The comparison was negatively impacted by the
recording of the current portion of operating lease liabilities in accrued
liabilities in the March 2020 period in connection with the adoption of ASC 842.
For the ratio of debt to total capital, debt is defined as short-term and
long-term borrowings, in addition to operating lease liabilities, beginning in
the Fiscal 2020 period. Total capital is defined as debt plus stockholders'
equity. The increase in the debt to total capital ratio at March 2020 compared
to March 2019 was attributed to the increase in operating lease liabilities, the
increase in short-term borrowings and the increase in long-term debt, as
discussed in the
"Balance Sheets" section above. The increase was also attributed to a decrease
in stockholders' equity, driven by share repurchases and payments of dividends,
partially offset by net income and stock-based compensation activity. Excluding
the operating lease liabilities, the debt to total capital ratio was 53.3% as of
March 2020 . VF's consolidated indebtedness excluding operating lease liabilities
and net of unrestricted cash of VF and its subsidiaries as a percentage of total
capital (net debt to capital) was 42.4% as of March 2020 .
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
calendar year as inventory builds to support peak sales periods in the second
half of the calendar year. Cash provided by operating activities in the second
half of the calendar year is substantially higher as inventories are sold and
accounts receivable are collected. Additionally, direct-to-consumer sales are
typically highest in the fourth quarter of the calendar year.
VF Corporation Fiscal 2020 Form 10-K 35
--------------------------------------------------------------------------------Table of Contents
In summary, our cash flows from continuing operations were as follows:
Year Ended March Three Months Ended
March 2018 Year Ended December
(In millions) 2020 2019 (Transition Period) 2017
Cash provided (used) by
operating activities
1,017.9
Cash used by investing
activities (285.3 ) (177.4 ) (46.2 ) (736.8 )
Cash provided (used) by
financing activities 309.7 (1,591.0 ) 406.8 (1,363.0 )
Cash Provided (Used) by Operating Activities
Cash flow related to operating activities is dependent on net income, adjustments to net income and changes in working capital. The decrease in cash provided by operating activities in the year endedMarch 2020 compared to the year endedMarch 2019 is primarily due to lower net income in the year endedMarch 2020 and an increase in net cash usage for working capital. Cash provided by operating activities in the year endedMarch 2019 reflects higher net income and net cash provided by working capital. Cash used by operating activities in the three months endedMarch 2018 reflects net cash usage from working capital driven by the timing of payments and cash collections. Cash provided by operating activities in the year endedDecember 2017 reflects lower net income that was largely offset by working capital changes primarily related to an increase in accrued income tax payable resulting from theU.S. Tax Act. Cash Used by Investing Activities The increase in cash used by investing activities in the year endedMarch 2020 compared to the year endedMarch 2019 related primarily to$430.3 million of proceeds from the sale of businesses, net of cash sold in the year endedMarch 2019 , partially offset by$320.4 million of net cash paid for acquisitions in the year endedMarch 2019 and$63.7 million from the sale of office real estate and related assets in connection with the relocation of VF's global headquarters and certain brands toDenver, Colorado in the year endedMarch 2020 . Capital expenditures increased$72.4 million compared to the year endedMarch 2019 . VF's investing activities in the year endedMarch 2019 include$430.3 million of proceeds from the sale of businesses, net of cash sold in the year. The proceeds were more than offset by$320.4 million of net cash paid for acquisitions, capital expenditures of$215.8 million and software purchases of$53.2 million . VF's investing activities in the three months endedMarch 2018 include$45.5 million of capital expenditures, proceeds from the sale of property, plant and equipment of$20.8 million and$18.7 million of software purchases. VF's investing activities in the year endedDecember 2017 related primarily to the Williamson-Dickie acquisition of$740.5 million , net of cash received. Additionally, the activities included$215.0 million of proceeds from the sale of LSG. Capital expenditures of$140.2 million and software purchases of$63.6 million offset the proceeds received. Cash Provided (Used) by Financing Activities The increase in cash provided by financing activities in the year endedMarch 2020 compared to the year endedMarch 2019 was primarily due to a net increase in short-term borrowings of$1.4 billion , proceeds from long-term debt of$1.1 billion and$906.1 million of cash received from Kontoor Brands, net of cash transferred, which was partially offset by an$849.3 million increase in share repurchases and a$642.8 million increase in payments on long-term debt during the year endedMarch 2020 . VF's financing activities in the year endedMarch 2019 include an$864.2 million net decrease in short-term borrowings,$767.1 million in cash dividends paid and$150.7 million in share repurchases. VF's financing activities in the three months endedMarch 2018 include a$795.9 million net increase in short-term borrowings, partially offset by$250.3 million in share repurchases and$181.4 million in cash dividends paid. VF's financing activities in the year endedDecember 2017 include$1.2 billion in share repurchases, a$250.0 million repayment of long-term debt and$684.7 million in cash dividends paid, partially offset by a$686.5 million net increase in short-term borrowings. During the years endedMarch 2020 and 2019, the three months endedMarch 2018 and the year endedDecember 2017 , VF purchased 12.0 million, 1.9 million, 3.4 million and 22.2 million shares, respectively, of its Common Stock in open market transactions under the share repurchase program authorized by VF's Board of Directors. The cost was$1.0 billion ,$150.7 million ,$250.3 million and$1.2 billion with an average price per share of$83.33 ,$80.62 ,$74.46 and$54.04 in the years endedMarch 2020 and 2019, the three months endedMarch 2018 and the year endedDecember 2017 , respectively. These amounts include shares held by the Company's deferred compensation plans. In response to the COVID-19 outbreak and to preserve financial liquidity, VF has made the decision to temporarily pause its share repurchase program. As of the end of Fiscal 2020, the Company had$2.8 billion remaining for future repurchases under its share repurchase program. 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. VF maintains a$2.25 billion senior unsecured revolving line of credit (the "Global Credit Facility") that expires inDecember 2023 . VF may request an unlimited number of one year extensions so long as each extension does not cause the remaining life of the Global Credit Facility to exceed five years, subject to stated terms and conditions. The Global Credit Facility may be used to borrow funds in bothU.S. dollar and certain non-U.S. dollar currencies, and has a$50.0 million letter of credit sublimit. In addition, the Global Credit Facility supports VF'sU.S. commercial paper program for short-term, seasonal working capital requirements and general corporate purposes, including share repurchases and acquisitions. Outstanding short-term balances may vary from period to period depending on the level of corporate requirements. Borrowings 36 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Table of Contents
