UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-5256
vfcirclelogo.jpg
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
 
23-1180120
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
105 Corporate Center Boulevard
Greensboro, North Carolina 27408
(Address of principal executive offices)
(336) 424-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, without par value, stated capital $.25 per share
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  þ   NO  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES  þ        NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  þ        NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934).    YES  ¨        NO  þ
The aggregate market value of Common Stock held by non-affiliates of V.F. Corporation on July 1, 2017, the last day of the registrant’s second fiscal quarter, was approximately $18,323,000,000 based on the closing price of the shares on the New York Stock Exchange.
As of January 27, 2018, there were 396,690,429 shares of Common Stock of the registrant outstanding.
Documents Incorporated By Reference
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2018 (Item 1 in Part I and Items 10, 11, 12, 13 and 14 in Part III), which definitive Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
This document (excluding exhibits) contains 97 pages.
The exhibit index begins on page 42.




PART I
ITEM 1.    BUSINESS.


V.F. Corporation, organized in 1899, is a global leader in the design, production, procurement, marketing and distribution of branded lifestyle apparel, footwear and related products. Unless the context indicates otherwise, the terms “VF,” the "Company,” “we,” “us,” and “our” used herein refer to V.F. Corporation and its consolidated subsidiaries.
Excluding the 'Business Held-For-Sale' subsection, amounts and percentages for all periods discussed below reflect the results of operations and financial condition from VF’s continuing operations.
VF’s diverse portfolio of more than 30 brands meets consumer needs across a broad spectrum of activities and lifestyles. Our ability to connect with consumers, as diverse as our brand portfolio, creates a unique platform for sustainable, long-term growth. Our long-term growth strategy is focused on four drivers:
Reshape our portfolio. Investing in our brands to realize their full potential, while ensuring the composition of our portfolio positions us to win in evolving market conditions;
Transform our model. Becoming consumer- and retail-centric to meet and exceed consumers' needs across all channels, and operate our business differently - from the design studio to the factory floor to the point of sale - by thinking and acting more like a vertical retailer;
Elevate direct-to-consumer. Investing in our direct-to-consumer business to make it the pinnacle expression of our brands, and prioritizing serving consumers through e-commerce and digitally enabled transactions; and,
Distort Asia. Accelerating our actions in Asia, especially China, to unlock growth opportunities for our brands in this fast-growing region.
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, denim,
 
backpack, luggage, accessory and apparel categories. Our largest brands are Vans®, The North Face®, Timberland®, Wrangler® and Lee®. In connection with our acquisition of 100% of the outstanding shares of Williamson-Dickie Mfg. Co. ("Williamson-Dickie") on October 2, 2017, we acquired a portfolio of brands including Dickies®, Workrite®, Kodiak®, Terra® and Walls®.
Our products are marketed to consumers shopping in specialty stores, department stores, national chains, mass merchants and our own direct-to-consumer operations, which include VF-operated stores, concession retail stores and e-commerce sites. Revenues from the direct-to-consumer business represented 32% of VF’s total 2017 revenues. In addition to selling directly into international markets, many of our brands sell products through licensees, agents, distributors and independently-operated partnership stores. In 2017, VF derived 65% of its revenues from the Americas region, 24% from the Europe region and 11% from the Asia-Pacific region.
To provide diversified products across multiple channels of distribution in different geographic areas, we balance our own manufacturing capabilities with sourcing of finished goods from independent contractors. We utilize state-of-the-art technologies for inventory replenishment that enable us to effectively and efficiently get the right assortment of products that match consumer demand.
For both management and internal financial reporting purposes, VF is organized by groupings of businesses called “coalitions.” The three coalitions are Outdoor & Action Sports, Jeanswear and Imagewear, and represent our reportable segments for financial reporting purposes. Coalition management has the responsibility to build and operate their brands, with certain financial, administrative and systems support and disciplines provided by central functions within VF.


VF Corporation 2017 Form 10-K 1



The following table summarizes VF’s primary owned and licensed brands by coalition:
COALITION
 
PRIMARY BRANDS
 
PRIMARY PRODUCTS
 
 
 
 
 
 
 
 
 
 
Outdoor & Action Sports
 
Vans®
 
Youth culture/action sports-inspired footwear, apparel, accessories
 
The North Face®
 
High performance outdoor apparel, footwear, equipment, accessories
 
 
Timberland®
 
Outdoor lifestyle footwear, apparel, accessories
 
 
Kipling®
 
Handbags, luggage, backpacks, totes, accessories
 
 
Napapijri®
 
Premium outdoor apparel, footwear, accessories
 
 
Smartwool®
 
Performance-based merino wool socks, apparel, accessories
 
 
JanSport®
 
Backpacks, luggage
 
 
Eastpak®
 
Backpacks, luggage
 
 
Reef®
 
Surf-inspired footwear, apparel, accessories
 
 
Eagle Creek®
 
Luggage, backpacks, travel accessories
 
 
 
 
 
 
 
 
 
 
Jeanswear
 
Wrangler®
 
Denim, casual apparel, footwear, accessories
 
 
Lee®
 
Denim, casual apparel
 
 
Riders by Lee®
 
Denim, casual apparel
 
 
Rustler®
 
Denim, casual apparel
 
 
Rock & Republic®
 
Denim, casual apparel, accessories
 
 
 
 
 
 
 
 
 
 
Imagewear
 
Red Kap®
 
Occupational apparel
 
 
Bulwark®
 
Protective occupational apparel
 
 
Horace Small®
 
Occupational apparel
 
 
Dickies®
 
Work and work-inspired lifestyle apparel and footwear
 
 
Workrite®
 
Protective occupational apparel
 
 
Kodiak®
 
Protective work footwear and lifestyle footwear
 
 
Terra®
 
Protective work footwear
 
 
Walls®
 
Outdoor work and hunt apparel
Financial information regarding VF’s coalitions is included in Note R to the consolidated financial statements.
OUTDOOR & ACTION SPORTS COALITION


Our Outdoor & Action Sports coalition is a group of authentic outdoor and activity-based lifestyle brands. Product offerings include performance-based apparel, footwear, equipment, backpacks, luggage and accessories.
Vans® is the largest brand in our Outdoor & Action Sports coalition. The Vans® brand offers performance and casual footwear and apparel targeting younger consumers that sit at the center of action sports, art, music and street fashion. Vans® products are available globally through chain stores, specialty stores, independent distributors and licensees, independently-operated partnership stores, concession retail stores, more than 650 VF-owned stores, on brand websites with strategic digital partners and online at www.vans.com.
The North Face® features performance-based apparel, outerwear, sportswear and footwear for men, women and children. Its equipment line includes tents, sleeping bags, backpacks and accessories. Many of The North Face® products are designed for extreme winter sport activities, such as high altitude mountaineering, skiing, snowboarding and ice and rock climbing. The North Face® products are marketed globally, primarily through specialty outdoor and premium sporting goods stores,
 
independent distributors, independently-operated partnership stores, concession retail stores, over 200 VF-operated stores, on brand websites with strategic digital partners and online at www.thenorthface.com.
The Timberland® brand offers outdoor, adventure-inspired lifestyle footwear, apparel and accessories that combine performance benefits and versatile styling for men, women and children. We sell Timberland® products globally through chain, department and specialty stores, independent distributors and licensees, independently-operated partnership stores, concession retail stores, over 250 VF-operated stores, on brand websites with strategic digital partners and online at www.timberland.com.
Kipling® branded handbags, luggage, backpacks, totes and accessories are sold globally through department, specialty and luggage stores, independently-operated partnership stores, independent distributors, concession retail stores, home shopping television, 100 VF-operated stores, at www.kipling.com and on brand websites with strategic digital partners.
The Napapijri® brand offers outdoor-inspired casual outerwear, sportswear and accessories at a premium price. Products are


2 VF Corporation 2017 Form 10-K



marketed to men, women and children in Europe, the Middle East, Asia and Africa. Products are sold in department and specialty shops, independently-operated partnership stores, concession retail stores, independent distributors as well as 30 VF-operated stores and online at www.napapijri.com and on brand websites with strategic digital partners.
The Smartwool® brand offers active outdoor consumers a premium, technical layering system of merino wool socks, apparel and accessories that are designed to work together in fit, form and function. Smartwool® products are sold globally through premium outdoor and specialty retailers, global distributors, on brand websites with strategic digital partners and online at www.smartwool.com.
JanSport® backpacks and accessories are sold in North America, South America and Asia through department, office supply and chain stores, as well as sports specialty stores, college bookstores and independent distributors. JanSport® products are also sold online at www.jansport.com.
Eastpak® backpacks, travel bags and luggage are sold globally, primarily through department and specialty stores and online at
 
www.eastpak.com and on brand websites with strategic digital partners. Eastpak® products are also marketed throughout Asia by distributors.
The Reef® brand of surf-inspired products includes sandals, shoes, swimwear, casual apparel and accessories for men, women and children. Products are sold globally through specialty shops, sporting goods chains, department stores and independent distributors. Products are also sold on brand websites with strategic digital partners and online at www.reef.com.
Eagle Creek® adventure travel gear products include luggage, backpacks and accessories sold through specialty luggage, outdoor and department stores primarily in North America and Europe, on brand websites with strategic digital partners and online at www.eaglecreek.com.
We expect continued long-term growth in our Outdoor & Action Sports coalition as we focus on product innovation, extend our brands into new product categories, open additional VF-owned stores, expand wholesale partnerships, develop geographically and acquire additional brands.
JEANSWEAR COALITION


Our Jeanswear coalition markets denim and related casual apparel products globally.
The Wrangler® brand offers denim, apparel, accessories and footwear through mass merchants, specialty stores and mid-tier and traditional department stores in the U.S., VF-operated stores and online at www.wrangler.com. Wrangler® westernwear is distributed primarily through western specialty stores, as well as various online retail sites.
Lee® brand products are sold through mid-tier and traditional department stores in the U.S., and online at www.lee.com. The Rustler® and Riders® by Lee® brands are marketed to mass merchant and regional discount stores in the U.S. Our Rock & Republic® brand has an exclusive wholesale distribution and licensing arrangement with Kohl’s Corporation that covers all branded apparel, accessories and other merchandise in the U.S.
Wrangler® and Lee® products outside of the U.S. are positioned as higher fashion and have higher selling prices. VF’s largest international jeanswear businesses are located in Europe and Asia, where Wrangler® and Lee® products are sold through department, specialty and concession retail stores, independently-operated partnership stores, online at www.wrangler.com and www.lee.com and on brand websites with strategic digital accounts. We also market Wrangler® and Lee® products to mass merchant, department and specialty stores in Canada and Mexico, as well as to department and specialty stores in South America. In addition,
 
we currently have more than 70 VF-operated stores primarily located in Europe, Asia and South America which are an important vehicle for representing our brands' image and marketing message directly to consumers. In international markets where VF does not have retail operations, Wrangler® and Lee® products are marketed through distributors, agents, licensees and single-brand or multi-brand partnership stores.
Our world-class supply chain, including owned manufacturing facilities, coupled with advanced vendor-managed inventory and retail floor space management programs with many of our major retailer customers, gives us a competitive advantage in our U.S. jeanswear business. We receive periodic point-of-sale information from these customers, at the individual store and style-size-color stock keeping unit level. We then ship products based on that customer data to ensure their selling floors are appropriately stocked with products that match their shoppers’ needs. Our system capabilities allow us to analyze our retail customers’ sales, demographic and geographic data to develop product assortment recommendations that maximize the productivity of their jeanswear selling space and optimize their inventory investment.
We intend to drive growth through superior product innovation, consumer insight and marketing strategies. Growth in the U.S. includes opportunities within mass merchant, mid-tier and traditional department stores and western specialty businesses. International growth will be driven by expansion of our existing businesses in Asia, Latin America and key European markets.
IMAGEWEAR COALITION


Our Imagewear coalition consists of occupational workwear apparel, footwear and uniforms sold through direct-to-consumer, wholesale and business-to-business ("BTB") channels. On October 2, 2017, VF completed the acquisition of Williamson-Dickie, which includes the Dickies®, Workrite®, Kodiak®, Terra® and Walls® brands.
 
The Imagewear coalition provides uniforms and career occupational apparel for workers in North America and internationally, under the Dickies® and Red Kap® brands (work apparel and footwear), the Bulwark® and Workrite® brands (flame resistant and protective apparel primarily for the petrochemical, utility and mining industries), the Walls® brand (outdoor workwear),


VF Corporation 2017 Form 10-K 3



the Kodiak® brand (work and lifestyle footwear), the Terra® brand (work footwear) and the Horace Small® brand (apparel for law enforcement and public safety personnel). Products include a wide range of workwear pants, coveralls, shirts, medical scrubs, outerwear, footwear and accessories. Imagewear revenues are influenced by the general level of business activity in each market.
Imagewear BTB channels include industrial laundries and distributors who in turn supply customized workwear to employers for production, service and white-collar personnel. Since industrial laundries and distributors maintain minimal inventories of work clothes, VF’s ability to offer rapid delivery of products in a broad range of sizes is an important advantage in this market. Our commitment to customer service, supported by an automated central distribution center with several satellite locations, enables customer orders to be filled within 24 hours of receipt. The Red Kap®, Bulwark®, Dickies® and Workrite® brands have a strong presence in the reseller distributor market.
The BTB business also develops and manages uniform programs through custom-designed websites for major business customers
 
and governmental organizations. These websites provide the employees of our customers with the convenience of shopping for their work and career apparel via the internet.
Imagewear products are also available on a wholesale basis, including product offerings at mass and specialty retailers, and a direct-to-consumer basis through our e-commerce sites at www.dickies.com, www.kodiakboots.com and www.walls.com and over 75 VF-operated retail stores. The Dickies® brand, with a strong workwear heritage, is a leader in this area with products that address the workers needs on the job and work-inspired product that allows the worker to stay involved with the brand while in a non-traditional work-setting.
We believe there is a strategic opportunity for growth in our Imagewear coalition in both existing and future markets and all channels and geographies by introducing innovative products that address workers’ desires for increased comfort and performance, combined with our unique service model and increased presence in the retail workwear market.
BUSINESS HELD-FOR-SALE


At December 30, 2017, the Nautica® brand business met the held-for-sale and discontinued operations accounting criteria. All disclosure throughout Part I of this Form 10-K excludes the Nautica® brand business.
DIRECT-TO-CONSUMER OPERATIONS


Our direct-to-consumer business includes full-price stores, outlet stores, e-commerce sites and concession retail locations. Direct-to-consumer revenues were 32% of total VF revenues in 2017 compared with 29% in 2016.
Our full-price stores allow us to display a brand’s full line of products with fixtures and imagery that support the brand’s positioning and promise to consumers. These experiences provide high visibility for our brands and products and enable us to stay close to the needs and preferences of our consumers. The complete and impactful presentation of products in our stores also helps to increase sell-through of VF products at our wholesale customers due to increased brand awareness, education and visibility. VF-operated full-price stores generally provide gross margins that are well above VF averages.
In addition, VF operates outlet stores in both premium outlet malls and more traditional value-based locations. These outlet stores carry merchandise that is specifically designed for sale in our outlet stores and serve an important role in our overall inventory management and profitability by allowing VF to sell a significant portion of excess, discontinued and out-of-season products at better prices than otherwise available from outside parties, while maintaining the integrity of our brands.
Our growing global direct-to-consumer operations included 1,518 stores at the end of 2017. We operate retail store locations for the following brands: Vans®, Timberland®, The North Face®, Kipling®, Dickies®, Lee®, Napapijri® and Wrangler®. We also operate 80 VF Outlet® stores in the U.S. that sell a broad selection of excess VF products, as well as other non-VF products. Approximately 65% of
 
VF-operated stores offer products at full price, and the remainder are outlet locations. Approximately 60% of our stores are located in the Americas region (55% in the U.S.), 25% in Europe and 15% in the Asia-Pacific region. Additionally, we have approximately 1,100 concession retail stores located principally in Europe and Asia.
E-commerce represented approximately 21% of our direct-to-consumer business in 2017. We currently market the following brands online: Vans®, The North Face®, Timberland®, Lee®, Kipling®, Wrangler®, Napapijri®, Smartwool®, JanSport®, Eastpak®, Eagle Creek®, Reef®, Dickies®, Kodiak® and Walls®. We continue to expand our e-commerce initiatives by rolling out additional, country-specific brand sites in Europe and Asia, which enhances our ability to deliver a superior, localized consumer experience.
We expect our direct-to-consumer business to continue growing at a faster pace than VF’s overall growth rate as we expand our e-commerce presence and open new stores. We opened 111 stores during 2017, concentrating on the brands with the highest retail growth potential: Vans®The North Face® and Timberland®.
In addition to our direct-to-consumer operations, our licensees, distributors and other independent parties own and operate over 3,000 partnership stores. These are primarily mono-brand retail locations selling VF products that have the appearance of VF-operated stores. Most of these partnership stores are located in Europe and Asia, and are concentrated in the Timberland®Lee®, The North Face®, Vans®Wrangler®, Kipling® and Napapijri® brands.


