NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
|
Description of Business
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Ralph Lauren Corporation ("RLC") is a global leader in the design, marketing, and distribution of premium lifestyle products, including apparel, accessories, home furnishings, and other licensed product categories. RLC's long-standing reputation and distinctive image have been developed across an expanding number of products, brands, sales channels, and international markets. RLC's brand names include Ralph Lauren, Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Ralph Lauren Children, Chaps, and Club Monaco, among others. RLC and its subsidiaries are collectively referred to herein as the "Company," "we," "us," "our," and "ourselves," unless the context indicates otherwise.
The Company has diversified its business by geography (North America, Europe, and Asia, among other regions) and channels of distribution (wholesale, retail, and licensing). This allows the Company to maintain a dynamic balance as its operating results do not depend solely on the performance of any single geographic area or channel of distribution. The Company's wholesale sales are made principally to major department stores and specialty stores around the world. The Company also sells directly to consumers through its integrated retail channel, which includes its retail stores, concession-based shop-within-shops, and e-commerce operations around the world. In addition, the Company licenses to unrelated third parties for specified periods the right to operate retail stores and/or to use its various trademarks in connection with the manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.
Effective beginning in the fourth quarter of Fiscal 2017, the Company organizes its business into the following
three
reportable segments: North America, Europe, and Asia. In addition to these reportable segments, the Company also has other non-reportable segments. See
Note 20
for further discussion of the Company's segment reporting structure.
Basis of Consolidation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") and present the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company utilizes a
52-53
week fiscal year ending on the Saturday closest to March 31. As such, fiscal year
2017
ended on
April 1, 2017
and was a
52
-week period ("Fiscal
2017
"); fiscal year
2016
ended on
April 2, 2016
and was a
53
-week period ("Fiscal
2016
"); fiscal year
2015
ended on
March 28, 2015
and was a
52
-week period ("Fiscal
2015
"); and fiscal year 2018 will end on March 31, 2018 and will be a 52-week period ("Fiscal 2018").
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include reserves for bad debt, customer returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; fair value measurements; accounting for income taxes and related uncertain tax positions; valuation of stock-based compensation awards and related estimated forfeiture rates; reserves for restructuring activity; and accounting for business combinations, among others.
Reclassifications
Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation, including the realignment of the Company's segment reporting structure, as further described in
Note 20
.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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3.
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Summary of Significant Accounting Policies
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Revenue Recognition
Revenue is recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectability is reasonably assured.
Revenue within the Company's wholesale business is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates for end-of-season markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these costs have not differed materially from actual results.
Retail store and concession-based shop-within-shop revenue is recognized net of estimated returns at the time of sale to consumers. E-commerce revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery of the shipment to its customers. Such revenue is also reduced by an estimate of returns.
Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes income for unredeemed gift cards when the likelihood of redemption by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property.
Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (i) contractually guaranteed minimum royalty levels or (ii) actual sales and royalty data, or estimates thereof, received from the Company's licensees.
The Company accounts for sales taxes and other related taxes on a net basis, excluding such taxes from revenue.
Cost of Goods Sold and Selling Expenses
Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, and import costs, as well as changes in reserves for shrinkage and inventory realizability. Gains and losses associated with forward foreign currency exchange contracts that are designated as cash flow hedges of inventory transactions are also recognized within cost of goods sold when the hedged inventory is sold. The costs of selling merchandise, including those associated with preparing merchandise for sale, such as picking, packing, warehousing, and order charges ("handling costs"), are included in selling, general, and administrative ("SG&A") expenses in the consolidated statements of operations.
Shipping and Handling Costs
The costs associated with shipping goods to customers are reflected as a component of SG&A expenses in the consolidated statements of operations. Shipping costs were
$42.8 million
,
$44.6 million
, and
$42.8 million
in
Fiscal 2017
,
Fiscal 2016
and
Fiscal 2015
, respectively. Handling costs (described above), also included within SG&A expenses, were
$170.1 million
,
$181.2 million
, and
$181.0 million
in
Fiscal 2017
,
Fiscal 2016
and
Fiscal 2015
, respectively. Shipping and handling costs billed to customers are included in revenue.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advertising and Marketing Costs
Advertising costs, including the costs to produce advertising, are expensed when the advertisement is first exhibited. Out-of-store advertising costs paid to wholesale customers under cooperative advertising programs are expensed as an advertising cost within SG&A expenses if both the identified advertising benefit is sufficiently separable from the purchase of the Company's products by customers and the fair value of such benefit is measurable. Otherwise, such costs are reflected as a reduction of revenue. Costs of in-store advertising paid to wholesale customers under cooperative advertising programs are not included in advertising costs, but rather are reflected as a reduction of revenue since the benefits are not sufficiently separable from the purchases of the Company's products by customers. Costs associated with the marketing and promotion of the Company's products are included within SG&A expenses.