under the Global Credit Facility are priced at a credit spread of 81.0 basis points over the appropriate LIBOR benchmark for each currency. VF is also required to pay a facility fee to the lenders, currently equal to 6.5 basis points of the committed amount of the facility. The credit spread and facility fee are subject to adjustment based on VF's credit ratings. InApril 2020 , VF entered into an amendment to the Global Credit Facility that resulted in certain changes to the restrictive covenants, including an increase to the consolidated indebtedness to consolidated capitalization ratio financial covenant to 70% and revised calculation of consolidated indebtedness to be net of unrestricted cash of VF and its subsidiaries. InMarch 2020 , VF elected to draw down$1.0 billion from the Global Credit Facility to strengthen the Company's cash position and support general working capital needs in Fiscal 2021, which was an action taken by VF in response to the COVID-19 pandemic. OnApril 9, 2020 , VF elected to draw down an additional$1.0 billion available from the Global Credit Facility. VF has a commercial paper program that allows for borrowings up to$2.25 billion to the extent that it has borrowing capacity under the Global Credit Facility. Commercial paper borrowings and standby letters of credit issued as ofMarch 2020 were$215.0 million and$18.4 million , respectively. VF has$97.3 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$13.8 million and$9.1 million atMarch 2020 andMarch 2019 , respectively. Borrowings under these arrangements had a weighted average interest rate of 16.3% and 24.6% atMarch 2020 andMarch 2019 , respectively. InFebruary 2020 , VF issued €500.0 million of 0.250% euro-denominated fixed-rate notes maturing inFebruary 2028 and €500.0 million of 0.625% euro-denominated fixed-rate notes maturing inFebruary 2032 . The 2028 notes were issued as a green bond, and thus an amount equal to the net proceeds will be used to finance projects that focus on key environmental sustainability initiatives including sustainable products and materials, sustainable operations and supply chain, and natural carbon sinks. In February andMarch 2020 , VF completed cash tender offers for$23.0 million and$63.1 million in aggregate principal amounts of its outstanding 6.00% fixed-rate notes due 2033 and 6.45% fixed-rate notes due 2037, respectively. The cash tender offers were subject to various conditions, which resulted in premiums of$8.6 million and$31.9 million for the 2033 and 2037 notes, respectively. InMarch 2020 , VF completed the full redemption of$500.0 million in aggregate principal amount of its outstanding 3.50% fixed-rate notes due 2021. The redemption price was equal to the sum of the present value of the remaining scheduled payments of principal and interest discounted to the redemption date at 120 basis points, which resulted in a make-whole premium of$17.0 million . OnApril 23, 2020 , VF closed its sale of senior unsecured notes including$1.0 billion of 2.050% notes dueApril 2022 ,$750.0 million of 2.400% notes dueApril 2025 ,$500.0 million of 2.800% notes dueApril 2027 and$750.0 million of 2.950% notes dueApril 2030 . The net proceeds received by the Company were approximately$2.98 billion . A portion of the net proceeds was used to repay the$2.0 billion of borrowings under the Global Credit Facility noted above and the remaining net proceeds will be used for general corporate purposes. Following the notes issuance and repayment, VF has approximately$2.2 billion available for borrowing against the Global Credit Facility and approximately$3.0 billion of cash and equivalents on hand. VF's favorable credit agency ratings allow for access to additional liquidity at competitive rates. At the end ofMarch 2020 , VF's long-term debt ratings were 'A' byStandard & Poor's Ratings Services and 'A3' by Moody's Investors Service, both with 'stable' outlooks, and commercial paper ratings by those rating agencies were 'A-1' and 'Prime-2', respectively. InApril 2020 ,Standard & Poor's Ratings Services revised VF's credit rating outlook to 'negative' from 'stable' to reflect the risk that extended economic stress from the COVID-19 pandemic on operating performance could result in a downgrade due to prolonged credit measure deterioration. Similarly, inApril 2020 Moody's Investor Services also revised VF's credit rating outlook to 'negative'. At the same time, both agencies affirmed VF's long-term debt and commercial paper ratings. 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 2023, 2028, 2032 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. Cash dividends totaled$1.90 per share in the year endedMarch 2020 as compared to$1.94 ,$0.46 and$1.72 in the year endedMarch 2019 , the three months endedMarch 2018 and the year endedDecember 2017 , respectively. The dividend payout ratio was 111.8% of diluted earnings per share in the year endedMarch 2020 , as compared to 61.7%, 73.0% and 112.9% in the year endedMarch 2019 , the three months endedMarch 2018 and the year endedDecember 2017 , respectively. The Company has declared a dividend of$0.48 per share that is payable in the first quarter of Fiscal 2021. Subject to approval by its Board of Directors, VF intends to continue to pay its regularly scheduled dividend and is not contemplating the suspension of its dividend program at this time. There is currently significant uncertainty about the duration and extent of the impact of COVID-19; however, we expect there will be a significant negative impact to our Fiscal 2021 cash flows. We believe the Company has sufficient liquidity and flexibility to operate during the disruptions caused by the COVID-19 pandemic and related governmental actions and regulations and health authority advisories and meet its obligations as they become due. However, due to the uncertainty of the duration and severity of the COVID-19 pandemic, governmental actions in response to the pandemic, and the impact on us and our consumers, customers and suppliers, there is no certainty that the measures we take will be sufficient to mitigate the risks posed by COVID-19. VF Corporation Fiscal 2020 Form 10-K 37 --------------------------------------------------------------------------------
Table of Contents
Following is a summary of VF's contractual obligations and commercial
commitments at the end of
Payment Due or Forecasted by Fiscal Year
(In millions) Total 2021 2022 2023 2024 2024 Thereafter
Recorded liabilities:
Long-term debt (1) $ 2,649 $ 2 $ 2 $ 2 $ 945 $ 2 $ 1,696
Operating leases (4) 1,470 378 320 244 167 109 252
Other (2) 302 92 44 38 32 34 62
Unrecorded commitments:
Interest payment
obligations (3) 712 51 51 51 48 45 466
Minimum royalty payments
(5) 38 16 7 4 2 2 7
Inventory obligations
(6) 1,761 1,730 12 10 9 - -
Other obligations (7) 395 249 84 50 7 5 -
$ 7,327 $ 2,518 $ 520 $ 399 $ 1,210 $ 197 $ 2,483 (1) Long-term debt consists of required principal payments on long-term debt and
finance lease obligations.
(2) Other recorded liabilities represent payments due for long-term liabilities
in VF's Consolidated Balance Sheet related to deferred compensation and
other employee-related benefits, product warranty claims and other
liabilities. These amounts are based on historical and forecasted cashoutflows. Amounts exclude liabilities for unrecognized income tax benefits
and deferred income taxes. Obligations under our qualified defined benefit
pension plans and unfunded supplemental executive retirement plan are not
included in the table above. Contractual cash obligations for these plans
cannot be determined due to the number of assumptions required to estimate
our future benefit obligations, including return on assets, discount rate
and future compensation increases. The liabilities associated with these
plans are presented in Note 16 to the consolidated financial statements. We
currently estimate that we will make contributions of approximately
million to our pension plans during Fiscal 2021. Future contributions may
differ from our planned contributions due to many factors, including changes
in tax and other benefit laws, changes to the plan, or significant
differences between expected and actual pension asset performance or
interest rates.
(3) Interest payment obligations represent required interest payments on
long-term debt and the interest portion of payments on finance leases.
Amounts exclude amortization of debt issuance costs, debt discounts and
acquisition costs that would be included in interest expense in the
consolidated financial statements.
(4) Operating leases represent required lease payments during the noncancelable
lease term. Variable payments for occupancy-related costs, real estate
taxes, insurance and contingent rent are not included above. In addition,
$319.6 million of leases (on an undiscounted basis) that have not yet commenced with terms of 2 to 15 years beginning in Fiscal 2021 are not included above.
(5) Minimum royalty payments represent obligations under license agreements to
use trademarks owned by third parties and include required minimum
advertising commitments. Actual payments could exceed minimum royalty
obligations.
(6) Inventory obligations represent binding commitments to purchase finished
goods, raw materials and sewing labor that are payable upon delivery of the
inventory to VF. This obligation excludes the amount included in accounts
payable at
(7) Other obligations represent other binding commitments for the expenditure of
funds, including (i) amounts related to contracts not involving the purchase
of inventories, such as the noncancelable portion of service or maintenance
agreements for management information systems, and (ii) capital expenditures
for approved projects.