4 VF Corporation 2017 Form 10-K



LICENSING ARRANGEMENTS


As part of our strategy of expanding market penetration of VF-owned brands, we enter into licensing agreements with independent parties for specific apparel and complementary product categories when such arrangements provide more effective manufacturing, distribution and marketing than could be achieved internally. We provide support to these business partners and ensure the integrity of our brand names by taking an active role in the design, quality control, advertising, marketing and distribution of licensed products.
Licensing arrangements relate to a broad range of VF brands. License agreements are for fixed terms of generally 3 to 5 years,
 
with conditional renewal options. Each licensee pays royalties to VF based on its sales of licensed products, with most agreements providing for a minimum royalty requirement. Royalties generally range from 4% to 10% of the licensing partners’ net licensed products sales. Royalty income was $75.5 million in 2017 (less than 1% of total revenues), primarily from the Vans®, Lee®, Timberland® and Wrangler® brands. In addition, licensees of our brands are generally required to spend from 1% to 3% of their net licensed product sales to advertise VF’s products. In some cases, these advertising amounts are remitted to VF for advertising on behalf of the licensees.
MANUFACTURING, SOURCING AND DISTRIBUTION


Product design and innovation, including fit, fabric, finish and quality, are important elements across our businesses. These functions are performed by employees located in our global supply chain organization and our branded business units across the globe.
In addition to the design functions of each brand, VF has three strategic global innovation centers that focus on technical and performance product development for apparel, footwear and jeanswear. The centers are staffed with dedicated scientists, engineers and designers who combine proprietary insights with consumer needs, and a deep understanding of technology and new materials. These innovation centers are integral to VF’s long-term growth as they allow us to deliver new products and experiences that consistently delight consumers, which drives organic growth and higher gross margins.
VF’s centralized global supply chain organization is responsible for producing, procuring and delivering products to our customers. VF is highly skilled in managing the complexities associated with our global supply chain. VF sourced or produced approximately 473 million units spread across more than 30 brands. Our products are obtained from 21 VF-operated manufacturing facilities and approximately 1,000 contractor manufacturing facilities in over 50 countries. Additionally, we operate 38 distribution centers and 1,518 retail stores. Managing this complexity is made possible by the use of a network of information systems for product development, forecasting, order management and warehouse management, along with our core enterprise resource management platforms.
In 2017, 23% of our units were manufactured in VF-owned facilities and 77% were obtained from independent contractors. Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors. Products obtained from contractors in the Western Hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives us greater flexibility, shorter lead times and allows for lower inventory levels. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing. We will continue to manage our supply chain from a global perspective and adjust as needed to changes in the global production environment.
VF operates manufacturing facilities in the U.S., Mexico, Central America and the Caribbean. A significant percentage of denim
 
bottoms and occupational apparel is manufactured in these plants, as well as a smaller percentage of footwear and other products. For these owned production facilities, we purchase raw materials from numerous U.S. and international suppliers to meet our production needs. Raw materials include products made from cotton, leather, rubber, wool, synthetics and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers, snaps, eyelets and laces). In some instances, we contract the sewing of VF-owned raw materials into finished product with independent contractors. Fixed price commitments for fabric and certain supplies are generally set on a quarterly basis for the next quarter’s purchases. No single supplier represents more than 10% of our total cost of goods sold.
Independent contractors generally own the raw materials and ship finished, ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with satellite offices across Asia) and Panama. These hubs are responsible for managing the manufacturing and procurement of product, supplier oversight, product quality assurance, sustainability within the supply chain, responsible sourcing and transportation and shipping functions. In addition, our hubs leverage proprietary knowledge and technology to enable certain contractors to more effectively control costs and improve labor efficiency. Substantially all products in the Outdoor & Action Sports coalition, as well as a portion of products for our Jeanswear and Imagewear coalitions, are obtained through these sourcing hubs.
Management continually monitors political risks and developments related to duties, tariffs and quotas. We limit VF’s sourcing exposure through, among other measures: (i) diversifying geographies with a mix of VF-operated and contracted production, (ii) shifting of production among countries and contractors, (iii) sourcing production to merchandise categories where product is readily available and (iv) sourcing from countries with tariff preference and free trade agreements. VF does not directly or indirectly source products from suppliers in countries that are prohibited by the U.S. State Department.
All VF-operated production facilities throughout the world, as well as all independent contractor facilities that manufacture VF products, must comply with VF’s Global Compliance Principles. These principles, established in 1997 and consistent with international labor standards, are a set of strict standards covering legal and ethical business practices, worker age, work hours, health and safety conditions, environmental standards and compliance with local laws and regulations. In addition, our owned


VF Corporation 2017 Form 10-K 5



factories must also undergo certification by the independent, nonprofit organization, Worldwide Responsible Accredited Production (“WRAP”), which promotes global ethics in manufacturing.
VF, through its contractor monitoring program, audits the activities of the independent businesses and contractors that produce VF products at locations across the globe. Each of the approximately 1,000 independent contractor facilities, including those serving our independent licensees, must be pre-certified before producing VF products. This pre-certification includes passing a factory inspection and signing a VF Terms of Engagement agreement. We maintain an ongoing audit program to ensure compliance with these requirements by using dedicated internal staff and externally contracted firms. Additional information about VF’s Code of Business Conduct, Global Compliance Principles, Terms of Engagement and Environmental Compliance Guidelines, along with a Global Compliance Report, is available on the VF website at www.vfc.com.
 
VF did not experience difficulty in fulfilling its raw material and contracting production needs during 2017. Absent any material changes, VF believes it would be able to largely offset any increases in product costs through (i) the continuing shift in the mix of its business to higher margin brands, geographies and channels of distribution, (ii) increases in the prices of its products and (iii) cost reduction efforts. The loss of any one supplier or contractor would not have a significant adverse effect on our business.
Product is shipped from our independent suppliers and VF-operated manufacturing facilities to distribution centers around the world. In some instances, product is shipped directly to our customers. Most distribution centers are operated by VF, and some support more than one brand. A portion of our distribution needs are met by contract distribution centers.
SEASONALITY


VF’s quarterly operating results vary due to the seasonality of our individual businesses, and are historically stronger in the second half of the year. On a quarterly basis in 2017, revenues ranged from a low of 19% of full year revenues in the second quarter to a high of 31% in the fourth quarter, while operating margin ranged from a low of 7% in the second quarter to a high of 17% in the third quarter. This variation results primarily from the seasonal influences on revenues of our Outdoor & Action Sports coalition, where 18% of the coalition’s revenues occurred in the second quarter compared to 30% in the fourth quarter of 2017. With changes in our mix of business and the growth of our retail
 
operations, historical quarterly revenue and profit trends may not be indicative of future trends.
Working capital requirements vary throughout the year. Working capital increases early in the year as inventory builds to support peak shipping periods and then moderates later in the year as those inventories are sold and accounts receivable are collected. Cash provided by operating activities is substantially higher in the second half of the year due to higher net income during that period and reduced working capital requirements, particularly during the fourth quarter.
ADVERTISING, CUSTOMER SUPPORT AND COMMUNITY OUTREACH


During 2017, our advertising and promotion expense was $715.9 million, representing 6% of total revenues. We advertise in consumer and trade publications, on radio and television and through digital initiatives including social media and mobile platforms on the Internet. We also participate in cooperative advertising on a shared cost basis with major retailers in print and digital media, radio and television. We sponsor sporting, musical and special events, as well as athletes and personalities who promote our products. We employ marketing sciences to optimize the impact of advertising and promotional spending, and to identify the types of spending that provide the greatest return on our marketing investments.
We provide advertising support to our wholesale customers in the form of point-of-sale fixtures and signage to enhance the presentation and brand image of our products. We also participate in shop-in-shops and concession retail arrangements, which are separate sales areas dedicated to a specific VF brand within our customers’ stores, to help differentiate and enhance the presentation of our products.
We contribute to incentive programs with our wholesale customers, including cooperative advertising funds, discounts and allowances. We also offer sales incentive programs directly to consumers in the form of rebate and coupon offers.
 
In addition to sponsorships and activities that directly benefit our products and brands, VF and its associates actively support our communities and various charities. For example, The North Face® brand has committed to programs that encourage and enable outdoor participation, such as The North Face Endurance Challenge® and The North Face Explore Fund™ programs. The Timberland® brand has a strong heritage of volunteerism, including the Path of Service™ program that offers full-time employees up to 40 hours of paid time off a year to serve their local communities through global service events such as Earth Day in the spring and Serv-a-palooza in the fall. The Wrangler® brand launched the Tough Enough to Wear Pink™ program, which honors and raises money for breast cancer survivors, and the National Patriot Program™, which funds agencies that serve wounded and fallen American military veterans and their families. The Vans® brand has hosted annual Vans® Earth Day and Vans® Gives Back Day events in which all employees at brand headquarters spend the day volunteering in the community.


6 VF Corporation 2017 Form 10-K



SUSTAINABILITY


VF is one of the world’s largest apparel, footwear and accessories manufacturers, and our global scale is significant. Equally significant is the responsibility we have to make an impact on the industry and our planet in advancing sustainable business. VF has set goals and made commitments to achieve significant progress in several different key areas of sustainability in an effort to accomplish this.
Dedication to continued sustainability progress is particularly focused in the realm of VF product materials. In 2017, VF set a goal of sourcing 50% recycled nylon and polyester for products by 2025, with a targeted 35% reduction in negative impact of key materials. This follows the issuance of a pledge to no longer allow the use of fur in any of our products, in support of newly released Animal Derived Materials & Forest Derived Materials policies.
VF is also dedicated to bringing about progress at our locations of operation, both within our owned portfolio and our external supply chain. In 2017, VF committed to measurably improve the lives of one million supply chain workers and others within their community, by 2030. Progress continues to be made toward the goals set for our internal facilities that include (i) the sourcing of 100% of our electricity from renewable sources within our owned and operated facilities by 2025, in line with our commitment to RE100, and (ii) achieving Zero Waste at 100% of our internal distribution center locations by 2020, which currently stands at almost 50% completion with 17 facilities already certified.
 
The VF brands are equally committed to sustainability action in their sectors. In 2017, Vans® opened its new LEED platinum headquarters building operating with 50% renewable energy. This brings the total count of LEED certified VF buildings in the U.S. up to 11. The Timberland® brand also announced a commitment in 2017 to source 100% of leather from LWG silver or gold rated tanneries by 2021. Wrangler® launched a new initiative in 2017, working with farmers and youth interested in farming, focused on the implementation of climate beneficial land use practices and the preservation of soil health.
VF’s large global presence necessitates a comprehensive approach to managing our impacts. The work that has been done to date has allowed us to make great strides in promoting the responsible stewardship of our scale. Success in this area has demonstrated that the VF scale is not something that simply needs to be managed for impact, but can also be used for good to create significant value.
Our new Sustainability & Responsibility strategy, Made for Change, launched in 2017, targets areas where we seek to drive transformational change to create this value in the future. The Made for Change strategy will focus on investigating and implementing new circular and sustainable business models that harness retail opportunities in new sectors, scaling our foundational social and environmental programs to lead the industry toward greater progress at a faster rate, and empowering our brands, associates, and consumers to act with purpose and impact with intention, wherever they may be.
OTHER MATTERS


Competitive Factors
Our business depends on our ability to stimulate consumer demand for VF’s brands and products. VF is well-positioned to compete in the apparel, footwear and accessories sector by developing high quality, innovative products at competitive prices that meet consumer needs, providing high service levels, ensuring the right products are on the retail sales floor to meet consumer demand, investing significant amounts into existing brands and managing our brand portfolio through acquisitions and dispositions. Many of VF’s brands have long histories and enjoy strong recognition within their respective consumer segments.
Intellectual Property
Trademarks, trade names, patents and domain names, as well as related logos, designs and graphics, provide substantial value in the development and marketing of VF’s products, and are important to our continued success. We have registered this intellectual property in the U.S. and in other countries where our products are manufactured and/or sold. We vigorously monitor and enforce VF’s intellectual property against counterfeiting, infringement and violations of other rights where and to the extent legal, feasible and appropriate. In addition, we grant licenses to other parties to manufacture and sell products utilizing our intellectual property in product categories and geographic areas in which VF does not operate.
Customers
VF products are sold on a wholesale basis to specialty stores, mid-tier and traditional department stores, national chains and mass
 
merchants. In addition, we sell products on a direct-to-consumer basis through VF-operated stores, concession retail stores and e-commerce sites. Our sales in international markets are growing and represented 41% of our total revenues in 2017, the majority of which were in Europe.
Sales to VF’s ten largest customers, all of which are retailers based in the U.S., amounted to 19% of total revenues in 2017, 21% in 2016 and 22% in 2015. Sales to the five largest customers amounted to approximately 15% of total revenues in 2017 and 16% in both 2016 and 2015. Sales to VF’s largest customer totaled 8% of total revenues in 2017 and 9% in both 2016 and 2015, the majority of which were derived from the Jeanswear coalition.
Employees
VF had approximately 69,000 employees at the end of 2017, of which approximately 31,000 were located in the U.S. In international markets, a significant percentage of employees are covered by trade-sponsored or governmental bargaining arrangements. Employee relations are considered to be good.
Backlog
The dollar amount of VF’s order backlog as of any date may not be indicative of actual future shipments and, accordingly, is not material to an understanding of the business taken as a whole.


VF Corporation 2017 Form 10-K 7



EXECUTIVE OFFICERS OF VF


The following are the executive officers of VF Corporation as of February 28, 2018. The executive officers are generally elected annually and serve at the pleasure of the Board of Directors. None of the VF Corporation executive officers have any family relationship with one another or with any of the directors of VF Corporation.
Steven E. Rendle, 58, has been Executive Chairman of the Board since November 2017, President and Chief Executive Officer of VF since January 2017 and a Director of VF since June 2015. Mr. Rendle served as President and Chief Operating Officer from June 2015 to December 2016, Senior Vice President — Americas from April 2014 until June 2015, Vice President and Group President — Outdoor & Action Sports Americas from May 2011 until April 2014, President of VF’s Outdoor Americas businesses from 2009 to 2011, President of The North Face® brand from 2004 to 2009 and Vice President of Sales of The North Face® brand from 1999 to 2004. Mr. Rendle joined VF in 1999.
Scott A. Roe, 53, has been Vice President and Chief Financial Officer of VF since April 2015. He served as Vice President — Controller and Chief Accounting Officer of VF from February 2013 until March 2015, Vice President — Finance of VF from 2012 to 2013, Vice President — Chief Financial Officer of VF International from 2006 to 2012 and Vice President — Chief Financial Officer of VF’s former intimate apparel business from 2002 to 2006. Mr. Roe joined VF in 1996.
Kevin D. Bailey, 57, has been Group President — APAC since January 2018. He served as President, APAC from January 2017 until December 2017, President Action Sports & VF CASA from March 2016 to December 2016, President Action Sports & the Vans® brand from April 2014 to February 2016, Global President of the Vans® brand from June 2009 to March 2014 and Vice President Direct-to-Consumer for the Vans® brand from June 2002 to November 2007. Mr. Bailey joined VF in 2004.
Scott H. Baxter, 53, has been Group President — Americas West since January 2018. He served as Vice President and Group President — Outdoor & Action Sports Americas from March 2016 until December 2017, Vice President and Group President — Jeanswear Americas, Imagewear and South America from May
 
2013 until March 2016, Vice President and Group President — Jeanswear Americas and Imagewear from 2011 until May 2013, President of Imagewear, composed of both the Image and VF's former Licensed Sports Group businesses, from 2008 to 2011 and President of VF's former Licensed Sports Group business from 2007 to 2008. Mr. Baxter joined VF in 2007.
Martino Scabbia Guerrini, 53, has been Group President — EMEA since January 2018. He served as President — VF EMEA from April 2017 until December 2017, Coalition President — Jeanswear, Sportswear and Contemporary International from January 2013 to November 2017, President — Sportswear and Contemporary EMEA from February 2009 to December 2012 and President — Sportswear and Packs from August 2006 to January 2009. Mr. Guerrini joined VF in 2006.
Curtis A. Holtz, 55, has been Group President — Americas East since January 2018. He served as Group President — Workwear, Jeans and Sportswear from January 2017 until December 2017, President — Imagewear from July 2015 to December 2016, Chief Financial Officer of VF Imagewear and International from 2010 to 2015 and President — VF’s former intimate apparel business from 2005 to 2007. Mr. Holtz joined VF in 1990.
Bryan H. McNeill, 56, has been Vice President — Controller and Chief Accounting Officer since April 2015. He served as Controller and Supply Chain Chief Financial Officer of VF International from January 2012 until March 2015 and Controller of VF International from May 2010 until December 2011. Mr. McNeill joined VF in 1993.
Laura C. Meagher, 57, has been Vice President, General Counsel and Secretary since 2012. She served as Vice President — Deputy General Counsel from 2008 to 2012 and Assistant General Counsel from 2004 to 2008. Ms. Meagher joined VF in 2004.
Additional information is included under the caption “Election of Directors” in VF’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 2018 (“2018 Proxy Statement”) that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 30, 2017, which information is incorporated herein by reference.
AVAILABLE INFORMATION


All periodic and current reports, registration statements and other filings that VF has filed or furnished to the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available free of charge from the SEC’s website (www.sec.gov) and public reference room at 100 F Street, NE, Washington, DC 20549 and on VF’s website at www.vfc.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. Copies of these reports may also be obtained free of charge upon written request to the Secretary of VF Corporation, P.O. Box 21488, Greensboro, NC 27420.
 
The following corporate governance documents can be accessed on VF’s website: VF’s Corporate Governance Principles, Code of Business Conduct, and the charters of our Audit Committee, Compensation Committee, Finance Committee and Nominating and Governance Committee. Copies of these documents also may be obtained by any shareholder free of charge upon written request to the Secretary of VF Corporation, P.O. Box 21488, Greensboro, NC 27420.
After VF’s 2018 Annual Meeting of Shareholders, VF intends to file with the New York Stock Exchange (“NYSE”) the certification regarding VF’s compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, VF filed this certification with the NYSE on May 12, 2017.


8 VF Corporation 2017 Form 10-K



ITEM 1A.    RISK FACTORS.


The following risk factors should be read carefully in connection with evaluating VF’s business and the forward-looking statements contained in this Form 10-K. Any of the following risks could materially adversely affect VF’s business, its operating results and its financial condition.
VF’s revenues and profits depend on the level of consumer spending for apparel and footwear, which is sensitive to global economic conditions and other factors. A decline in consumer spending could have a material adverse effect on VF.
The success of VF’s business depends on consumer spending on apparel and footwear, and there are a number of factors that influence consumer spending, including actual and perceived economic conditions, disposable consumer income, interest rates, consumer credit availability, unemployment, stock market performance, weather conditions, energy prices, consumer discretionary spending patterns and tax rates in the international, national, regional and local markets where VF’s products are sold. The current global economic environment is unpredictable, and adverse economic trends or other factors could negatively impact the level of consumer spending, which could have a material adverse impact on VF.
The apparel and footwear industries are highly competitive, and VF’s success depends on its ability to gauge consumer preferences and product trends, and to respond to constantly changing markets.
VF competes with numerous apparel and footwear brands and manufacturers. Competition is generally based upon brand name recognition, price, design, product quality, selection, service and purchasing convenience. Some of our competitors are larger and have more resources than VF in some product categories and regions. In addition, VF competes directly with the private label brands of its wholesale customers. VF’s ability to compete within the apparel and footwear industries depends on our ability to:
Anticipate and respond to changing consumer preferences and product trends in a timely manner;
Develop attractive, innovative and high quality products that meet consumer needs;
Maintain strong brand recognition;
Price products appropriately;
Provide best-in-class marketing support and intelligence;
Ensure product availability and optimize supply chain efficiencies;
Obtain sufficient retail store space and effectively present our products at retail; and
Produce or procure quality products on a consistent basis.
Failure to compete effectively or to keep pace with rapidly changing consumer preferences, markets and product trends could have a material adverse effect on VF’s business, financial condition and results of operations. Moreover, there are significant shifts underway in the wholesale and retail (e-commerce and retail store) channels. VF may not be able to manage its brands within and across channels sufficiently, which could have a material adverse effect on VF’s business, financial condition and results of operations.
 
VF’s results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
There can be no assurance that we will be able to successfully anticipate changing consumer preferences and product trends or economic conditions, and, as a result, we may not successfully manage inventory levels to meet our future order requirements. We often schedule internal production and place orders for products with independent manufacturers before our customers’ orders are firm. If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of product required to meet the demand. Inventory levels in excess of consumer demand may result in inventory write-downs, the sale of excess inventory at discounted prices or excess inventory held by our wholesale customers, which could have a negative impact on future sales, an adverse effect on the image and reputation of VF’s brands and negatively impact profitability. On the other hand, if we underestimate demand for our products, our manufacturing facilities or third-party manufacturers may not be able to produce products to meet consumer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to VF’s reputation and relationships. These risks could have a material adverse effect on our brand image as well as our results of operations and financial condition.
VF’s business and the success of its products could be harmed if VF is unable to maintain the images of its brands.
VF’s success to date has been due in large part to the growth of its brands’ images and VF’s customers’ connection to its brands. If we are unable to timely and appropriately respond to changing consumer demand, the names and images of our brands may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brands’ images to be outdated or associate our brands with styles that are no longer popular. In addition, brand value is based in part on consumer perceptions on a variety of qualities, including merchandise quality and corporate integrity. Negative claims or publicity regarding VF, its brands or its products, including licensed products, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our businesses may be similarly affected in the future. In addition, we have sponsorship contracts with a number of athletes, musicians and celebrities and feature those individuals in our advertising and marketing efforts. Actions taken by those individuals associated with our products could harm their reputations, which could adversely affect the images of our brands.
VF’s revenues and cash requirements are affected by the seasonal nature of its business.
VF’s business is increasingly seasonal, with a higher proportion of revenues and operating cash flows generated during the second half of the fiscal year, which includes the fall and holiday selling seasons. Poor sales in the second half of the fiscal year would have a material adverse effect on VF’s full year operating results and cause higher inventories. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales.


VF Corporation 2017 Form 10-K 9



VF’s profitability may decline as a result of increasing pressure on margins.
The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. If these factors cause us to reduce our sales prices to retailers and consumers, and we fail to sufficiently reduce our product costs or operating expenses, VF’s profitability will decline. This could have a material adverse effect on VF’s results of operations, liquidity and financial condition.
VF may not succeed in its business strategy.
One of VF’s key strategic objectives is growth. We seek to grow organically and through acquisitions. We seek to grow by building our lifestyle brands, expanding our share with winning customers, stretching VF’s brands to new regions, managing costs, leveraging our supply chain and information technology capabilities across VF and expanding our direct-to-consumer business, including opening new stores, remodeling and expanding our existing stores and growing our e-commerce business. However, we may not be able to grow our existing businesses. For example:
We may have difficulty completing acquisitions or dispositions to reshape our portfolio, and we may not be able to successfully integrate a newly acquired business or achieve the expected growth, cost savings or synergies from such integration.
We may not be able to transform our model to be more consumer- and retail-centric
We may not be able to expand our market share with winning customers, or our wholesale customers may encounter financial difficulties and thus reduce their purchases of VF products.
We may not be able to expand our brands in Asia or other geographies or achieve the expected results from our supply chain initiatives.
We may have difficulty recruiting, developing or retaining qualified employees.
We may not be able to achieve our direct-to-consumer expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new, remodeled and expanded stores profitably.
Failure to implement our strategic objectives may have a material adverse effect on VF’s business.
VF relies significantly on information technology. Any inadequacy, interruption, integration failure or security failure of this technology could harm VF’s ability to effectively operate its business.
Our ability to effectively manage and operate our business depends significantly on information technology systems. We rely heavily on information technology to track sales and inventory and manage our supply chain. We are also dependent on information technology, including the Internet, for our direct-to-consumer sales, including our e-commerce operations and retail business credit card transaction authorization. Despite our preventative efforts, our systems and those of our third-party service providers may be vulnerable to damage or interruption. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, difficulty in integrating new
 
systems or systems of acquired businesses or a breach in security of these systems could adversely impact the operations of VF’s business, including management of inventory, ordering and replenishment of products, e-commerce operations, retail business credit card transaction authorization and processing, corporate email communications and our interaction with the public on social media.
VF is subject to data security and privacy risks that could negatively affect its business operations, results of operations or reputation.
In the normal course of business, we often collect, retain and transmit certain sensitive and confidential customer information, including credit card information, over public networks. There is a significant concern by consumers and employees over the security of personal information transmitted over the Internet, identity theft and user privacy. Despite the security measures we currently have in place, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches, and VF and its customers could suffer harm if customer and other proprietary information were accessed by third parties due to a security failure in VF’s systems or one of our third-party service providers. It could require significant expenditures to remediate any such failure or breach, severely damage our reputation and our relationships with customers, and expose us to risks of litigation and liability. In addition, as a result of recent security breaches at a number of prominent retailers, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more uncertain. As a result, we may incur significant costs to comply with laws regarding the protection and unauthorized disclosure of personal information and we may not be able to comply with new regulations such as the General Data Protection Regulation in the European Union.
VF’s business is exposed to the risks of foreign currency exchange rate fluctuations. VF’s hedging strategies may not be effective in mitigating those risks.
A growing percentage of VF’s total revenues (approximately 41% in 2017) is derived from markets outside the U.S. VF’s international businesses operate in functional currencies other than the U.S. dollar. Changes in currency exchange rates affect the U.S. dollar value of the foreign currency-denominated amounts at which VF’s international businesses purchase products, incur costs or sell products. In addition, for VF’s U.S.-based businesses, the majority of products are sourced from independent contractors or VF plants located in foreign countries. As a result, the costs of these products are affected by changes in the value of the relevant currencies. Furthermore, much of VF’s licensing revenue is derived from sales in foreign currencies. Changes in foreign currency exchange rates could have an adverse impact on VF’s financial condition, results of operations and cash flows.
In accordance with our operating practices, we hedge a significant portion of our foreign currency transaction exposures arising in the ordinary course of business to reduce risks in our cash flows and earnings. Our hedging strategy may not be effective in reducing all risks, and no hedging strategy can completely insulate VF from foreign exchange risk.
Further, our use of derivative financial instruments may expose VF to counterparty risks. Although VF only enters into hedging contracts with counterparties having investment grade credit ratings, it is possible that the credit quality of a counterparty could be downgraded or a counterparty could default on its obligations,