VF had other financial commitments at the end of Fiscal 2020 that are not
included in the above table but may require the use of funds under certain
circumstances:
•
international bank guarantees are not included in the above table because
they represent contingent guarantees of performance under self-insurance and
other programs and would only be drawn upon if VF were to fail to meet its
other obligations.
• Purchase orders for goods or services in the ordinary course of business are
not included in the above table because they represent authorizations to
purchase rather than binding commitments.
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.
VF does not participate in transactions with unconsolidated entities or
financial partnerships established to facilitate off-balance sheet arrangements
or other limited purposes.
38 VF Corporation Fiscal 2020 Form 10-K
--------------------------------------------------------------------------------Table of Contents Risk Management VF is exposed to risks in the ordinary course of business. Management regularly assesses and manages exposures to these risks through operating and financing activities and, when appropriate, by (i) taking advantage of natural hedges within VF, (ii) purchasing insurance from commercial carriers, or (iii) using derivative financial instruments. Some potential risks are discussed below: Insured risks VF is self-insured for a significant portion of its employee medical, workers' compensation, vehicle and general liability exposures. VF purchases insurance from highly-rated commercial carriers to cover other risks, including directors and officers, property and umbrella, and to establish stop-loss limits on self-insurance arrangements. Cash and equivalents risks VF had$1.4 billion of cash and equivalents at the end of Fiscal 2020. Management continually monitors the credit ratings of the financial institutions with whom VF conducts business. Similarly, management monitors the credit quality of cash equivalents. Defined benefit pension plan risks At the end of Fiscal 2020, VF's defined benefit pension plans were underfunded by a net total of$14.0 million . The underfunded status includes a$118.5 million liability related to our unfundedU.S. supplemental defined benefit plan,$52.8 million of net liabilities related to our non-U.S. defined benefit plans, and a$157.4 million net asset related to ourU.S. qualified defined benefit plan. VF will continue to evaluate the funded status and future funding requirements of these plans, which depends in part on the future performance of the plans' investment portfolios. Management believes that VF has sufficient liquidity to make any required contributions to the pension plans in future years. VF's reported earnings are subject to risks due to the volatility of its pension expense, which has ranged in recent years from$34.8 million in the year endedDecember 2017 to$23.6 million in the year endedMarch 2020 , including the$27.4 million settlement charge discussed below. These fluctuations are primarily due to the decrease in service costs due to the freeze of future benefit accruals in theU.S. qualified and supplemental defined benefit plans as ofDecember 31, 2018 and varying amounts of actuarial gains and losses that are deferred and amortized to future years' expense. The assumptions that impact actuarial gains and losses include the rate of return on investments held by the pension plans, the discount rate used to value participant liabilities and demographic characteristics of the participants. In Fiscal 2019, VF approved a freeze of all future benefit accruals under theU.S. qualified defined benefit pension plan and supplemental defined benefit pension plan, effectiveDecember 31, 2018 . During the year endedMarch 2020 , VF took an additional step in managing pension risk by offering former employees in theU.S. qualified plan a lump-sum option to receive a distribution of their deferred vested benefits, pursuant to which the plan paid approximately$130 million in distributions to settle$170 million of projected benefit obligations related to participants. VF recorded a$23.0 million settlement charge in other income (expense), net line item in the Consolidated Statement of Income during the year endedMarch 2020 to recognize the related deferred actuarial losses in accumulated OCI. TheU.S. qualified plan participants were reduced by 10% as a result of this offer. No additional funding of the pension plan was required as all distributions were paid out of existing plan assets, and the plan's funded status remained materially unchanged. Refer to Note 16 to the consolidated financial statements and the "Critical Accounting Policies and Estimates" section below. VF has taken a series of steps to manage the risk and volatility in the pension plans and their impact on the financial statements. TheU.S. qualified and supplemental defined benefit plans were closed to new entrants in 2005 and all future benefit accruals were frozen as ofDecember 31, 2018 . The investment strategy of theU.S. qualified plan continues to define dynamic asset allocation targets that are dependent upon changes in the plan's funded status, capital market expectations, and risk tolerance. Management will continue to evaluate actions that may help to reduce VF's risks related to its defined benefit plans. Interest rate risks VF limits the risk of interest rate fluctuations by managing the mix of fixed and variable interest rate debt. In addition, VF may use derivative financial instruments to manage risk. Since all of VF's long-term debt has fixed interest rates, the exposure relates to changes in interest rates on variable rate short-term borrowings (which averaged approximately$399.0 million during Fiscal 2020). However, any change in interest rates would also affect interest income earned on VF's cash equivalents. Based on the average amount of variable rate borrowings and cash equivalents during Fiscal 2020, the effect of a hypothetical 1% increase in interest rates would be a decrease in reported net income of approximately$0.5 million . Foreign currency exchange rate risks VF is a global enterprise subject to the risk of foreign currency fluctuations. Approximately 47% of VF's revenues in the year endedMarch 2020 were generated in international markets. Most of VF's foreign businesses operate in functional currencies other than theU.S. dollar. In periods where theU.S. dollar strengthens relative to the euro or other foreign currencies where VF has operations, there is a negative impact on VF's operating results upon translation of those foreign operating results into theU.S. dollar. As discussed later in this section, management hedges VF's investments in certain foreign operations and foreign currency transactions. The reported values of assets and liabilities in these foreign businesses are subject to fluctuations in foreign currency exchange rates. For net advances to and investments in VF's foreign businesses that are considered to be long-term, the impact of changes in foreign currency exchange rates on those long-term advances is deferred as a component of accumulated OCI in stockholders' equity. TheU.S. dollar value of net investments in foreign subsidiaries fluctuates with changes in the underlying functional currencies. InFebruary 2020 , VF issued €1.0 billion of euro-denominated fixed-rate notes and inSeptember 2016 , VF issued €850 million of euro-denominated fixed-rate notes. These notes have been designated as net investment hedges of VF's investment in certain foreign operations. Because this debt qualified as a nonderivative hedging instrument, foreign currency transaction gains or losses of the debt are deferred in the foreign currency translation and other component of accumulated OCI as VF Corporation Fiscal 2020 Form 10-K 39 --------------------------------------------------------------------------------
Table of Contents
an offset to the foreign currency translation adjustments on the hedged investments. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated. VF monitors net foreign currency market exposures and enters into derivative foreign currency contracts to hedge the effects of exchange rate fluctuations for a significant portion of forecasted foreign currency cash flows or specific foreign currency transactions (relating to cross-border inventory purchases, production costs, product sales, operating costs and intercompany royalty payments). VF's practice is to buy or sell foreign currency exchange contracts that cover up to 80% of foreign currency exposures for periods of up to 24 months. Currently, VF uses only foreign exchange forward contracts but may use options or collars in the future. This use of financial instruments allows management to reduce the overall exposure to risks from exchange rate fluctuations on VF's cash flows and earnings, since gains and losses on these contracts will offset losses and gains on the transactions being hedged. For cash flow hedging contracts outstanding at the end of Fiscal 2020, if there were a hypothetical 10% change in foreign currency exchange rates compared to rates at the end of Fiscal 2020, it would result in a change in fair value of those contracts of approximately$239 million . However, any change in the fair value of the hedging contracts would be substantially offset by a change in the fair value of the underlying hedged exposure impacted by the currency rate changes. Counterparty risks VF is exposed to credit-related losses in the event of nonperformance by counterparties to derivative hedging instruments. To manage this risk, we have established counterparty credit guidelines and only enter into derivative transactions with financial institutions that have 'A minus/A3' investment grade credit ratings or better. VF continually monitors the credit rating of, and limits the amount hedged with, each counterparty. Additionally, management utilizes a portfolio of financial institutions to minimize exposure to potential counterparty defaults and adjusts positions as necessary. VF also monitors counterparty risk for derivative contracts within the defined benefit pension plans. Commodity price risks VF is exposed to market risks for the pricing of cotton, leather, rubber, wool and other materials, which we either purchase directly or in a converted form such as fabric or shoe soles. To manage risks of commodity price changes, management negotiates prices in advance when possible. VF has not historically managed commodity price exposures by using derivative instruments. Deferred compensation and related investment security risks VF has nonqualified deferred compensation plans in which liabilities to the plans' participants are based on the market values of the participants' selection of a hypothetical portfolio of investment funds. VF invests in a portfolio of securities that substantially mirrors the participants' investment selections. The increases and decreases in deferred compensation liabilities are substantially offset by corresponding increases and decreases in the market value of VF's investments, resulting in an insignificant net exposure to operating results and financial position. CRITICAL ACCOUNTING POLICIES AND ESTIMATES VF has chosen accounting policies that management believes are appropriate to accurately and fairly report VF's operating results and financial position