10 VF Corporation 2017 Form 10-K



which could have a material adverse impact on VF’s financial condition, results of operations and cash flows.
There are risks associated with VF’s acquisitions.
Any acquisitions or mergers by VF will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating the operations, systems and personnel of the companies and the loss of key employees and customers as a result of changes in management. In addition, geographic distances may make integration of acquired businesses more difficult. We may not be successful in overcoming these risks or any other problems encountered in connection with any acquisitions.
Our acquisitions may cause large one-time expenses or create goodwill or other intangible assets that could result in significant impairment charges in the future. We also make certain estimates and assumptions in order to determine purchase price allocation and estimate the fair value of assets acquired and liabilities assumed. If our estimates or assumptions used to value these assets and liabilities are not accurate, we may be exposed to losses that may be material.
VF’s operations and earnings may be affected by legal, regulatory, political and economic risks.
Our ability to maintain the current level of operations in our existing markets and to capitalize on growth in existing and new markets is subject to legal, regulatory, political and economic risks. These include the burdens of complying with U.S. and international laws and regulations, unexpected changes in regulatory requirements,  tariffs or other trade barriers and the economic uncertainty associated with the pending exit of the United Kingdom from the European Union ("Brexit") or any other similar referendums that may be held.
A significant portion of VF's 2017 net income was earned in jurisdictions outside the U.S. and most of our goods are manufactured outside the U.S. VF is exposed to risks of changes in U.S. policy for companies having business operations and manufacturing products outside the U.S. We cannot predict any changes to U.S. participation in or renegotiations of certain trade agreements or whether quotas, duties, taxes, exchange controls or other restrictions will be imposed by the U.S., the European Union or other countries on the import or export of our products, or what effect any of these actions would have on VF’s business, financial condition or results of operations. Changes in regulatory, geopolitical policies and other factors may adversely affect VF’s business or may require us to modify our current business practices. While enactment of any such change is not certain, if such changes were adopted, our costs could increase, which would reduce our earnings.
Changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.
We are subject to taxation in the U.S. and numerous foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which includes a broad range of tax reform proposals affecting businesses, including a reduction in the U.S. federal corporate tax rate from 35% to 21%, a one-time mandatory deemed repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred, and a new minimum
 
tax on certain foreign earnings. The Tax Act significantly impacts our effective tax rate for 2017 as a result of the deemed repatriation tax, and may impact several other elements of our operating model. In future years, certain additional provisions of the Tax Act, such as a minimum tax on foreign earnings, will also apply to VF and, as a result, could increase our effective tax rate. Taxes due over a period of time as a result of the new tax law could be accelerated upon certain triggering events, including failure to pay such taxes when due. The new law makes broad and complex changes to the U.S. tax code and we expect to see future regulatory, administrative or legislative guidance. We are analyzing the Tax Act to determine the full impact of the new tax law, and to the extent any future guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations.
In addition, many countries in the European Union and around the globe have adopted and/or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our U.S. and international business activities, many of these enacted and proposed changes to the taxation of our activities could increase our worldwide effective tax rate and harm our financial position and results of operations.
We may have additional tax liabilities.
As a global company, we determine our income tax liability in various tax jurisdictions based on an analysis and interpretation of local tax laws and regulations. This analysis requires a significant amount of judgment and estimation and is often based on various assumptions about the future actions of the local tax authorities. These determinations are the subject of periodic U.S. and international tax audits. Although we accrue for uncertain tax positions, our accrual may be insufficient to satisfy unfavorable findings. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods, which may have a material adverse effect on our financial condition, results of operations or cash flows.
VF’s balance sheet includes a significant amount of intangible assets and goodwill. A decline in the fair value of an intangible asset or of a business unit could result in an asset impairment charge, which would be recorded as an operating expense in VF’s Consolidated Statement of Income and could be material.
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 year, or whenever events or changes in circumstances indicate that the fair value of such assets may be below their carrying amount. In addition, intangible assets that are being amortized are tested for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. For these impairment tests, we use various valuation methods to estimate the fair value of our business units and intangible assets. If the fair value of an asset is less than its carrying value, we would recognize an impairment charge for the difference.
It is possible that we could have an impairment charge for goodwill or trademark and trade name intangible assets in future periods if (i) overall economic conditions in 2018 or future years vary from our current assumptions, (ii) business conditions or our strategies for a specific business unit change from our current assumptions, (iii) investors require higher rates of return on equity investments


VF Corporation 2017 Form 10-K 11



in the marketplace or (iv) enterprise values of comparable publicly traded companies, or of actual sales transactions of comparable companies, were to decline, resulting in lower comparable multiples of revenues and earnings before interest, taxes, depreciation and amortization and, accordingly, lower implied values of goodwill and intangible assets. A future impairment charge for goodwill or intangible assets could have a material effect on our consolidated financial position or results of operations.
VF uses third-party suppliers and manufacturing facilities worldwide for a substantial portion of its raw materials and finished products, which poses risks to VF’s business operations.
During Fiscal 2017, approximately 77% of VF’s units were purchased from independent manufacturers primarily located in Asia, with substantially all of the remainder produced by VF-owned and operated manufacturing facilities located in the U.S., Mexico, Central America and the Caribbean. Any of the following could impact our ability to produce or deliver VF products, or our cost of producing or delivering products and, as a result, our profitability:
Political or labor instability in countries where VF’s facilities, contractors and suppliers are located;
Changes in local economic conditions in countries where VF’s facilities, contractors, and suppliers are located;
Political or military conflict could cause a delay in the transportation of raw materials and products to VF and an increase in transportation costs;
Disruption at ports of entry, such as the west coast dock workers labor dispute that disrupted international trade at seaports, could cause delays in product availability and increase transportation times and costs;
Heightened terrorism security concerns could subject imported or exported goods to additional, more frequent or more lengthy inspections, leading to delays in deliveries or impoundment of goods for extended periods;
Decreased scrutiny by customs officials for counterfeit goods, leading to more counterfeit goods and reduced sales of VF products, increased costs for VF’s anti-counterfeiting measures and damage to the reputation of its brands;
Disruptions at manufacturing or distribution facilities caused by natural and man-made disasters;
Disease epidemics and health-related concerns could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargo of VF’s goods produced in infected areas;
Imposition of regulations and quotas relating to imports and our ability to adjust timely to changes in trade regulations could limit our ability to produce products in cost-effective countries that have the required labor and expertise;
Imposition of duties, taxes and other charges on imports; and
Imposition or the repeal of laws that affect intellectual property rights.
Although no single supplier and no one country is critical to VF’s production needs, if we were to lose a supplier it could result in interruption of finished goods shipments to VF, cancellation of orders by customers and termination of relationships. This, along with the damage to our reputation, could have a material adverse
 
effect on VF’s revenues and, consequently, our results of operations.
Our business is subject to national, state and local laws and regulations for environmental, consumer protection, employment, privacy, safety and other matters. The costs of compliance with, or the violation of, such laws and regulations by VF or by independent suppliers who manufacture products for VF could have an adverse effect on our operations and cash flows, as well as on our reputation.
Our business is subject to comprehensive national, state and local laws and regulations on a wide range of environmental, consumer protection, employment, privacy, safety and other matters. VF could be adversely affected by costs of compliance with or violations of those laws and regulations. In addition, while we do not control their business practices, we require third-party suppliers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. The costs of products purchased by VF from independent contractors could increase due to the costs of compliance by those contractors.
Failure by VF or its third-party suppliers to comply with such laws and regulations, as well as with ethical, social, product, labor and environmental standards, or related political considerations, could result in interruption of finished goods shipments to VF, cancellation of orders by customers and termination of relationships. If one of our independent contractors violates labor or other laws, implements labor or other business practices or takes other actions that are generally regarded as unethical, it could jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts that may reduce demand for VF’s merchandise. Damage to VF’s reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on VF’s results of operations, financial condition and cash flows, as well as require additional resources to rebuild VF’s reputation.
Fluctuations in wage rates and the price, availability and quality of raw materials and finished goods could increase costs.
Fluctuations in the price, availability and quality of fabrics, leather or other raw materials used by VF in its manufactured products, or of purchased finished goods, could have a material adverse effect on VF’s cost of goods sold or its ability to meet its customers’ demands. The prices we pay depend on demand and market prices for the raw materials used to produce them. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including general economic conditions and demand, crop yields, energy prices, weather patterns and speculation in the commodities markets. Prices of purchased finished products also depend on wage rates in Asia and other geographic areas where our independent contractors are located, as well as freight costs from those regions. In addition, fluctuations in wage rates required by legal or industry standards could increase our costs. In the future, VF may not be able to offset cost increases with other cost reductions or efficiencies or to pass higher costs on to its customers. This could have a material adverse effect on VF’s results of operations, liquidity and financial condition.
We may be adversely affected by weather conditions.
Our business is adversely affected by unseasonable weather conditions. A significant portion of the sales of our products is dependent in part on the weather and is likely to decline in years in which weather conditions do not favor the use of these products.


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For example, periods of unseasonably warm weather in the fall or winter can lead to inventory accumulation by our wholesale customers, which can, in turn, negatively affect orders in future seasons. In addition, abnormally harsh or inclement weather can also negatively impact retail traffic and consumer spending. Any and all of these risks may have a material adverse effect on our financial condition, results of operations or cash flows.
A substantial portion of VF’s revenues and gross profit is derived from a small number of large customers. The loss of any of these customers or the inability of any of these customers to pay VF could substantially reduce VF’s revenues and profits.
A few of VF’s customers account for a significant portion of revenues. Sales to VF’s ten largest customers were 19% of total revenues in 2017, with our largest customer accounting for 8% of revenues. Sales to our customers are generally on a purchase order basis and not subject to long-term agreements. A decision by any of VF’s major customers to significantly decrease the volume of products purchased from VF could substantially reduce revenues and have a material adverse effect on VF’s financial condition and results of operations.
The retail industry has experienced financial difficulty that could increase VF's bad debt.
Recently there have been consolidations, reorganizations, restructurings, bankruptcies and ownership changes in the retail industry. These events individually, and together, could materially, adversely affect VF's business. These changes could impact VF’s opportunities in the market and increase VF’s reliance on a smaller number of large customers. In the future, retailers are likely to further consolidate, undergo restructurings or reorganizations or bankruptcies, realign their affiliations or reposition their stores’ target markets. These developments could result in a reduction in the number of stores that carry VF’s products, an increase in ownership concentration within the retail industry, an increase in credit exposure to VF or an increase in leverage by VF’s customers over their suppliers.
Further, the global economy periodically experiences recessionary conditions with rising unemployment, reduced availability of credit, increased savings rates and declines in real estate and securities values. These recessionary conditions could have a negative impact on retail sales of apparel and other consumer products. The lower sales volumes, along with the possibility of restrictions on access to the credit markets, could result in our customers experiencing financial difficulties including store closures, bankruptcies or liquidations. This could result in higher credit risk to VF relating to receivables from our customers who are experiencing these financial difficulties. If these developments occur, our inability to shift sales to other customers or to collect on VF’s trade accounts receivable could have a material adverse effect on VF’s financial condition and results of operations.
Our ability to obtain short-term or long-term financing on favorable terms, if needed, could be adversely affected by geopolitical risk and volatility in the capital markets.
Any disruption in the capital markets could limit the availability of funds or the ability or willingness of financial institutions to extend capital in the future. This could adversely affect our liquidity and funding resources or significantly increase our cost of capital. An inability to access capital and credit markets may have an adverse effect on our business, results of operations, financial condition and cash flows.
 
VF has a global revolving credit facility. One or more of the participating banks may not be able to honor their commitments, which could have an adverse effect on VF’s business.
VF has a $2.25 billion global revolving credit facility that expires in April 2020. If the financial markets return to recessionary conditions, this could impair the ability of one or more of the banks participating in our credit agreements to honor their commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.
The loss of members of VF’s executive management and other key employees could have a material adverse effect on its business.
VF depends on the services and management experience of its executive officers and business leaders who have substantial experience and expertise in VF’s business. The unexpected loss of services of one or more of these individuals could have a material adverse effect on VF. Our future success also depends on our ability to recruit, retain and engage our personnel sufficiently. Competition for experienced and well-qualified personnel is intense and we may not be successful in attracting and retaining such personnel.
VF’s direct-to-consumer business includes risks that could have an adverse effect on its results of operations.
VF sells merchandise direct-to-consumer through VF-operated stores and e-commerce sites. Its direct-to-consumer business is subject to numerous risks that could have a material adverse effect on its results. Risks include, but are not limited to, (a) U.S. or international resellers purchasing merchandise and reselling it overseas outside VF’s control, (b) failure of the systems that operate the stores and websites, and their related support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions, (c) credit card fraud and (d) risks related to VF’s direct-to-consumer distribution centers and processes. Risks specific to VF’s e-commerce business also include (a) diversion of sales from VF stores or wholesale customers, (b) difficulty in recreating the in-store experience through direct channels, (c) liability for online content, (d) changing patterns of consumer behavior and (e) intense competition from online retailers. VF’s failure to successfully respond to these risks might adversely affect sales in its e-commerce business, as well as damage its reputation and brands.
Our VF-operated stores and e-commerce business require substantial fixed investments in equipment and leasehold improvements, information systems, inventory and personnel. We have entered into substantial operating lease commitments for retail space. Due to the high fixed-cost structure associated with our direct-to-consumer operations, a decline in sales or the closure of or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs.
VF’s net sales depend on the volume of traffic to its stores and the availability of suitable lease space.
A growing portion of our revenues are direct-to-consumer sales through VF-operated stores. In order to generate customer traffic, we locate many of our stores in prominent locations within successful retail shopping centers or in fashionable shopping districts. Our stores benefit from the ability of the retail center and


VF Corporation 2017 Form 10-K 13



other attractions in an area to generate consumer traffic in the vicinity of our stores. Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot control the development of new shopping centers or districts; the availability or cost of appropriate locations within existing or new shopping centers or districts; competition with other retailers for prominent locations; or the success of individual shopping centers or districts. Further, if we are unable to renew or replace our existing store leases or enter into leases for new stores on favorable terms, or if we violate the terms of our current leases, our growth and profitability could be harmed. All of these factors may impact our ability to meet our growth targets and could have a material adverse effect on our financial condition or results of operations.
VF may be unable to protect its trademarks and other intellectual property rights.
VF’s trademarks and other intellectual property rights are important to its success and its competitive position. VF is susceptible to others copying its products and infringing its intellectual property rights, especially with the shift in product mix to higher priced brands and innovative new products in recent years. Some of VF’s brands, such as The North Face®, Timberland®, Vans®, JanSport®, Dickies®, Wrangler® and Lee®, enjoy significant worldwide consumer recognition, and the higher pricing of those products creates additional risk of counterfeiting and infringement.
VF’s trademarks, trade names, patents, trade secrets and other intellectual property are important to VF’s success. Counterfeiting of VF’s products or infringement on its intellectual property rights could diminish the value of our brands and adversely affect VF’s revenues. Actions we have taken to establish and protect VF’s intellectual property rights may not be adequate to prevent copying of its products by others or to prevent others from seeking to invalidate its trademarks or block sales of VF’s products as a violation of the trademarks and intellectual property rights of others. In addition, unilateral actions in the U.S. or other countries, including changes to or the repeal of laws recognizing trademark or other intellectual property rights, could have an impact on VF’s ability to enforce those rights.
The value of VF’s intellectual property could diminish if others assert rights in or ownership of trademarks and other intellectual property rights of VF, or trademarks that are similar to VF’s trademarks, or trademarks that VF licenses from others. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have prior rights to VF’s trademarks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the U.S. In other cases, there may be holders who have prior rights to similar trademarks. VF is from time to time involved in opposition and cancellation proceedings with respect to some of its intellectual property rights.
We may be subject to liability if third parties successfully claim that we infringe on their trademarks, copyrights, patents or other intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements.
 
VF is subject to the risk that its licensees may not generate expected sales or maintain the value of VF’s brands.
During 2017, $75.5 million of VF’s revenues were derived from licensing royalties. Although VF generally has significant control over its licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial controls over their businesses. Failure of our licensees to successfully market licensed products or our inability to replace existing licensees, if necessary, could adversely affect VF’s revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. Risks are also associated with a licensee’s ability to:
Obtain capital;
Manage its labor relations;
Maintain relationships with its suppliers;
Manage its credit risk effectively;
Maintain relationships with its customers; and
Adhere to VF’s Global Compliance Principles.
In addition, VF relies on its licensees to help preserve the value of its brands. Although we attempt to protect VF’s brands through approval rights over design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of licensed VF brands by our licensees. The misuse of a brand by a licensee could have a material adverse effect on that brand and on VF.
If VF encounters problems with its distribution system, VF’s ability to deliver its products to the market could be adversely affected.
VF relies on owned or independently-operated distribution facilities to warehouse and ship product to its customers. VF’s distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. Because substantially all of VF’s products are distributed from a relatively small number of locations, VF’s operations could also be interrupted by earthquakes, floods, fires or other natural disasters affecting its distribution centers. We maintain business interruption insurance, but it may not adequately protect VF from the adverse effects that could be caused by significant disruptions in VF’s distribution facilities, such as the long-term loss of customers or an erosion of brand image. In addition, VF’s distribution capacity is dependent on the timely performance of services by third parties, including the transportation of product to and from its distribution facilities. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve operating efficiencies could be materially adversely affected.
Volatility in securities markets, interest rates and other economic factors could substantially increase VF’s defined benefit pension costs.
VF currently has obligations under its defined benefit pension plans. The funded status of the pension plans is dependent on many factors, including returns on investment assets and the discount rate used to determine pension obligations. Unfavorable impacts from returns on plan assets, decreases in discount rates, changes in plan demographics or revisions in the applicable laws or regulations could materially change the timing and amount of


14 VF Corporation 2017 Form 10-K



pension funding requirements, which could reduce cash available for VF’s business.
VF’s operating performance also may be negatively impacted by the amount of expense recorded for its pension plans. Pension expense is calculated using actuarial valuations that incorporate
 
assumptions and estimates about financial market, economic and demographic conditions. Differences between estimated and actual results give rise to gains and losses that are deferred and amortized as part of future pension expense, which can create volatility that adversely impacts VF’s future operating results.
ITEM 1B.    UNRESOLVED STAFF COMMENTS.

None.


VF Corporation 2017 Form 10-K 15



ITEM 2.    PROPERTIES.


The following is a summary of VF Corporation’s principal owned and leased properties as of December 30, 2017.
VF’s global headquarters are located in a 180,000 square foot, owned facility in Greensboro, North Carolina. VF owns other facilities in Greensboro, including the Jeanswear coalition headquarters building. In addition, we own facilities in Stabio, Switzerland and lease offices in Hong Kong, China, which serve as our European and Asia-Pacific regional headquarters, respectively. We also own or lease coalition and brand headquarters facilities throughout the world.
VF owns a 236,000 square foot facility in Appleton, Wisconsin that serves as a shared services center for our Outdoor & Action Sports coalition in North America. Additionally, we own and lease shared service facilities in Bornem, Belgium that support our international operations. Our sourcing hubs are located in Panama City, Panama and Hong Kong, China.
 
Our largest distribution centers are located in Prague, Czech Republic and Visalia, California. Additionally, we operate 36 other owned or leased distribution centers primarily in the U.S., but also in Argentina, Belgium, Canada, Chile, China, Mexico, the Netherlands and the United Kingdom. We operate 21 owned or leased manufacturing plants primarily in Mexico, but also in the Dominican Republic, Honduras, Nicaragua and the U.S.
In addition to the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We operate 1,518 retail stores across the Americas, European and Asia-Pacific regions. Retail stores are generally leased under operating leases and include renewal options. We believe all facilities and machinery and equipment are in good condition and are suitable for VF’s needs.
ITEM  3.    LEGAL PROCEEDINGS.


There are no pending material legal proceedings, other than ordinary, routine litigation incidental to the business, to which VF or any of its subsidiaries is a party or to which any of their property is the subject.
ITEM  4.    MINE SAFETY DISCLOSURES.

Not applicable.


16 VF Corporation 2017 Form 10-K



PART II
ITEM 5.    MARKET FOR VF’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.


VF’s Common Stock is listed on the New York Stock Exchange under the symbol “VFC”. The following table sets forth the high and low sale prices of VF Common Stock, as reported on the NYSE Composite Tape in each fiscal quarter of 2017 and 2016, along with dividends declared.
 
High
 
Low
 
Dividends
Declared
2017
 
 
 
 
 
Fourth quarter
$
75.25

 
$
62.83

 
$
0.46

Third quarter
64.51

 
55.51

 
0.42

Second quarter
58.18

 
51.22

 
0.42

First quarter
56.27

 
48.05

 
0.42

 
 
 
 
 
$
1.72

2016
 
 
 
 
 
Fourth quarter
$
58.35

 
$
51.76

 
$
0.42

Third quarter
65.25

 
55.20

 
0.37

Second quarter
66.31

 
57.78

 
0.37

First quarter
67.10

 
52.21

 
0.37

 
 
 
 
 
$
1.53


As of January 27, 2018, there were 3,435 shareholders of record. Quarterly dividends on VF Common Stock, when declared, are paid on or about the 20th day of March, June, September and December.


VF Corporation 2017 Form 10-K 17



PERFORMANCE GRAPH:

The following graph compares the cumulative total shareholder return on VF Common Stock with that of the Standard & Poor’s (“S&P”) 500 Index and the S&P 1500 Apparel, Accessories & Luxury Goods Subindustry Index (“S&P 1500 Apparel Index”) for the five fiscal years ended December 30, 2017. The S&P 1500 Apparel Index at the end of 2017 consisted of Carter’s, Inc., Fossil, Inc., G-III Apparel Group, Ltd., Hanesbrands Inc., Michael Kors Holdings Ltd., Movado Group, Inc., Oxford Industries, Inc., Perry Ellis
 
International, Inc., PVH Corp., Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc., Vera Bradley, Inc. and V.F. Corporation. The graph assumes that $100 was invested at the end of 2012 in each of VF Common Stock, the S&P 500 Index and the S&P 1500 Apparel Index, and that all dividends were reinvested. The graph plots the respective values on the last trading day of 2012 through 2017. Past performance is not necessarily indicative of future performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN OF VF COMMON STOCK,
S&P 500 INDEX AND S&P 1500 APPAREL INDEX
VF Common Stock closing price on December 30, 2017 was $74.00
performancechart2017.jpg
Company / Index
 
Base 2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
 
2017
 
VF Corporation
 
$
100.00

 
 
$
169.30

 
 
$
206.23

 
 
$
177.39

 
 
$
155.86

 
 
$
222.49

 
S&P 500 Index
 
100.00

 
 
134.11

 
 
153.03

 
 
155.18

 
 
173.74

 
 
211.67

 
S&P 1500 Apparel, Accessories & Luxury Goods
 
100.00

 
 
140.32

 
 
147.88

 
 
117.05

 
 
105.25

 
 
125.63

 


18 VF Corporation 2017 Form 10-K



ISSUER PURCHASES OF EQUITY SECURITIES:

The following table sets forth VF’s repurchases of our Common Stock during the fiscal quarter ended December 30, 2017 under the share repurchase program authorized by VF’s Board of Directors in 2017.
 
Fiscal Period
 
Total Number of Shares Purchased
 
Weighted Average Price  Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Programs
 
Dollar Value of Shares that May Yet be Purchased Under the Program
October 1 — October 28, 2017
 

 
$

 

 
4,237,940,717

October 29 — November 25, 2017
 

 

 

 
4,237,940,717

November 26 — December 30, 2017
 

 

 

 
4,237,940,717

Total
 

 
 
 

 
 

The VF Board of Directors approved a new $5.0 billion share repurchase authorization on March 29, 2017, which replaces all remaining shares under the 2013 authorization. VF began repurchasing shares under this new authorization during the second quarter of 2017.


VF Corporation 2017 Form 10-K 19



ITEM 6.    SELECTED FINANCIAL DATA.


The following table sets forth selected consolidated financial data for the five years ended December 30, 2017. VF operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. All references to “2017”, “2016” and “2015” relate to the 52-week fiscal periods ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively, all references to “2014” relate to the 53-week fiscal period ended January 3, 2015, and all references to “2013” relate to the 52-week fiscal period ended December 28, 2013.
 
Unless otherwise indicated, the following disclosures reflect the Company’s continuing operations, including financial position metrics. Refer to Note C to VF’s consolidated financial statements included in this report for additional information regarding discontinued operations.
This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and VF’s consolidated financial statements and accompanying notes included in this report. Historical results presented herein may not be indicative of future results.
 
(Dollars and shares in thousands, except per share amounts)

 
 
2017
 
 
2016
 
2015
 
2014
 
2013
SUMMARY OF OPERATIONS (1)
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
 
$
11,811,177

 
 
$
11,026,147

 
$
10,996,393

 
$
10,831,889

 
$
9,967,493

Operating income
 
 
1,503,090

 
 
1,368,260

 
1,644,828

 
1,663,387

 
1,460,172

Income from continuing operations
 
 
721,209

 
 
1,078,854

 
1,217,056

 
1,233,711

 
1,076,891

Earnings per common share from continuing operation – basic
 
 
$
1.81

 
 
$
2.59

 
$
2.86

 
$
2.85

 
$
2.45

Earnings per common share from continuing operations – diluted
 
 
1.79

 
 
2.56

 
2.82

 
2.80

 
2.41

Dividends per share
 
 
1.7200

 
 
1.5300

 
1.3300

 
1.1075

 
0.9150

Dividend payout ratio (2)
 
 
96.2
%
 
 
59.9
%
 
47.2
%
 
39.5
%
 
38.0
%
FINANCIAL POSITION (3)
 
 
 
 
 
 
 
 
 
 
 
 
Working capital
 
 
$
1,355,611

 
 
$
2,383,174

 
$
2,036,268

 
$
2,221,957

 
$
1,923,704

Current ratio
 
 
1.5

 
 
2.4

 
2.1

 
2.5

 
2.3

Total assets
 
 
$
9,556,437

 
 
$
9,001,985

 
$
8,587,064

 
$
8,602,747

 
$
8,469,172

Long-term debt, less current maturities
 
 
2,187,789

 
 
2,039,180

 
1,401,820

 
1,403,919

 
1,406,050

Stockholders’ equity
 
 
3,719,900

 
 
4,940,921

 
5,384,838

 
5,630,882

 
6,077,038

Debt to total capital ratio (4)
 
 
44.0
%
 
 
31.9
%
 
25.6
%
 
20.2
%
 
19.0
%
Weighted average common shares outstanding
 
 
399,223

 
 
416,103

 
425,408

 
432,611

 
438,657

Book value per common share
 
 
$
9.40

 
 
$
11.93

 
$
12.62

 
$
13.01

 
$
13.80

OTHER STATISTICS
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin
 
 
12.7
%
 
 
12.4
%
 
15.0
%
 
15.4
%
 
14.6
%
Return on invested capital (5) (6) 
 
 
10.5
%
 
 
15.4
%
 
17.1
%
 
17.1
%
 
15.8
%
Return on average stockholders’ equity (5)
 
 
18.9
%
 
 
23.8
%
 
25.3
%
 
22.5
%
 
21.2
%
Return on average total assets (5)
 
 
8.2
%
 
 
12.7
%
 
14.4
%
 
14.8
%
 
14.2
%
Cash provided by operations (7)
 
 
$
1,474,660

 
 
$
1,480,568

 
$
1,203,616

 
$
1,761,841

 
$
1,555,060

Cash dividends paid
 
 
684,679

 
 
635,994

 
565,275

 
478,933

 
402,136

(1) 
VF recorded a $465.5 million provisional tax charge during the fourth quarter of 2017 related to the transitional impact of the Tax Act. The charge impacted basic earnings per share by $1.17 and diluted earnings per share by $1.15. Operating results for 2016 include charges for the impairment of goodwill and intangible assets, pension settlement and restructuring charges. The charges impacted pretax operating income by $185.6 million, after-tax income from continuing operations by $137.3 million, basic earnings per share by $0.33 and diluted earnings per share by $0.33.
(2) 
Dividend payout ratio is defined as dividends per share divided by earnings per diluted share.
(3) 
VF early adopted the accounting standards update regarding intra-entity transfers in the first quarter of 2017, which resulted in a cumulative adjustment to retained earnings and reduction in other assets in the Consolidated Balance Sheet at January 1, 2017 of $237.8 million.
(4) 
Total capital is defined as stockholders’ equity plus short-term and long-term debt.
(5) 
The numerator in the return calculations is defined as income from continuing operations plus total interest income/expense, net of taxes.
(6) 
Invested capital is defined as average stockholders’ equity plus average short-term and long-term debt.
(7) 
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. Accordingly, the information includes the results of continuing and discontinued operations.



20 VF Corporation 2017 Form 10-K


ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


OVERVIEW


VF Corporation (together with its subsidiaries, collectively known as “VF” or the "Company”) is a global leader in the design, production, procurement, marketing and distribution of branded lifestyle apparel, footwear and related products. VF’s diverse portfolio of more than 30 brands meets consumer needs across a broad spectrum of activities and lifestyles. Our long-term growth strategy is focused on four drivers — reshape our portfolio, transform our model, elevate direct-to-consumer and distort Asia.
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, denim, backpack, luggage, accessory and apparel categories. Our products are marketed to consumers shopping in specialty stores, department stores, national chains, mass merchants and our own direct-to-consumer operations, which includes VF-operated stores, concession retail stores and e-commerce sites.
VF is organized by groupings of businesses called “coalitions”. The three coalitions are Outdoor & Action Sports, Jeanswear and Imagewear. These coalitions are our reportable segments for financial reporting purposes.
BASIS OF PRESENTATION

The Nautica® brand business, the Licensing Business (which comprised the Licensed Sports Group and JanSport® brand collegiate businesses), and the Contemporary Brands coalition have been reported as discontinued operations in our Consolidated Statements of Income, and the related assets and liabilities have been presented as held-for-sale in the Consolidated Balance Sheets, through their dates of disposal. These changes have been applied to 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 C to VF’s consolidated financial statements for additional information on discontinued operations.
VF operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. All references to “2017”, “2016” and “2015” relate to the 52-week fiscal years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively. During the first quarter of 2017, the Company approved a change in fiscal year end to the Saturday closest to March 31 from the Saturday closest to December 31. Accordingly,
 
VF will report a transition quarter that runs from December 31, 2017 through March 31, 2018. The Company's next fiscal year will run from April 1, 2018 through March 30, 2019 (“Fiscal 2019”).
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 2017 foreign currency amounts below reflect the changes in foreign exchange rates from 2016 and their impact on both translating foreign currencies into U.S. dollars and on transactions denominated in a foreign currency. References to 2016 foreign currency amounts below reflect the changes in foreign exchange rates from 2015 and their impact on both translating foreign currencies into U.S. dollars and on transactions denominated in a foreign currency. VF’s most significant foreign currency exposure relates to business conducted in euro-based countries. However, VF conducts business in other developed and emerging markets around the world with exposure to foreign currencies other than the euro.
HIGHLIGHTS OF 2017

2017 marked the beginning of VF's renewed strategic journey, as we focused our efforts and investments on the evolution of VF and our brands to become more consumer and retail centric. Our focus and investment in support of our strategies drove accelerated growth and value creation across key pillars of our portfolio in 2017. The choices and capabilities embedded in our strategic growth plan have enabled our strong portfolio of diverse global brands to connect more deeply with consumers, and the results in 2017 reflect initial success in the execution of our plan as VF's core growth engines - international, direct-to-consumer, Outdoor & Action Sports and our workwear platform - continued to show strength.
We are still in the early phases of this strategic journey, and while the consumer landscape is rapidly changing and the global retail environment around the world is dynamic, we believe the choices and capabilities embedded in our strategic growth plan will enable our strong portfolio of diverse global brands to connect more deeply with consumers and fuel growth into the future.
 