in conformity with accounting principles generally accepted in theU.S. VF applies these accounting policies in a consistent manner. Significant accounting policies are summarized in Note 1 to the consolidated financial statements. The application of these accounting policies requires that VF 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 on an ongoing basis. Because VF's business cycle is relatively short (i.e., from the date that inventory is received until that inventory is sold and the trade receivable is collected), actual results related to most estimates are known within a few months after any balance sheet date. In addition, VF may retain outside specialists to assist in valuations of business acquisitions, impairment testing of goodwill and intangible assets, equity compensation, pension benefits and self-insured liabilities. If actual results ultimately differ from previous estimates, the revisions are included in results of operations when the actual amounts become known. VF believes the following accounting policies involve the most significant management estimates, assumptions and judgments used in preparation of the consolidated financial statements or are the most sensitive to change from outside factors. The application of these critical accounting policies and estimates is discussed with the Audit Committee of the Board of Directors. Inventories VF's inventories are stated at the lower of cost or net realizable value. Cost includes all material, labor and overhead costs incurred to manufacture or purchase the finished goods. Overhead allocated to manufactured product is based on the normal capacity of plants and does not include amounts related to idle capacity or abnormal production inefficiencies. VF performs a detailed review at each business unit, at least quarterly, of all inventories on the basis of individual styles or individual style-size-color stock keeping units to identify slow moving or excess products, discontinued and to- be-discontinued products, and off-quality merchandise. This review matches inventory on hand, plus current production and purchase commitments, with current and expected future sales orders. Management performs an evaluation to estimate net realizable value using a systematic and consistent methodology of forecasting future demand, market conditions and selling prices less costs of disposal. If the estimated net realizable value is less than cost, VF provides an allowance to reflect the lower value of that inventory. This methodology recognizes inventory exposures 40 VF Corporation Fiscal 2020 Form 10-K -------------------------------------------------------------------------------- at the time such losses are evident rather than at the time goods are actually sold. Historically, these estimates of future demand and selling prices have not varied significantly from actual results due to VF's timely identification and ability to rapidly dispose of these distressed inventories. Existence of physical inventory is verified through periodic physical inventory counts and ongoing cycle counts at most locations throughout the year. VF provides for estimated inventory losses that have likely occurred since the last physical inventory date. Historically, physical inventory shrinkage has not been material. Long-Lived Assets, Including Intangible Assets andGoodwill VF allocates the purchase price of an acquired business to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill. VF evaluates fair value at acquisition using three valuation techniques - the replacement cost, market and income methods - and weights the valuation methods based on what is most appropriate in the circumstances. The process of assigning fair values, particularly to acquired intangible assets, is highly subjective. Fair value for acquired intangible assets is generally based on the present value of expected cash flows. Indefinite-lived trademark or trade name intangible assets (collectively referred to herein as "trademarks") represent individually acquired trademarks, some of which are registered in multiple countries. Definite-lived customer relationship intangible assets are based on the value of relationships with wholesale customers at the time of acquisition.Goodwill represents the excess of cost of an acquired business over the fair value of net tangible assets and identifiable intangible assets acquired, and is assigned at the reporting unit level. VF's depreciation policies for property, plant and equipment reflect judgments on their estimated economic lives and residual value, if any. VF's amortization policies for definite-lived intangible assets reflect judgments on the estimated amounts and duration of future cash flows expected to be generated by those assets. In evaluating the amortizable life for customer relationship intangible assets, management considers historical attrition patterns for various groups of customers. Testing of Definite-Lived Assets VF's policy is to review property, plant and equipment and definite-lived intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. VF tests for potential impairment at the asset or asset group level, which is the lowest level for which there are identifiable cash flows that are largely independent. VF measures recoverability of the carrying value of an asset or asset group by comparison to the estimated pre-tax undiscounted cash flows expected to be generated by the asset. If the forecasted pre-tax undiscounted cash flows to be generated by the asset are not expected to be adequate to recover the asset's carrying value, a fair value analysis must be performed, and an impairment charge is recorded if there is an excess of the asset's carrying value over its estimated fair value. When testing property, plant and equipment for potential impairment, VF uses the income-based discounted cash flow method using the estimated cash flows of the respective asset or asset group. The estimated pre-tax undiscounted cash flows of the asset or asset group through the end of its useful life are compared to its carrying value. If the pre-tax undiscounted cash flows of the asset or asset group exceed its carrying value, there is no impairment charge. If the pre-tax undiscounted cash flows of the asset or asset group are less than its carrying value, the estimated fair value of the asset or asset group is calculated based on the after-tax discounted cash flows using an appropriate weighted average cost of capital ("WACC"), and an impairment charge is recognized for the difference between the estimated fair value of the asset or asset group and its carrying value. When testing customer relationship intangible assets for potential impairment, management considers historical customer attrition rates and projected revenues and profitability related to customers that existed at acquisition. Management uses the multi-period excess earnings method, which is a specific application of the discounted cash flow method, to value customer relationship assets. The estimated pre-tax undiscounted cash flows of the asset through the end of its useful life are compared to its carrying value. If the pre-tax undiscounted cash flows of the asset exceed its carrying value, there is no impairment charge. If the pre-tax undiscounted cash flows of the asset are less than its carrying value, the estimated fair value of the asset is calculated based on the present value of the after-tax cash flows expected to be generated by the customer relationship asset after deducting contributory asset charges, and an impairment charge is recognized for the difference between the estimated fair value of the asset and its carrying value. Testing of Indefinite-Lived Assets andGoodwill VF's policy is to evaluate indefinite-lived intangible assets and goodwill for possible impairment as of the beginning of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate that the fair value of such assets may be below their carrying amount. As part of its annual impairment testing, VF may elect to assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If management's assessment of these qualitative factors indicates that it is not more likely than not that the fair value of the intangible asset or reporting unit is less than its carrying value, then no further testing is required. Otherwise, the intangible asset or reporting unit must be quantitatively tested for impairment. An indefinite-lived intangible asset is quantitatively tested for possible impairment by comparing the estimated fair value of the asset to its carrying value. Fair value of an indefinite-lived trademark is based on an income approach using the relief-from-royalty method. Under this method, forecasted revenues for products sold with the trademark are assigned a royalty rate that would be charged to license the trademark (in lieu of ownership), and the estimated fair value is calculated as the present value of those forecasted royalties avoided by owning the trademark. The appropriate discount rate is based on the reporting unit's WACC that considers market participant assumptions, plus a spread that factors in the risk of the intangible asset. The royalty rate is 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 VF Corporation Fiscal 2020 Form 10-K 41 -------------------------------------------------------------------------------- performance of the reporting unit. If the estimated fair value of the trademark intangible asset exceeds its carrying value, there is no impairment charge. If the estimated fair value of the trademark is less than its carrying value, an impairment charge would be recognized for the difference.Goodwill is quantitatively evaluated for possible impairment by comparing the estimated fair value of a reporting unit to its carrying value. Reporting units are businesses with discrete financial information that is available and reviewed by management. For goodwill impairment testing, VF estimates the fair value of a reporting unit using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit's forecasted future cash flows that are discounted to present value using the reporting unit's WACC as discussed above. For the market-based approach, management uses both the guideline company and similar transaction methods. The guideline company method analyzes 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 are based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit. Based on the range of estimated fair values developed from the income and market-based methods, VF determines the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, VF calculates the impairment loss as the difference between the carrying value of the reporting unit and the estimated fair value. The income-based fair value methodology requires management's assumptions and judgments regarding economic conditions in the markets in which VF operates and conditions in the capital markets, many of which are outside of management's control. At the reporting unit level, fair value estimation requires management's assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit's strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management's estimates and assumptions regarding: • Annual cash flows, on a debt-free basis, arising from future revenues and
profitability, changes in working capital, capital spending and income taxes
for at least a 10-year forecast period.
• A terminal growth rate for years beyond the forecast period. The terminal
growth rate is selected based on consideration of growth rates used in the
forecast period, historical performance of the reporting unit and economic
conditions.
• A discount rate that reflects the risks inherent in realizing the forecasted
cash flows. A discount rate considers the risk-free rate of return on
long-term treasury securities, the risk premium associated with investing in
equity securities of comparable companies, the beta obtained from comparable
companies and the cost of debt for investment grade issuers. In addition,
the discount rate may consider any company-specific risk in achieving the
prospective financial information.
Under the market-based fair value methodology, judgment is required in
evaluating market multiples and recent transactions. Management believes that
the assumptions used for its impairment tests are representative of those that
would be used by market participants performing similar valuations of VF's
reporting units.
Fiscal 2020 Impairment Testing
During the three months ended September 28, 2019 ("September 2019 "), management
determined that the recent downturn in the historical financial results,
combined with a downward revision to the forecast included in VF's updated
strategic growth plan, was a triggering event that required management to
perform a quantitative impairment analysis of both the Timberland reporting unit
goodwill and indefinite-lived trademark intangible asset. See additional
discussion in the "Timberland Reporting Unit and Indefinite-Lived Intangible
Asset Impairment Analysis" section below.
Management performed its annual goodwill and indefinite-lived intangible asset
impairment testing as of the beginning of the fourth quarter of Fiscal 2020. VF
elected to bypass the qualitative analysis for the Timberland and Altra
reporting unit goodwill and indefinite-lived trademark intangible assets. See
additional discussion in the "Timberland Reporting Unit and Indefinite-Lived
Intangible Asset Impairment Analysis" and "Altra Reporting Unit and
Indefinite-Lived Intangible Asset Impairment Analysis" sections below.
Management performed a qualitative analysis for all other reporting units and
trademark intangible assets, as discussed below in the "Other Reporting Units -
Qualitative impairment analysis" section.
Subsequent to the annual goodwill and indefinite-lived intangible asset
impairment testing, management determined that the unfavorable projected
financial impact from COVID-19 was a triggering event that required management
to perform quantitative impairment analyses of the Timberland, Altra and
Icebreaker reporting unit goodwill and indefinite-lived trademark intangible
assets. See additional discussion in the "Timberland Reporting Unit and
Indefinite-Lived Intangible Asset Impairment Analysis", "Altra Reporting Unit
and Indefinite-Lived Intangible Asset Impairment Analysis" and "Icebreaker
Reporting Unit and Indefinite-Lived Intangible Asset Impairment Analysis"
sections below.
Timberland Reporting Unit and Indefinite-Lived Intangible Asset Impairment
Analysis
During the three months ended September 2019 , management determined that the
recent downturn in the historical financial results, combined with a downward
revision to the forecast included in VF's updated strategic growth plan, was a
triggering event that required management to perform a quantitative impairment
analysis of both the Timberland reporting unit goodwill, which includes the
Timberland® brand, and the Timberland indefinite-lived trademark intangible
asset, which includes both the Timberland® and Timberland PRO® brands. Based on
the analysis, management concluded that the goodwill and indefinite-lived
trademark intangible asset were not impaired. For goodwill, the estimated fair
value of the reporting unit exceeded the carrying value by 27%. The estimated
fair value of the indefinite-lived trademark intangible asset exceeded its
carrying value by a significant amount. The carrying values of the reporting
unit goodwill and indefinite-lived trademark intangible asset at the
42 VF Corporation Fiscal 2020 Form 10-K
--------------------------------------------------------------------------------
August 24, 2019 testing date were $733.5 million and $1,010.1 million ,
respectively.
In conjunction with VF's annual goodwill and indefinite-lived intangible asset
impairment testing as of the beginning of the fourth quarter of Fiscal 2020,
management performed a quantitative impairment analysis of both the Timberland
reporting unit goodwill and the Timberland indefinite-lived trademark intangible
asset. This decision to bypass the optional qualitative impairment assessment
and proceed directly to a quantitative impairment analysis was based on the
results of the recent interim quantitative impairment analysis and continued
deterioration in Timberland financial results. Based on the analysis, management
concluded that the goodwill and indefinite-lived trademark intangible asset were
not impaired. For goodwill, the estimated fair value of the reporting unit
exceeded the carrying value by 4%. The estimated fair value of the
indefinite-lived trademark intangible asset exceeded its carrying value by a
significant amount. The carrying values of the reporting unit goodwill and
indefinite-lived trademark intangible asset at the December 29, 2019 testing
date were $732.7 million and $1,014.2 million , respectively.
As of March 28, 2020 , management determined that the unfavorable projected
financial impact of the COVID-19 pandemic was a triggering event that required
management to perform a quantitative impairment analysis of both the Timberland
reporting unit goodwill and the Timberland indefinite-lived trademark intangible
asset. Based on the analysis, management recorded a goodwill impairment charge
of $323.2 million to write down the Timberland reporting unit carrying value to
its estimated fair value. No impairment charge was recorded on the
indefinite-lived trademark intangible asset. The estimated fair value of the
indefinite-lived trademark intangible asset exceeded its carrying value by a
significant amount. The remaining carrying values of the reporting unit goodwill
and indefinite-lived trademark intangible asset at the March 28, 2020 testing
date were $409.1 million and $999.5 million , respectively.