We continued reshaping our portfolio in 2017 to align with our financial aspirations, as we closed on the acquisition of Williamson-Dickie Mfg. Co. ("Williamson-Dickie") in the fourth quarter of 2017, and announced the acquisition of Icebreaker Holdings, Ltd., which we expect to close in the first quarter of Fiscal 2019. Further, we completed the sale of the Licensing Business in 2017 and have announced the planned sale of the Nautica® brand business.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and moves from a global taxation regime to a modified territorial regime. As part of the legislation, U.S. companies are required to pay a tax on historical earnings generated offshore that have not been repatriated to the U.S. and revalue deferred tax asset and liability positions at the lower federal base tax rate of 21%. The transitional impact of the Tax Act resulted in a provisional net


VF Corporation 2017 Form 10-K 21


charge of approximately of $465.5 million, or $1.15 cents per share, during the fourth quarter of 2017.
The execution of our 2021 strategic choices, including the re-shaping of our portfolio, and significant changes to the U.S. corporate income tax laws, delivered the following results in 2017:
2017 revenues were up 7% to $11.8 billion compared to 2016.
Outdoor & Action Sports coalition revenues increased 8% over 2016 to $8.2 billion, including a 1% favorable impact from foreign currency.
Direct-to-consumer revenues increased 17% over 2016, including a 1% favorable impact from foreign currency, and accounted for 32% of VF’s total revenues in 2017. VF opened 111 retail stores in 2017. E-commerce revenues increased 34% in 2017.
International revenues increased 12%, including a 1% favorable impact from foreign currency, and represented 41% of VF’s total revenues in 2017.
 
Gross margin increased 120 basis points to 50.5% in 2017, reflecting benefits from pricing and a mix-shift toward higher margin businesses, partially offset by impacts from foreign currency.
Cash flow from operations was $1.5 billion in 2017.
Earnings per share decreased 30% to $1.79 in 2017 from $2.56 in 2016, driven by the negative impact from the recent U.S. tax legislation, incremental transaction and deal-related costs and unfavorable impacts from foreign currency that were partially offset by contributions related to the Williamson-Dickie acquisition.
VF increased the quarterly dividend rate by 10% in the fourth quarter, marking the 45th consecutive year of increase in the rate of dividends paid per share.
VF repurchased $1.2 billion of its Common Stock and paid $684.7 million in cash dividends, returning approximately $1.9 billion to stockholders.
ANALYSIS OF RESULTS OF OPERATIONS

Consolidated Statements of Income

The following table presents a summary of the changes in total revenues during the last two years: 
(In millions)
 
2017
Compared to
2016
 
 
2016
Compared to
2015
Total revenues — prior year
 
$
11,026.1

 
 
$
10,996.4

Organic growth
 
489.3

 
 
125.7

Acquisition
 
247.2

 
 

Impact of foreign currency
 
48.6

 
 
(96.0
)
Total revenues — current year
 
$
11,811.2

 
 
$
11,026.1


2017 compared to 2016

VF reported a 7% increase in revenues in 2017. The 2017 results were driven by an increase in the Outdoor & Action Sports coalition and continued strength in our direct-to-consumer and international businesses. The increase was also attributable to growth in the Imagewear coalition, which included a $247.2 million contribution from the Williamson-Dickie acquisition, which closed on October 2, 2017. These increases were offset by declines in the Jeanswear coalition. International sales grew in every region in 2017.
 
2016 compared to 2015

VF reported revenues in 2016 that were in line with 2015 revenues. The 2016 results were primarily attributable to a 2% increase in the Outdoor & Action Sports coalition and continued strength in the international and direct-to-consumer businesses, which offset foreign currency headwinds of 1% and softness in our Jeanswear and Imagewear coalitions. Excluding the negative impact from foreign currency, international sales grew in every region in 2016.
Additional details on revenues are provided in the section titled “Information by Business Segment”.
The following table presents the percentage relationship to total revenues for components of the Consolidated Statements of Income:
 
 
2017
 
 
2016
 
2015
Gross margin (total revenues less cost of goods sold)
 
50.5
%
 
 
49.3
%
 
49.0
%
Selling, general and administrative expenses
 
37.8

 
 
36.2

 
34.1

Impairment of goodwill and intangible assets
 

 
 
0.7

 

Operating income
 
12.7
%
 
 
12.4
%
 
15.0
%


22 VF Corporation 2017 Form 10-K


2017 compared to 2016
 
Gross margin improved 120 basis points to 50.5% in 2017 compared to 49.3% in 2016, reflecting a 180 basis point benefit from pricing, a mix-shift toward higher margin businesses and lower restructuring costs, which was partially offset by a 60 basis point impact from foreign currency.
Selling, general and administrative expenses as a percentage of total revenues increased 160 basis points in 2017 compared to 2016. This increase is primarily due to investments in our key growth priorities, which include direct-to-consumer, product innovation, demand creation and technology initiatives. The increases were offset by lower restructuring costs in 2017 and a pension settlement charge of $50.9 million in 2016, which did not recur in 2017.
In 2017, operating margin increased 30 basis points, to 12.7% from 12.4% in 2016. In addition to the items described above, the increase in operating margin reflects a 70 basis point increase from goodwill and intangible asset impairments in 2016 that did not recur in 2017.
Net interest expense increased $0.3 million to $85.9 million in 2017. The increase in net interest expense was due to higher interest rates on short-term borrowings and higher interest on long-term debt balances due to a full year of interest on the €850 million euro-denominated 0.625% fixed-rate notes issued in September 2016, which were partially offset by the payoff of the $250.0 million of 5.95% fixed-rate notes on November 1, 2017 and an increase in international short-term investment rates.
Outstanding interest-bearing debt averaged $3.2 billion for 2017 compared to $2.6 billion for 2016, with short-term borrowings representing 27% and 37% of average debt outstanding for the respective years. The weighted average interest rates on outstanding debt were 3.1% in 2017 and 3.5% in 2016, as the impact of the issuance of €850 million euro-denominated 0.625% fixed-rate notes in September of 2016 was offset by higher short-term debt rates.
Other income (expense) primarily consists of foreign currency gains and losses, the funding fee charged on the sale of our trade receivables and non-operating gains and losses. Other income (expense) netted to $(0.7) million and $2.0 million in 2017 and 2016, respectively.
The effective income tax rate was 49.1% in 2017 compared to 16.0% in 2016. The effective income tax rate is substantially higher in 2017 when compared to 2016 primarily due to discrete tax expense associated with the Tax Act. The Tax Act reduces the federal tax rate on U.S. earnings to 21% and moves from a global taxation regime to a modified territorial regime. As part of the legislation, U.S. companies are required to pay a tax on historical earnings generated offshore that have not been repatriated to the U.S. Additionally, revaluation of deferred tax asset and liability positions at the lower federal base rate of 21% is also required. The transitional impact of the Tax Act resulted in a provisional net charge of $465.5 million, or $1.15 per share, during the fourth quarter of 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 revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%. Other provisional charges of $42.6 million were primarily related to U.S. federal and state tax on
 
foreign income and dividends and establishing a deferred tax liability for foreign withholding taxes.
The 2017 effective income tax rate included a net discrete tax expense of $438.9 million, which included the provisional net charge of $465.5 million related to the Tax Act, $25.2 million of tax benefits related to stock compensation, $2.9 million of net tax benefit related to the realization of previously unrecognized tax benefits and interest, and $1.9 million of discrete tax expense related to the effects of tax rate changes, exclusive of the Tax Act. The $438.9 million net discrete tax expense in 2017 increased the effective income tax rate by 31.0% compared to a favorable 3.4% impact of discrete items in 2016. Without discrete items, the effective tax rate during 2017 decreased by approximately 1.3% primarily due to the negative tax impact related to the 2016 goodwill impairment. The international effective tax rate was 13.1% and 10.9% for 2017 and 2016, respectively.
As a result of the above, net income in 2017 was $0.7 billion ($1.79 per diluted share), compared to $1.1 billion ($2.56 per diluted share) in 2016.
2016 compared to 2015
In 2016, gross margin improved 30 basis points, reflecting a 130 basis point benefit from pricing, lower product costs and a mix-shift toward higher margin businesses, which was partially offset by a 20 basis point impact from restructuring activities and a negative 80 basis point impact from foreign currency.
Selling, general and administrative expenses as a percentage of total revenues increased 210 basis points compared to 2015. This increase was primarily due to restructuring initiatives of $31.8 million, a pension settlement charge of $50.9 million, investments in our key growth priorities, which include direct-to-consumer, product innovation, demand creation and technology initiatives and the benefit of a $16.6 million gain on the sale of a VF Outlet® location in 2015.
As a result of management’s decision to merge the lucy® brand into The North Face® brand, VF recorded a $79.6 million noncash impairment charge to write-off the goodwill and intangible assets of the lucy® reporting unit during the fourth quarter of 2016. For additional information, refer to Notes G, H and U to the consolidated financial statements and the “Critical Accounting Policies and Estimates” section below.
In 2016, operating margin decreased 260 basis points, to 12.4% from 15.0% in 2015. The decrease in operating margin reflects a 170 basis point decrease from goodwill and intangible asset impairment, restructuring, and pension settlement charges that did not occur in 2015, a negative 60 basis point impact from changes in foreign currency and investments in our key growth priorities, which include direct-to-consumer, product innovation, demand creation and technology initiatives.
In 2016, net interest expense increased $3.9 million to $85.5 million primarily due to higher interest rates on short-term borrowings and an increase in long-term debt due to the issuance of €850 million euro-denominated 0.625% fixed-rate notes in September 2016.
Outstanding interest-bearing debt averaged $2.6 billion for 2016 and $2.4 billion for 2015, with short-term borrowings representing 37% and 42% of average debt outstanding for the respective years. The weighted average interest rate on outstanding debt was 3.5% in both 2016 and 2015, as the impact of the issuance of €850 million


VF Corporation 2017 Form 10-K 23


euro-denominated 0.625% fixed-rate notes in September of 2016 was offset by higher short-term debt rates.
Other income (expense) netted to $2.0 million and $1.0 million in 2016 and 2015, respectively.
The effective income tax rate was 16.0% in 2016 compared to 22.2% in 2015. The 2016 tax rate included a net discrete tax benefit of $43.1 million, which included $27.9 million of tax benefits related to the early adoption of the accounting standards update on stock compensation, $13.2 million of net tax benefits related to the realization of previously unrecognized tax benefits and interest, and $4.1 million of discrete tax expense related to the effects of tax rate changes. The $43.1 million net discrete tax benefit in 2016 reduced the effective income tax rate by 3.4% compared to a favorable 2.8% impact of discrete items in 2015. Without discrete items, the effective tax rate during 2016 decreased by approximately 5.6% primarily due to i) a higher percentage of
 
foreign earnings in 2016, ii) the comparative impact of tax benefits recorded in 2016 related to the utilization of foreign tax attributes, iii) the full year benefits of the federal research tax credit and other incentives signed into law in December 2015 and iv) the negative tax impact related to the 2016 goodwill impairment. The international effective tax rate was 10.9% and 12.5% for 2016 and 2015, respectively.
As a result of the above, net income in 2016 was $1.1 billion ($2.56 per diluted share) compared to $1.2 billion ($2.82 per diluted share) in 2015. The decrease in diluted earnings per share in 2016 compared to 2015 was the result of goodwill and intangible asset impairment charges ($0.15 per share), restructuring charges ($0.10 per share) and a pension settlement charge ($0.07 per share).
Refer to additional discussion in the “Information by Business Segment” section below.
Information by Business Segment


Management at each of the coalitions has direct control over and responsibility for its revenues and operating income, hereinafter termed “coalition revenues” and “coalition profit”, respectively. VF management evaluates operating performance and makes investment and other decisions based on coalition revenues and
 
coalition profit. Common costs such as information systems processing, retirement benefits and insurance are allocated to the coalitions based on appropriate metrics such as sales, usage or employment.
The following tables present a summary of the changes in coalition revenues and coalition profit during the last two years:
(In millions)
Outdoor & Action Sports
 
Jeanswear
 
Imagewear
 
Other
 
Total
Coalition revenues — 2015
$
7,492.8

 
$
2,792.2

 
$
577.5

 
$
133.9

 
$
10,996.4

Operations
162.7

 
3.4

 
(24.5
)
 
(15.9
)
 
125.7

Impact of foreign currency
(36.9
)
 
(57.9
)
 
(1.2
)
 

 
(96.0
)
Coalition revenues — 2016
7,618.6

 
2,737.7

 
551.8

 
118.0

 
11,026.1

Organic growth
548.2

 
(84.7
)
 
30.7

 
(4.9
)
 
489.3

Acquisition

 

 
247.2

 

 
247.2

Impact of foreign currency
45.7

 
2.4

 
0.5

 

 
48.6

Coalition revenues — 2017
$
8,212.5

 
$
2,655.4

 
$
830.2

 
$
113.1

 
$
11,811.2

 
 
 
 
 
 
 
 
 
 
(In millions)
Outdoor & Action Sports
 
Jeanswear
 
Imagewear
 
Other
 
Total
Coalition profit — 2015
$
1,288.8

 
$
535.4

 
$
105.9

 
$
15.0

 
$
1,945.1

Operations
36.8

 
(43.0
)
 
(7.3
)
 
(19.8
)
 
(33.3
)
Impact of foreign currency
(82.4
)
 
(0.5
)
 
5.4

 

 
(77.5
)
Coalition profit — 2016
1,243.2

 
491.9

 
104.0

 
(4.8
)
 
1,834.3

Organic growth
192.0

 
(73.9
)
 
(6.7
)
 
1.7

 
113.1

Acquisition

 

 
14.2

 

 
14.2

Impact of foreign currency
(56.9
)
 
3.9

 
1.8

 

 
(51.2
)
Coalition profit — 2017
$
1,378.3

 
$
421.9

 
$
113.3

 
$
(3.1
)
 
$
1,910.4



24 VF Corporation 2017 Form 10-K


The following section discusses the changes in revenues and profitability by coalition:
Outdoor & Action Sports
 
 
 
 
 
 
 
 
 
 
Percent Change
(Dollars in millions)
 
2017
 
 
2016
 
2015
 
 
2017
 
 
2016
Coalition revenues
 
$
8,212.5

 
 
$
7,618.6

 
$
7,492.8

 
 
7.8
%
 
 
1.7
 %
Coalition profit
 
1,378.3

 
 
1,243.2

 
1,288.8

 
 
10.9
%
 
 
(3.5
)%
Operating margin
 
16.8
%
 
 
16.3
%
 
17.2
%
 
 

 
 


The Outdoor & Action Sports coalition includes the following brands: Vans®, The North Face®, Timberland®, Kipling®, Napapijri®, JanSport®, Reef®, Smartwool®, Eastpak®, lucy® and Eagle Creek®.