The Timberland® brand, acquired in 2011, offers outdoor, adventure-inspired
lifestyle footwear, apparel and accessories that combine performance benefits
and versatile styling for men, women and children. Products are sold globally
through chain, department and specialty stores, independent distributors and
licensees, independently-operated partnership stores, concession retail stores,
VF-operated stores, on brand websites with strategic digital partners and
online. The Timberland reporting unit is included in the Outdoor reportable
segment.
Management's revenue and profitability forecasts used in the Timberland
reporting unit and indefinite-lived trademark intangible asset valuations
considered historical performance, strategic initiatives and industry trends.
Assumptions used in the valuations were similar to those that would be used by
market participants performing independent valuations of the business.
Key assumptions developed by management and used in the quantitative analysis of
the Timberland reporting unit and indefinite-lived trademark intangible asset
include:
• Financial projections and future cash flows, including a base year
reflecting the recent deterioration of actual results including the impact
of COVID-19, delayed and extended recovery from the COVID-19 pandemic in
relation to other VF brands, ultimately trending towards growth rates and
profitability in-line with historical trends and terminal growth rates
based on the expected long-term growth rate of the brand;
• Tax rates based on the statutory rates for the countries in which the
brand operates and the related intellectual property is domiciled;
• Royalty rates based on market data as well as active license agreements of
the brand; and,
• Market-based discount rates.
The valuation model used by management in the impairment testing assumes recovery from the recent downturn in the brand's operating results, including the impact of the COVID-19 pandemic, and the return to growth rates and profitability more in-line with historical operating trends. If the brand is unable to achieve the financial projections, an impairment on the indefinite-lived trademark intangible asset or additional impairment on the reporting unit goodwill could occur in the future. Altra Reporting Unit and Indefinite-Lived Intangible Asset Impairment Analysis In conjunction with VF's annual goodwill and indefinite-lived intangible asset impairment testing as of the beginning of the fourth quarter of Fiscal 2020, management performed a quantitative impairment analysis of both the Altra reporting unit goodwill and the indefinite-lived trademark intangible asset. This decision to bypass the optional qualitative impairment assessment and proceed directly to a quantitative impairment analysis was based on review of actual Altra financial performance in the period since acquisition compared to the original acquisition valuation model. Based on the analyses, management concluded that the goodwill and indefinite-lived trademark intangible asset were not impaired. For goodwill, the estimated fair value of the reporting unit exceeded the carrying value by a significant amount. The estimated fair value of the indefinite-lived trademark intangible asset exceeded its carrying value by 18%. The carrying values of the reporting unit goodwill and indefinite-lived trademark intangible asset at theDecember 29, 2019 testing date were$61.7 million and$46.4 million , respectively. As ofMarch 28, 2020 , management determined that the unfavorable projected financial impact of the COVID-19 pandemic was a triggering event that required management to perform a quantitative impairment analysis of both the Altra reporting unit goodwill and the indefinite-lived trademark intangible asset. Based on the analyses, management concluded that the goodwill and indefinite-lived trademark intangible asset were not impaired. For goodwill, the estimated fair value of the reporting unit exceeded the carrying value by 18%. The estimated fair value of the indefinite-lived trademark intangible asset exceeded its carrying value by 7%. The carrying values of the reporting unit goodwill and indefinite-lived trademark intangible asset at theMarch 28, 2020 testing date were$61.7 million and$46.4 million , respectively. The Altra® brand, acquired in Fiscal 2019, is an athletic and performance-based lifestyle footwear brand. Products are sold primarily through the wholesale channel and online inNorth America andEurope . The Altra® brand is included in the Outdoor reportable segment. Management's revenue and profitability forecasts used in the Altra reporting unit and indefinite-lived trademark intangible asset valuations considered historical performance, strategic initiatives and industry trends. Assumptions used in the valuations were similar to those that would be used by market participants performing independent valuations of the business. VF Corporation Fiscal 2020 Form 10-K 43 -------------------------------------------------------------------------------- Key assumptions developed by management and used in the quantitative analysis of the Altra reporting unit and indefinite-lived trademark intangible asset include: • Financial projections and future cash flows, including a base year
reflecting recent actual results, return to financial performance more
in-line with that used in the acquisition valuation model and terminal
growth rates based on the expected long-term growth rate of the brand;
• Tax rates based on the statutory rates for the countries in which the
brand operates and the related intellectual property is domiciled;
• Royalty rates based on active license agreements of other VF brands; and,
• Market-based discount rates.
The valuation model used by management in the impairment testing assumes recovery from the recent downturn in the brand's operating results due to the COVID-19 pandemic, and the return to growth rates and profitability more in-line with historical operating trends and the original acquisition valuation model. If the brand is unable to achieve the financial projections, an impairment on the indefinite-lived trademark intangible asset or impairment on the reporting unit goodwill could occur in the future. Icebreaker Reporting Unit and Indefinite-Lived Intangible Asset Impairment Analysis As ofMarch 28, 2020 , management determined that the unfavorable projected financial impact of the COVID-19 pandemic was a triggering event that required management to perform a quantitative impairment analysis of both the Icebreaker reporting unit goodwill and the indefinite-lived trademark intangible asset. Based on the analyses, management concluded that the goodwill and indefinite-lived trademark intangible asset were not impaired. For goodwill, the estimated fair value of the reporting unit exceeded the carrying value by 9%. The estimated fair value of the indefinite-lived trademark intangible asset exceeded its carrying value by a significant amount. The carrying values of the reporting unit goodwill and indefinite-lived trademark intangible asset at theMarch 28, 2020 testing date were$78.4 million and$58.6 million , respectively. The Icebreaker® brand, acquired in Fiscal 2019, specializes in high-performance apparel based on natural fibers, including Merino wool, plant-based fibers and recycled fibers. The Icebreaker® brand is included in the Outdoor reportable segment. Management's revenue and profitability forecasts used in the Icebreaker reporting unit and indefinite-lived trademark intangible asset valuations considered historical performance, strategic initiatives and industry trends. Assumptions used in the valuations were similar to those that would be used by market participants performing independent valuations of the business. Key assumptions developed by management and used in the quantitative analysis of the Icebreaker reporting unit and indefinite-lived trademark intangible asset include: • Financial projections and future cash flows, including a base year
reflecting recent actual results including the impact of COVID-19, return
to financial performance more in-line with that used in the acquisition
valuation model and terminal growth rates based on the expected long-term
growth rate of the brand;
• Tax rates based on the statutory rates for the countries in which the
brand operates and the related intellectual property is domiciled;
• Royalty rates based on active license agreements of other VF brands; and,
• Market-based discount rates.