2017 compared to 2016
Global revenues for Outdoor & Action Sports increased 8% in 2017, driven by growth in the direct-to-consumer and wholesale channels, including a 1% favorable impact from foreign currency. The direct-to-consumer growth was driven by strong e-commerce and comparable store growth. Revenues in the Americas region increased 5% in 2017, reflecting 13% growth in the non-U.S. Americas region, which included a 2% favorable impact from foreign currency, and 4% growth in the U.S. Revenues in Europe increased 14%, including a 1% favorable impact from foreign currency. Revenues in the Asia-Pacific region increased 7% in 2017, including a 1% favorable impact from foreign currency.
Vans® brand global revenues increased 19% in 2017, reflecting strong operational growth in both the direct-to-consumer and wholesale channels. The growth in the direct-to-consumer channel was driven by strong comparable store and e-commerce growth.
Global revenues for The North Face® brand increased 4% in 2017, as growth in the direct-to-consumer channel, driven by comparable store and e-commerce growth, and a 1% favorable impact from foreign currency, were partially offset by relatively flat wholesale revenues. Global wholesale revenues for The North Face® brand were tempered by U.S. retailer bankruptcies, lower year-over-year off-price shipments and efforts to manage inventory levels in certain markets.
Global revenues for the Timberland® brand increased 2% in 2017, as growth in the direct-to-consumer channel, driven by comparable store and e-commerce growth, and a 1% favorable impact from foreign currency, were partially offset by relatively flat wholesale revenues.
Global direct-to-consumer revenues for Outdoor & Action Sports grew 17% in 2017, driven by an expanding e-commerce business, comparable store growth and a 1% favorable impact from foreign currency. Wholesale revenues increased 2% in 2017, driven by growth in the Vans® brand and Europe, partially offset by the above-mentioned U.S. retailer bankruptcies, lower year-over-year off-price shipments and efforts to manage inventory levels in certain markets.
Operating margin increased 50 basis points in 2017 despite a negative impact from foreign currency. Excluding the impact of foreign currency, gross margin expansion, driven by a mix-shift to higher margin businesses, pricing and lower product costs, was partially offset by increased investments in direct-to-consumer, product and innovation, demand creation and technology.
 
2016 compared to 2015
Global revenues for Outdoor & Action Sports increased 2% in 2016, reflecting strong growth in the direct-to-consumer channel, partially offset by weakness in the U.S. wholesale channel. Revenues in the Americas region were consistent with 2015, and revenues in the Asia-Pacific region increased 4% in 2016 despite a 2% negative impact from foreign currency. European revenues increased 5% in 2016, representing operational growth of 4% and a favorable impact from foreign currency of 1%.
Vans® brand global revenues were up 6% in 2016, reflecting strong operational growth in the direct-to-consumer channel, partially offset by declines in the wholesale channel and a negative 1% impact from foreign currency.
Global revenues for The North Face® brand decreased 2% in 2016, as strong operational growth in the direct-to-consumer channel was more than offset by declines in the wholesale channel in the U.S. and an unfavorable foreign currency impact of 1%. The wholesale revenue declines for The North Face® brand were attributable to retailer bankruptcies and management’s proactive approach to managing inventory levels in the market by reducing off-price shipments in the U.S. during the fourth quarter. The combination of both factors negatively impacted revenue growth for the year by approximately 4%.
Global revenues for the Timberland® brand were up 1% in 2016 driven by growth in the direct-to-consumer channel and international business, partially offset by weaker wholesale revenues in the U.S.
Global direct-to-consumer revenues for Outdoor & Action Sports grew 12% in 2016, driven by new store openings and an expanding e-commerce business, partially offset by an unfavorable 1% impact from foreign currency. Wholesale revenues were down 4% in 2016, primarily due to retailer bankruptcies and reduced off-price shipments in the U.S., and a negative impact from foreign currency of 1%.
Operating margin decreased 90 basis points in 2016 as the negative impact from foreign currency, increased investments in direct-to-consumer, product development and innovation and restructuring charges more than offset the benefits of favorable pricing and lower product costs.



VF Corporation 2017 Form 10-K 25


Jeanswear
 
 
 
 
 
 
 
 
 
 
Percent Change
(Dollars in millions)
 
2017
 
 
2016
 
2015
 
 
2017
 
 
2016
Coalition revenues
 
$
2,655.4

 
 
$
2,737.7

 
$
2,792.2

 
 
(3.0
)%
 
 
(2.0
)%
Coalition profit
 
421.9

 
 
491.9

 
535.4

 
 
(14.2
)%
 
 
(8.1
)%
Operating margin
 
15.9
%
 
 
18.0
%
 
19.2
%
 
 

 
 


The Jeanswear coalition consists of the global jeanswear businesses, led by the Wrangler® and Lee® brands.

2017 compared to 2016
Global Jeanswear revenues decreased 3% in 2017 compared to 2016, as growth in the direct-to-consumer channel was more than offset by U.S. wholesale declines in the mass, mid-tier and department store channels. Specifically, our U.S. wholesale business has been impacted by a key customer's inventory destocking decision and continued channel consolidation, which was partially mitigated by strong growth with our digital wholesale partners. Revenues in the Americas region decreased 4% in 2017, driven by softness in the wholesale channel. Revenues in the Asia-Pacific region decreased 3% in 2017 due to declines in the wholesale channel in Asia and India, partially offset by growth in the direct-to-consumer channel in Asia. European revenues increased 4% in 2017 due to growth in our wholesale and direct-to-consumer businesses and a 2% favorable impact from foreign currency.
Global revenues for the Wrangler® brand decreased 1% in 2017, driven by declines in the U.S. mass and western specialty businesses. Global revenues for the Lee® brand were down 6% in 2017 compared to 2016, due to declines in the U.S. mid-tier and department store channels, which were partially offset by growth in the direct-to-consumer channel.
Operating margin decreased 210 basis points in 2017 over 2016, primarily due to lower revenues, gross margin contraction from higher product costs and additional investments in our strategic growth priorities.
 
2016 compared to 2015
Global Jeanswear revenues decreased 2% in 2016 compared to 2015, due to a 2% negative impact from foreign currency. Revenues in the Americas region decreased 2% in 2016, due to a 2% negative impact from foreign currency. Revenues in the Asia-Pacific region decreased 4% in 2016, driven by a 5% negative impact from foreign currency. European revenues increased 3% in 2016, including a 1% negative impact from foreign currency.
Global revenues for the Wrangler® brand decreased 1% in 2016, as 1% operational growth, which was tempered by aggressive inventory management by key retailers, was offset by a negative 2% impact from foreign currency. Global revenues for the Lee® brand were down 3% in 2016 compared to 2015, primarily driven by a negative 2% impact from foreign currency and softness in the U.S. mid-tier channel.
Operating margin decreased 120 basis points in 2016 over 2015, primarily due to lower gross margin largely driven by restructuring charges and higher product costs as a result of lower production volumes.


26 VF Corporation 2017 Form 10-K


Imagewear
 
 
 
 
 
 
 
 
 
 
Percent Change
(Dollars in millions)
 
2017
 
 
2016
 
2015
 
 
2017
 
 
2016
Coalition revenues
 
$
830.2

 
 
$
551.8

 
$
577.5

 
 
50.5
%
 
 
(4.4
)%
Coalition profit
 
113.3

 
 
104.0

 
105.9

 
 
8.9
%
 
 
(1.8
)%
Operating margin
 
13.6
%
 
 
18.9
%
 
18.3
%
 
 

 
 


The Imagewear coalition consists of occupational apparel and uniform product categories including the Red Kap® and Bulwark® brand industrial businesses, as well as the workwear apparel brands from the Williamson-Dickie acquisition including Dickies®, Workrite®, Kodiak®, Terra® and Walls®. The Imagewear coalition also includes the results of certain transition services related to the sale of the Licensed Sports Group (the "LSG transition services") that commenced in the second quarter of 2017.

2017 compared to 2016
Global Imagewear revenues increased 50% in 2017 compared to 2016. Included in these 2017 results are revenues from the LSG transition services of $19.9 million and revenues from the Williamson-Dickie acquisition of $247.2 million. Excluding revenues from the LSG transition services and Williamson-Dickie, Imagewear revenues increased 2% in 2017 compared to 2016 primarily due to growth in our Bulwark® brand, which was fueled by increased oil and gas exploration activities, mostly offset by industry consolidation.
Operating margin decreased 530 basis points in 2017 compared to 2016. Excluding the impact of the LSG transition services and the Williamson-Dickie acquisition, operating margin in 2017 decreased 250 basis points. The decrease was driven by lower gross margin attributable to business mix and higher inventory costs and higher selling, general and administrative expenses.
 
2016 compared to 2015
Imagewear revenues decreased 4% in 2016 compared to 2015 primarily due to continued weakness in the industrial manufacturing and energy sectors, which negatively impacted sales of the Bulwark® and Red Kap® brands.
The 60 basis point increase in operating margin in 2016 compared to 2015 was driven by improved gross margin, primarily due to favorable pricing, product mix and foreign currency impacts, partially offset by restructuring charges.

Other
 
 
 
 
 
 
 
 
 
 
Percent Change
(Dollars in millions)
 
2017
 
 
2016
 
2015
 
 
2017
 
 
2016
Revenues
 
$
113.1

 
 
$
118.0

 
$
133.9

 
 
(4.2
)%
 
 
(11.8
)%
Profit (loss)
 
(3.1
)
 
 
(4.8
)
 
15.0

 
 
35.9
 %
 
 
(132.2
)%
Operating margin
 
(2.7
)%
 
 
(4.1
)%
 
11.2
%
 
 
 
 
 
 

VF Outlet® stores in the U.S. sell both VF and non-VF products. Revenues and profits of VF products sold in these stores are reported as part of the operating results of the applicable coalition, while revenues and profits of non-VF products are reported in this “other” category. The improvement in profit and operating margin
 
in 2017 was due to no restructuring charges during the year. The decrease in profit and operating margin in 2016 was primarily due to a $16.6 million gain recognized on the sale of a VF Outlet® location during 2015 and restructuring charges of $1.3 million in 2016.
Reconciliation of Coalition Profit to Consolidated Income Before Income Taxes


There are three types of costs necessary to reconcile total coalition profit to consolidated income before income taxes. These costs are (i) impairment of goodwill and intangible assets, which is excluded from coalition profit because these costs are not part of the ongoing operations of the respective businesses, (ii) interest expense, net, which is excluded from coalition profit because substantially all financing costs are managed at the corporate office and are not
 
under the control of coalition management, and (iii) corporate and other expenses, discussed below, which are excluded from coalition profit to the extent they are not allocated to the coalitions. Impairment of goodwill and intangible assets and net interest expense are discussed in the “Consolidated Statements of Income” section, and corporate and other expenses are discussed below.


VF Corporation 2017 Form 10-K 27


Following is a summary of VF’s corporate and other expenses:
(In millions)
 
2017
 
 
2016
 
2015
Information systems and shared services
 
$
365.0

 
 
$
333.0

 
$
307.6

Less costs allocated to coalitions
 
(228.4
)
 
 
(213.9
)
 
(190.8
)
Information systems and shared services retained at
corporate
 
136.6

 
 
119.1

 
116.8

Corporate headquarters’ costs
 
218.4

 
 
169.1

 
138.1

Other
 
53.0

 
 
96.2

 
44.3

Corporate and other expenses
 
$
408.0

 
 
$
384.4

 
$
299.2


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 coalitions based on utilization of those services. Costs to develop new computer applications are generally not allocated to the coalitions. The increases in information systems and shared services costs in 2017 and 2016 primarily resulted from the 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 coalitions. The increase in corporate headquarters’ costs in 2017 compared to 2016 was primarily driven by higher strategic project costs, an increase in cash and stock-based
 
compensation expense and charitable contributions. The increase in corporate headquarters’ costs in 2016 compared to 2015 was primarily driven by restructuring initiatives in the fourth quarter of 2016 and higher cash and stock-based compensation expense.
Other
This category includes (i) costs of corporate programs or corporate-managed decisions that are not allocated to the coalitions, (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-managed U.S. defined benefit pension plans. The decrease in other expense in 2017 compared to 2016 and the increase in other expense in 2016 compared to 2015 was largely driven by a $50.9 million settlement charge in 2016 related to our U.S. pension obligation, resulting from offering former employees a one-time option to receive a lump sum distribution of their deferred vested benefits.
International Operations


International revenues increased 12% in 2017 compared to an increase of 3% in 2016. Foreign currency favorably impacted international revenue growth by 1% in 2017 and negatively impacted growth by 3% in 2016. Revenues in Europe increased 15% in 2017, reflecting operational growth and a 2% benefit from foreign currency. In the Asia-Pacific region, revenues increased 6%
 
primarily driven by strong growth across the region, particularly in China. Revenues in the Americas (non-U.S.) region grew 13%, reflecting operational growth and a 1% benefit from foreign currency. International revenues represented 41% and 40% of total VF revenues in 2017 and 2016, respectively.
Direct-to-Consumer Operations


Direct-to-consumer revenues grew 17% in 2017 compared to growth of 10% in 2016, reflecting growth in all regions and in nearly every brand with a retail format. Foreign currency favorably impacted direct-to-consumer revenue growth by 1% in 2017 and negatively impacted direct-to-consumer growth by 1% in 2016. The increase in direct-to-consumer revenues in both periods was due to comparable store growth for locations open at least twelve
 
months at each reporting date, and an expanding e-commerce business which grew 34% and 23% in 2017 and 2016, respectively. VF opened 111 stores in 2017, bringing the total number of VF-owned retail stores to 1,518 at December 2017. Direct-to-consumer revenues were 32% of total VF revenues in 2017 compared to 29% in 2016.


28 VF Corporation 2017 Form 10-K


ANALYSIS OF FINANCIAL CONDITION


Balance Sheets


The Williamson-Dickie acquisition significantly impacted the December 2017 Consolidated Balance Sheet. Accordingly, the table below presents the December 2017 balance sheet accounts excluding the Williamson-Dickie balances at that date so that the remaining VF balances are comparable with the December 2016 balances.

 
 
December 2017
 
 
December 2016
(In thousands)
 
As Reported
 
Williamson-Dickie
 
VF excluding Williamson-Dickie
 
 
As Reported
Accounts receivable
 
$
1,422,101

 
$
132,402

 
$
1,289,699

 
 
$
1,148,797

Inventories
 
1,705,171

 
236,749

 
1,468,422

 
 
1,424,571

Other current assets
 
296,712

 
10,601

 
286,111

 
 
293,888

Property, plant and equipment
 
1,002,700

 
100,520

 
902,180

 
 
895,960

Intangible assets and goodwill
 
3,782,425

 
488,570

 
3,293,855

 
 
3,088,595

Other assets
 
781,253

 
12,291

 
768,962

 
 
922,312

Short-term borrowings
 
729,384

 

 
729,384

 
 
26,029

Current portion of long-term debt
 
6,165

 
2,285

 
3,880

 
 
253,689

Accounts payable
 
755,569

 
84,425

 
671,144

 
 
620,194

Accrued liabilities
 
1,143,330

 
48,987

 
1,094,343

 
 
812,032

Long-term debt
 
2,187,789

 
25,490

 
2,162,299

 
 
2,039,180

Other liabilities
 
1,305,613

 
21,811

 
1,283,802

 
 
885,825


Unless noted otherwise, the discussion that follows relates to VF's businesses excluding the Williamson-Dickie balances at December 2017. The discussion refers to significant changes in balances at December 2017 compared to December 2016:
Increase in accounts receivable — primarily due to higher wholesale shipments in the fourth quarter of 2017 and the impact of foreign currency fluctuations.
Increase in inventories — driven by the impact of foreign currency fluctuations.
Increase in intangible assets and goodwill — driven by the impact of foreign currency fluctuations.
Decrease in other assets — primarily due to the cumulative-effect adjustment to retained earnings of a deferred charge upon the early adoption of the accounting standards update regarding intra-entity asset transfers; partially offset by an increase in net pension assets for certain defined benefit plans and the impact of foreign currency fluctuations.
Increase in short-term borrowings — due to the increase in commercial paper borrowings primarily related to the funding of the Williamson-Dickie acquisition.
 