The valuation model used by management in the impairment testing assumes recovery from the recent downturn in the brand's operating results due to the COVID-19 pandemic, and the return to growth rates and profitability more in-line with historical operating trends and the original acquisition valuation model. If the brand is unable to achieve the financial projections, an impairment on the indefinite-lived trademark intangible asset or impairment on the reporting unit goodwill could occur in the future. Other Reporting Units - Qualitative Impairment Analysis For all other reporting units, VF elected to perform a qualitative assessment during the annual goodwill and indefinite-lived intangible asset impairment testing to determine whether it was more likely than not that the goodwill and indefinite-lived trademark intangible assets in those reporting units were impaired. In this qualitative assessment, VF considered relevant events and circumstances for each reporting unit, including (i) current year results, (ii) financial performance versus management's annual and five-year strategic plans, (iii) changes in the reporting unit carrying value since prior year, (iv) industry and market conditions in which the reporting unit operates, (v) macroeconomic conditions, including discount rate changes, and (vi) changes in products or services offered by the reporting unit. If applicable, performance in recent years was compared to forecasts included in prior valuations. Based on the results of the qualitative assessment, VF concluded that it was not more likely than not that the carrying values of the goodwill and indefinite-lived trademark intangible assets were greater than their fair values, and that further quantitative testing was not necessary. Management's Use of Estimates and Assumptions Management made its estimates based on information available as of the date of our assessments, using assumptions we believe market participants would use in performing an independent valuation of the business. It is possible that VF's conclusions regarding impairment or recoverability of goodwill or indefinite-lived intangible assets in any reporting unit could change in future periods. There can be no assurance that the estimates and assumptions used in our goodwill and indefinite-lived intangible asset impairment testing will prove to be accurate predictions of the future, if, for example, (i) the businesses do not perform as projected, (ii) overall economic conditions in Fiscal 2021 or future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies for a specific reporting unit change from current assumptions, including loss of major customers, (iv) investors require higher rates of return on equity investments in the marketplace, or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA. A future impairment charge for goodwill or indefinite-lived intangible assets could have a material effect on VF's consolidated financial position and results of operations. 44 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Stock Options
VF uses a lattice option-pricing model to estimate the fair value of stock options granted to employees and nonemployee members of the Board of Directors. VF believes that a lattice model provides a refined estimate of the fair value of options because it can incorporate (i) historical option exercise patterns and multiple assumptions about future option exercise patterns for each of several groups of option holders, and (ii) inputs that vary over time, such as assumptions for interest rates and volatility. Management performs an annual review of all assumptions employed in the valuation of option grants and believes they are reflective of the outstanding options and underlying Common Stock and of groups of option participants. The lattice valuation incorporates the assumptions listed in Note 18 to the consolidated financial statements. One of the critical assumptions in the valuation process is estimating the expected average life of the options before they are exercised. For each option grant, VF estimated the expected average life based on evaluations of the historical and expected option exercise patterns for each of the groups of option holders that have historically exhibited different option exercise patterns. These evaluations included (i) voluntary stock option exercise patterns based on a combination of changes in the price of VF Common Stock and periods of time that options are outstanding before exercise, and (ii) involuntary exercise patterns resulting from turnover, retirement and death. Volatility is another critical assumption requiring judgment. Management bases its estimates of future volatility on a combination of implied and historical volatility. Implied volatility is based on short-term (6 to 9 months) publicly traded near-the-money options on VF Common Stock. VF measures historical volatility over a ten-year period, corresponding to the contractual term of the options, using daily stock prices. Management's assumption for valuation purposes is that expected volatility starts at a level equal to the implied volatility and then transitions to the historical volatility over the remainder of the ten-year option term. Pension Obligations VF sponsors a qualified defined benefit pension plan covering most full-timeU.S. employees hired before 2005 and an unfunded supplemental defined benefit pension plan ("U.S. pension plans") that provides benefits in excess of the limitations imposed by income tax regulations. In Fiscal 2019, VF approved a freeze of all future benefit accruals under theU.S. qualified defined benefit pension plan and supplemental defined benefit pension plan, effectiveDecember 31, 2018 . VF also sponsors certain non-U.S. defined benefit pension plans. The selection of actuarial assumptions for determining the projected pension benefit liabilities and annual pension expense is significant due to amounts involved and the long time period over which benefits are accrued and paid. Annually, management reviews the principal economic actuarial assumptions summarized in Note 16 to the consolidated financial statements, and revises them as appropriate based on current rates and trends as of the valuation date. VF also periodically reviews and revises, as necessary, other plan assumptions such as rates of compensation increases, retirement, termination, disability and mortality. VF believes the assumptions appropriately reflect the participants' demographics and projected benefit obligations of the plans and result in the best estimate of the plans' future experience. Actual results may vary from the actuarial assumptions used. The below discussion of discount rate, return on assets and mortality assumptions relates specifically to theU.S. pension plans, as they comprise approximately 91% of VF's total defined benefit plan assets and approximately 88% of VF's total projected benefit obligations of the combinedU.S. and international plans. One of the critical assumptions used in the actuarial model is the discount rate, which is used to estimate the present value of future cash outflows necessary to meet projected benefit obligations for the specific plan. It is the estimated interest rate that VF could use to settle its projected benefit obligations at the valuation date. The discount rate assumption is based on current market interest rates. VF selects a discount rate for each of theU.S. pension plans by matching high quality corporate bond yields to the timing of projected benefit payments to participants in each plan. VF uses the population ofU.S. corporate bonds rated 'Aa' by Moody's Investors Service orStandard & Poor's Ratings Services . VF excludes the highest and lowest yielding bonds from this population of approximately 919 such bonds. The bonds must be noncallable/nonputable unless make-whole provisions exist. Each plan's projected benefit payments are matched to current market interest rates over the expected payment period to calculate an associated present value. A single equivalent discount rate is then determined that produces the same present value. The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics. VF believes that those 'Aa' rated issues meet the "high quality" intent of the applicable accounting standards and that theMarch 2020 discount rates of 3.44% for theU.S. qualified defined benefit pension plan and 3.46% for the unfunded supplemental defined benefit plan appropriately reflect current market conditions and the long-term nature of projected benefit payments to participants in theU.S. pension plans. VF utilizes the spot rate approach to measure service and interest costs. Under the spot rate approach, the full yield curve is applied separately to cash flows for each projected benefit obligation, service cost, and interest cost for a more precise calculation. Another critical assumption of the actuarial model is the expected long-term rate of return on investments. VF's investment objective is to invest in a diversified portfolio of assets with an acceptable level of risk to maximize the long-term return while minimizing volatility in the value of plan assets relative to the value of plan liabilities. These risks include market, interest rate, credit, liquidity, regulatory and foreign securities risks. Investment assets consist of cash equivalents,U.S. and international equity, corporate and governmental fixed-income securities, insurance contracts, and alternative assets. VF develops a projected rate of return for each of the investment asset classes based on many factors, including historical and expected returns, the estimated inflation rate, the premium to be earned in excess of a risk-free return, the premium for equity risk and the premium for longer duration fixed-income securities. The weighted average projected long-term rates of return of the various assets held by theU.S. qualified plan provide the basis for the expected long-term rate of return VF Corporation Fiscal 2020 Form 10-K 45 -------------------------------------------------------------------------------- actuarial assumption. VF's rate of return assumption was 5.70% and 5.50% in the year endedMarch 2020 due to theDecember 2019 interim remeasurement for the lump-sum offer settlement event, 5.70% in the year endedMarch 2019 , 5.85% in the