Decrease in current portion of long-term debt — due to the repayment of $250.0 million of notes that matured during the year.
Increase in accounts payable — primarily due to the timing of inventory purchases and payments to vendors and the impact of foreign currency fluctuations.
Increase in accrued liabilities — primarily due to changes in the fair value of derivative liabilities related to foreign exchange contracts, an increase in accrued income taxes related to the current portion of the transition tax related to the Tax Act and the impact of foreign currency fluctuations.
Increase in long-term debt — due to foreign currency fluctuations of euro-denominated bonds.
Increase in other liabilities — primarily due to an increase in accrued income taxes from the noncurrent portion of the transition tax related to the Tax Act, partially offset by a decrease in deferred income tax liabilities resulting from revaluation at the lower U.S. corporate rate required by the Tax Act.


VF Corporation 2017 Form 10-K 29


Liquidity and Cash Flows


The financial condition of VF is reflected in the following:
(Dollars in millions)
 
2017
 
 
2016
Working capital
 
$1,355.6
 
 
$2,383.2
Current ratio
 
1.5 to 1
 
 
2.4 to 1
Debt to total capital
 
44.0%
 
 
31.9%

For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and total capital is defined as debt plus stockholders’ equity. The increase in the debt to total capital ratio at December 2017 compared to 2016 was primarily due to the increase in short-term borrowings, partially offset by the decrease in total long-term debt, as discussed in “Balance Sheets” above. In addition, VF repurchased $1.2 billion of stock and paid $684.7 million in dividends in 2017, which reduced stockholders’ equity by $1.9 billion. Stockholder's equity was also reduced by $237.8 million related to the cumulative-effect adjustment upon the early adoption of the accounting standards update regarding intra-entity
 
asset transfers and the impact of the $465.5 million provisional net charge related to the Tax Act.
VF’s primary source of liquidity is the strong annual cash flow provided by operating activities. Cash from operations is typically lower in the first half of the year as inventory builds to support peak sales periods in the second half of the year. Cash provided by operating activities in the second half of the year is substantially higher as inventories are sold and accounts receivable are collected. Additionally, direct-to-consumer sales are highest in the fourth quarter of the year.
In summary, our cash flows were as follows:
(In millions)
 
2017
 
 
2016
 
2015
Cash provided by operating activities
 
$
1,474.7

 
 
$
1,480.6

 
$
1,203.6

Cash used by investing activities
 
(776.3
)
 
 
(112.4
)
 
(322.8
)
Cash used by financing activities
 
(1,363.0
)
 
 
(1,076.9
)
 
(840.2
)
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. Accordingly, the information in the table above and cash flow discussion below include the results of continuing and discontinued operations.

Cash Provided by Operating Activities

Cash flow provided by operating activities is dependent on the level of net income, adjustments to net income and changes in working capital. Cash provided by operating activities remained relatively flat as lower net income was offset by working capital changes primarily related to an increase in accrued income tax payable resulting from the Tax Act.
Cash provided by operating activities increased $277.0 million in 2016 primarily due to i) a $250.0 million discretionary contribution to the U.S. qualified pension plan in 2015 that did not recur in 2016, and ii) a decrease in net cash usage from working capital changes due in part to higher collections of accounts receivable and lower increases of inventory, partially offset by higher levels of cash tax payments compared to 2015.
Cash Used by Investing Activities
VF’s investing activities in 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, which is $99.0 million higher than the proceeds received from the sale of the Contemporary Brands coalition in 2016. Capital expenditures of $169.6 million and software purchases of $65.2 million offset the proceeds received. Capital expenditures decreased $6.3 million compared to 2016. Software purchases increased $21.0 million in 2017 primarily due to system implementations and investments in our digital platform.
VF’s investing activities in 2016 related primarily to capital expenditures of $175.8 million and software purchases of $44.2 million, partially offset by $116.0 million of proceeds from the sale of its Contemporary Brands coalition. Capital expenditures
 
decreased $78.7 million compared to 2015 primarily due to the purchase in 2015 of a headquarters building in the Outdoor & Action Sports coalition. Software purchases decreased $19.1 million in 2016 primarily due to the completion of a major system implementation that incurred significant costs through the middle of 2015.
Cash Used by Financing Activities
The increase in cash used by financing activities in 2017 compared to 2016 was driven by i) no long-term debt borrowings in 2017 compared to $951.8 million in proceeds during 2016, ii) the $250.0 million repayment of long-term debt discussed in "Balance Sheets" above, iii) a $199.9 million increase in purchases of treasury stock, and iv) a $48.7 million increase in cash dividends paid. These increases were partially offset by the $1.1 billion increase in net cash generated by short-term borrowings as discussed in “Balance Sheets” above.
The increase in cash used by financing activities in 2016 compared to 2015 was driven by i) the $853.3 million net decrease in short-term borrowings, ii) a $267.8 million increase in purchases of treasury stock and iii) a $70.7 million increase in cash dividends paid. These increases were partially offset by $951.8 million of proceeds from the issuance of long-term debt.
During 2017, 2016 and 2015, VF purchased 22.2 million, 15.9 million and 10.0 million shares, respectively, of its Common Stock in open market transactions. The respective cost was $1.2 billion, $1.0 billion and $732.6 million with an average price per share of $54.04 in 2017, $62.80 in 2016 and $73.00 in 2015.
In March 2017, VF's Board of Directors approved a $5.0 billion share repurchase authorization, replacing the 2013 authorization. As of


30 VF Corporation 2017 Form 10-K


the end of 2017, VF has purchased 14.0 million shares of its Common Stock in open market transactions at a total cost of $762.1 million (average price per share of $54.46) under the new share repurchase authorization, and had $4.2 billion remaining for future repurchases. 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 relied 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”). The Global Credit Facility expires in April 2020 and VF may request two extensions of one year each, subject to stated terms and conditions. The Global Credit Facility may be used to borrow funds in both U.S. dollar and certain non-U.S. dollar currencies, and has a $50.0 million letter of credit sublimit. In addition, the Global Credit Facility supports VF’s U.S. commercial paper program for short-term, seasonal working capital requirements and general corporate purposes, including share repurchases. Borrowings under the Global Credit Facility are priced at a credit spread of 80.5 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 7.0 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.
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 of December 2017 were $705.0 million and $15.3 million, respectively, leaving $1.5 billion available for borrowing against the Global Credit Facility at December 2017.
VF has $267.0 million of international lines of credit with various banks, which are uncommitted and may be terminated at any time
 
by either VF or the banks. Total outstanding balances under these arrangements were $24.4 million and $26.0 million at December 2017 and 2016, respectively. Borrowings under these arrangements had a weighted average interest rate of 9.9% and 7.2% at December 2017 and 2016, respectively, excluding accepted letters of credit which are non-interest bearing to VF.
VF repaid $250.0 million of 5.95% fixed-rate notes on November 1, 2017, using a combination of operating cash flows and commercial paper borrowings.
VF’s favorable credit agency ratings allow for access to additional liquidity at competitive rates. At the end of 2017, VF’s long-term debt ratings were ‘A’ by Standard & Poor’s Ratings Services and ‘A3’ by Moody’s Investors Service, and commercial paper ratings by those rating agencies were ‘A-1’ and ‘Prime-2’, respectively. None of VF’s long-term debt agreements contain acceleration of maturity clauses based solely on changes in credit ratings. However, if there were a change in control of VF and, as a result of the change in control, the 2021, 2023 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 of notes repurchased, plus any accrued and unpaid interest.
Cash dividends totaled $1.72 per share in 2017, compared to $1.53 in 2016 and $1.33 in 2015. The dividend payout ratio was 96.2% of diluted earnings per share in 2017, 59.9% in 2016 and 47.2% in 2015. Based on the quarterly dividend in place, the current indicated annual dividend rate for 2018 is $1.84 per share.

Following is a summary of VF’s contractual obligations and commercial commitments at the end of 2017 that will require the use of funds:
 
 
 
 
Payment Due or Forecasted by Calendar Year
(In millions)
Total
 
 
2018
 
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Recorded liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (1)
$
2,186

 
 
$
4

 
 
$
4

 
$
4

 
$
502

 
$

 
$
1,672

Other (2)
452

 
 
123

 
 
82

 
59

 
45

 
41

 
102

Unrecorded commitments:

 
 

 
 

 

 

 

 

Interest payment obligations (3)
840

 
 
65

 
 
65

 
65

 
64

 
47

 
534

Operating leases (4)
1,156

 
 
346

 
 
272

 
207

 
138

 
86

 
107

Minimum royalty payments (5)
31

 
 
16

 
 
7

 
5

 
3

 

 

Inventory obligations (6)
1,820

 
 
1,820

 
 

 

 

 

 

Other obligations (7)
442

 
 
365

 
 
48

 
12

 
8

 
3

 
6

 
$
6,927

 
 
$
2,739

 
 
$
478

 
$
352

 
$
760

 
$
177

 
$
2,421

 
(1) 
Long-term debt consists of required principal payments on long-term debt and capital 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 cash outflows. 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 N to the consolidated financial statements. We currently estimate that we will make contributions of approximately $35.1 million to our pension plans during calendar year 2018. Future contributions may differ from our planned contributions due to many factors, including changes


VF Corporation 2017 Form 10-K 31


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 capital 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 minimum lease payments during the noncancelable lease term. Most real estate leases also require payment of related operating expenses such as taxes, insurance, utilities and maintenance, which 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 December 2017 related to inventory purchases.
(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, (ii) capital expenditures for approved projects, and (iii) amounts related to the definitive merger agreement to acquire 100% of the stock of Icebreaker Holdings, Ltd.

VF had other financial commitments at the end of 2017 that are not included in the above table but may require the use of funds under certain circumstances:
$123.9 million of surety bonds, custom bonds, standby letters of credit and 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.
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 $566.1 million of cash and equivalents at the end of 2017. 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 2017, VF’s defined benefit pension plans were underfunded by a net total of $134.2 million. The underfunded status includes a $162.0 million liability related to our unfunded U.S. nonqualified defined benefit plan, $48.5 million of net liabilities related to our non-U.S. defined benefit plans, and a $76.3 million asset related to our U.S. qualified defined benefit
 
plan. VF has made significant cash contributions in recent years to improve the funded status of its plans, including a discretionary contribution to the U.S. qualified plan of $250.0 million in 2015. 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 2017 to $113.0 million in 2016, including the $50.9 million settlement charge discussed below. These fluctuations are primarily due to 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.
During 2016, VF took an additional step in managing pension risk by offering former employees in the U.S. qualified plan a one-time option to receive a distribution of their deferred vested benefits, pursuant to which the plan paid $197.1 million in lump-sum distributions to settle $224.7 million of projected benefit obligations.  The Company recorded $50.9 million in settlement charges during 2016 to recognize the related deferred actuarial losses in accumulated other comprehensive income (loss). 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 as a result of this offer. However, assuming other key assumptions remain


32 VF Corporation 2017 Form 10-K


unchanged, pension expense will decrease in future years due to lower amortization of net deferred actuarial losses. Refer to Note N 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. In 2005, VF’s U.S. defined benefit plans were closed to new entrants, which did not affect the benefits of existing plan participants at that date or their accrual of future benefits. In more recent years, the investment strategy of the U.S. qualified plan has been revised to define dynamic asset allocation targets that are dependent upon changes in the plan’s funded status, capital market expectations, and risk tolerance. Additionally, VF completed the one-time lump-sum offering noted above during 2016 which reduced the number of plan participants in the U.S. qualified plan by 23%. 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 $870 million during 2017). 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 2017, the effect of a hypothetical 1% increase in interest rates would be a decrease in reported net income of approximately $3.6 million.
Foreign currency exchange rate risks
VF is a global enterprise subject to the risk of foreign currency fluctuations. Approximately 41% of VF’s revenues in 2017 were generated in international markets. Most of VF’s foreign businesses operate in functional currencies other than the U.S. dollar. In periods where the U.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 the U.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. The U.S. dollar value of net investments in foreign subsidiaries fluctuates with changes in the underlying functional currencies. On September 20, 2016, VF issued €850 million of euro-denominated fixed-rate notes which it has designated as a net investment hedge of VF’s investment in certain foreign operations. Because this debt qualified as a nonderivative hedging instrument, foreign currency transaction gains or losses of the debt are deferred in the foreign currency translation and other component of accumulated OCI as an offset to the foreign currency translation adjustments on the hedged investments. 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 2017, if there were a hypothetical 10% change in foreign currency exchange rates compared to rates at the end of 2017, it would result in a change in fair value of those contracts of approximately $230 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, including VF Common Stock. VF invests in a portfolio of securities that substantially mirrors the participants’ investment selections. The increases and decreases in deferred compensation liabilities (except for the participants’ investment selections in VF Common Stock) 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. The VF Common Stock is treated as treasury shares for financial reporting purposes, so any gains or losses on those shares result in exposure to operating results and financial position as a result of the corresponding change in participant liabilities.


VF Corporation 2017 Form 10-K 33


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 the U.S. VF applies these accounting policies in a consistent manner. Significant accounting policies are summarized in Note A 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 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 significant.
Long-Lived Assets, Including Intangible Assets and Goodwill


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. Definite-lived license intangible assets relate to VF's licensing contracts with customers. 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. For license-related intangible assets, management considers historical trends and anticipated license renewal periods.
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 undiscounted cash flows expected to be generated by the asset. If the forecasted 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.


34 VF Corporation 2017 Form 10-K


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. Under this method, VF calculates the present value of the after-tax cash flows expected to be generated by the customer relationship asset after deducting contributory asset charges.
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 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 weighted average cost of capital (“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 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 coalition 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.
2017 impairment testing
During the third quarter of 2017, management determined that there had been a triggering event related to the Nautica® brand reporting unit that required an interim impairment analysis of the goodwill and trademark intangible assets. VF early adopted the accounting standard update that permits a single step quantitative goodwill impairment test. Accordingly, the estimated fair value of the reporting unit was compared to the carrying value, and a $104.7 million goodwill impairment was recorded in the third quarter of 2017. The Nautica® brand reporting unit has since been reported in discontinued operations.
Management performed its annual goodwill and indefinite-lived intangible asset impairment testing as of the beginning of the fourth quarter of 2017. Management performed a qualitative analysis for all reporting units and trademark intangible assets, as discussed below in the “Qualitative impairment analysis” section.


VF Corporation 2017 Form 10-K 35


Qualitative impairment analysis
For all reporting units, VF elected to perform a qualitative assessment to determine whether it is more likely than not that the goodwill and 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 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 assessment, 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 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 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 2018 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 intangible assets could have a material effect on VF’s consolidated financial position and results of operations.
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 P 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.