three months endedMarch 2018 and 6.00% in the year endedDecember 2017 . In recent years, VF has altered the investment mix by (i) increasing the allocation to fixed-income investments and reducing the allocation to equity investments, and (ii) increasing the allocation in equities to more international investments. The changes in asset allocation are anticipated, over time, to reduce the year-to-year variability of theU.S. qualified plan's funded status and impact on pension expense. Management monitors the plan's asset allocation to balance risk with anticipated investment returns in a given year. Based on an evaluation of market conditions and projected market returns, VF will be using a rate of return assumption of 5.25% for theU.S. qualified defined benefit pension plan for Fiscal 2021. We consistently review all of our demographic assumptions as part of the normal management of our defined benefit plans, and update these assumptions as appropriate. The Company performed a demographic assumptions study in 2017 and updated the assumptions, as necessary, in the year endedMarch 2019 valuations. VF utilizes the RP-2014 base table and MP-2014 mortality improvement scale, which were adjusted for characteristics of our plan-specific populations and other data where appropriate, in developing our best estimate of the expected mortality rates of plan participants in theU.S. pension plans. In 2019, theSociety of Actuaries (SOA) issue a new mortality table (PRI-2012) and improvement scale (MP-2019) which reflect a decrease in life expectancies compared to the previous table and scales. Management considered the PRI-2012 table and MP-2019 scale and determined they are directionally consistent with the current assumptions and concluded no change was needed for the year endedMarch 2020 . Differences between actual results in a given year and the actuarially determined assumed results for that year (e.g., investment performance, discount rates and other assumptions) do not affect that year's pension expense, but instead are deferred as unrecognized actuarial gains or losses in accumulated other comprehensive income (loss) in the Consolidated Balance Sheet. At the end of Fiscal 2020 for all pension plans, there were$358.0 million of pretax accumulated deferred actuarial losses, plus$0.7 million of pretax net deferred prior service credits, resulting in an after-tax amount of$262.5 million in accumulated other comprehensive income (loss) in theMarch 2020 Consolidated Balance Sheet. The net deferred loss will be amortized as a component of pension expense. Pension expense recognized in the consolidated financial statements was$23.6 million in the year endedMarch 2020 ,$39.7 million in the year endedMarch 2019 ,$4.6 million in the three months endedMarch 2018 and$34.8 million in the year endedDecember 2017 , respectively. Pension expense for the year endedMarch 2020 was higher as it included a$23.0 million settlement charge resulting from 2,400 participants accepting a one-time option to receive a distribution of their deferred vested benefits (refer to Note 16). The cost of pension benefits actually earned each year by covered active employees (commonly called "service cost") was$14.5 million in the year endedMarch 2020 ,$22.4 million in the year endedMarch 2019 ,$5.9 million in the three months endedMarch 2018 and$24.9 million in the year endedDecember 2017 . Pension expense was lower in the year endedMarch 2020 compared to the year endedMarch 2019 due primarily to lower service costs due to the freeze in future benefit accruals in theU.S. qualified and nonqualified plans, lower amortization of unrecognized actuarial losses and lower interest costs resulting from lower interest rates. Looking forward, VF expects pension income for the next 12 months of approximately$8.7 million primarily due to expected return on plan assets exceeding the other components of pension expense. The sensitivity of changes in actuarial assumptions on Fiscal 2020 pension expense and on projected benefit obligations related to theU.S. defined benefit pension plan at the end of Fiscal 2020, all other factors being equal, is illustrated by the following: Increase (Decrease) in Projected Benefit (Dollars in millions) Pension Expense Obligations 0.50% decrease in discount rate $ 12 $ 81 0.50% increase in discount rate (4 ) (74 ) 0.50% decrease in expected investment return 8 - 0.50% increase in expected investment return (8 ) - 0.50% decrease in rate of compensation change - - 0.50% increase in rate of compensation change - -
As discussed in the "Risk Management" section above, VF has taken a series of steps to reduce volatility in the pension plans and their impact on the financial statements. On a longer-term basis, VF believes the year-to-year variability of the retirement benefit expense should decrease.
46 VF Corporation Fiscal 2020 Form 10-K --------------------------------------------------------------------------------
Income Taxes
As a global company, VF is subject to income taxes and files income tax returns in over 100 U.S. and foreign jurisdictions each year. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company could be subject to changes in its tax rates, the adoption of newU.S. or international tax legislation or changes in interpretation of existing tax laws and regulations or rulings by courts or government authorities leading to exposure to additional tax liabilities. In particular, tax authorities and the courts have increased their focus on income earned in no- or low-tax jurisdictions or income that is not taxed in any jurisdiction. Tax authorities have also become skeptical of special tax rulings provided to companies offering lower taxes than may be applicable in other countries. VF makes an ongoing assessment to identify any significant exposure related to increases in tax rates in the jurisdictions in which VF operates. As discussed in Note 19 to the consolidated financial statements, VF has been granted a lower effective income tax rate on taxable earnings in certain foreign jurisdictions. Furthermore, inFebruary 2015 , theEuropean Union Commission ("EU") opened a state aid investigation intoBelgium's tax rulings. OnJanuary 11, 2016 , the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF. OnMarch 22, 2016 , theBelgium government filed an appeal seeking annulment of the EU decision. Additionally, onJune 21, 2016 ,VF Europe BVBA filed its own application for annulment of the EU decision. OnDecember 22, 2016 ,Belgium adopted a law which entitled theBelgium tax authorities to issue tax assessments and demand timely payments from companies which benefited from the excess profits regime. OnJanuary 10, 2017 ,VF Europe BVBA received an assessment for €31.9 million tax and interest related to excess profits benefits received in prior years.VF Europe BVBA remitted €31.9 million ($33.9 million ) onJanuary 13, 2017 , which was recorded as an income tax receivable in 2017 based on the expected success of the aforementioned requests for annulment. An additional assessment of €3.1 million ($3.8 million ) was received and paid inJanuary 2018 . OnFebruary 14, 2019 the General Court annulled the EU decision and onApril 26, 2019 the EU appealed the General Court's annulment. Both listed requests for annulment remain open and unresolved. Additionally, the EU has initiated proceedings related to individual rulings granted byBelgium , including the ruling granted to VF. If this matter is adversely resolved, these amounts will not be collected by VF. The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and significant management judgment. VF's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. VF has reviewed all issues raised upon examination, as well as any exposure for issues that may be raised in future examinations. VF has evaluated these potential issues under the "more-likely-than-not" standard of the accounting literature. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. Income tax expense could be materially affected to the extent VF prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits or valuation allowances have been established, or to the extent VF is required to pay amounts greater than the established liability for unrecognized tax benefits. VF does not currently anticipate any material impact on earnings from the ultimate resolution of income tax uncertainties. There are no accruals for general or unknown tax expenses. As ofMarch 2020 , VF has$237.3 million of gross deferred income tax assets related to operating loss and capital loss carryforwards, and$166.6 million of valuation allowances against those assets. Realization of deferred tax assets related to operating loss and capital loss carryforwards is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws. If management believes that VF will not be able to generate sufficient taxable income or capital gains to offset losses during the carryforward periods, VF records valuation allowances to reduce those deferred tax assets to amounts expected to be ultimately realized. If in a future period management determines that the amount of deferred tax assets to be realized differs from the net recorded amount, VF would record an adjustment to income tax expense in that future period. OnMay 19, 2019 ,Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing ("Swiss Tax Act"). Provisions of the Swiss Tax Act were enacted for Swiss federal purposes during the second quarter of Fiscal 2020, and later enacted for certain cantons during the fourth quarter. In addition to changes to the federal and cantonal tax rates, there were transitional measures allowing companies to recognize a step-up in tax basis that is subsequently amortized over a period of time. Calculation of the additional tax basis involves estimates and application of specific guidelines determined by the Swiss federal authorities as well as through ongoing discussions with Swiss cantonal tax authorities. These provisions resulted in adjustments to deferred tax assets and liabilities such that a net tax benefit of$93.6 million was recorded in the year endedMarch 2020 . Recently Issued and Adopted Accounting Standards
Refer to Note 1 to the consolidated financial statements for discussion of recently issued and adopted accounting standards.
© Edgar Online, source