Advertising and marketing expenses amounted to
$219.9 million
,
$280.0 million
, and
$274.6 million
in
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
, respectively. Deferred advertising, marketing, and promotional costs, which principally relate to advertisements that have not yet been exhibited or services that have not yet been received, were
$4.1 million
and
$7.2 million
at the end of
Fiscal 2017
and
Fiscal 2016
, respectively, and were recorded within prepaid expenses and other current assets in the Company's consolidated balance sheets.
Foreign Currency Translation and Transactions
The financial position and operating results of the Company's foreign operations are primarily consolidated using their respective local currency as the functional currency. Local currency assets and liabilities are translated to U.S. Dollars at the rates of exchange in effect on the balance sheet date, and local currency revenues and expenses are translated to U.S. Dollars at average rates of exchange in effect during the period. The resulting translation gains or losses are included in the consolidated statements of comprehensive income (loss) as a component of other comprehensive income (loss) ("OCI") and in the consolidated statements of equity within accumulated other comprehensive income (loss) ("AOCI"). Gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature are also included within this component of equity.
The Company also recognizes gains and losses on both third-party and intercompany transactions that are denominated in a currency other than the respective entity's functional currency. Foreign currency transaction gains and losses are recognized in earnings and separately disclosed in the consolidated statements of operations.
Comprehensive Income (Loss)
Comprehensive income (loss), which is reported in the consolidated statements of comprehensive income (loss) and consolidated statements of equity, consists of net income (loss) and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income (loss). The components of OCI for the Company consist of foreign currency translation gains (losses); net realized and unrealized gains (losses) on cash flow hedges, such as forward foreign currency exchange contracts; net realized and unrealized gains (losses) on available-for-sale investments; and net realized and unrealized gains (losses) related to the Company's defined benefit plans.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company's Class A and Class B common stock. Diluted net income (loss) per common share adjusts basic net income (loss) per common share for the dilutive effects of outstanding stock options, restricted stock, restricted stock units ("RSUs"), and any other potentially dilutive instruments, only in the periods in which such effects are dilutive.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average number of common shares outstanding used to calculate basic net income (loss) per common share is reconciled to shares used to calculate diluted net income (loss) per common share as follows:
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Fiscal Years Ended
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April 1,
2017
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|
April 2,
2016
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|
March 28,
2015
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|
(millions)
|
Basic shares
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82.7
|
|
|
85.2
|
|
|
88.2
|
|
Dilutive effect of stock options, restricted stock, and RSUs
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—
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(a)
|
0.7
|
|
|
0.9
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|
Diluted shares
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|
82.7
|
|
|
85.9
|
|
|
89.1
|
|
|
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(a)
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Incremental shares of
0.7 million
attributable to outstanding stock options, restricted stock, and RSUs were excluded from the computation of diluted shares for Fiscal 2017, as such shares would not be dilutive as a result of the net loss incurred.
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All earnings per share amounts have been calculated using unrounded numbers. Options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income (loss) per common share. In addition, the Company has outstanding performance-based RSUs, which are included in the computation of diluted shares only to the extent that the underlying performance conditions (and applicable market condition modifiers, if any) (i) have been satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive. As of the end of
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
, there were
2.2 million
,
2.6 million
, and
1.9 million
, respectively, additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs, that were excluded from the diluted shares calculations.
Stock-Based Compensation
The Company recognizes expense for all stock-based compensation awards granted to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures. The Company uses the Black-Scholes valuation model to estimate the grant date fair value of its stock option awards. For performance-based RSU awards that include a market condition in the form of a total shareholder return ("TSR") modifier, the Company uses a Monte Carlo simulation valuation model to estimate the grant date fair value. The fair values of restricted stock awards, service-based RSUs, and performance-based RSUs that are not subject to a TSR modifier are determined based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for those awards that are not entitled to dividend equivalents. Compensation expense for all performance-based RSUs is recognized over the requisite service period when attainment of the performance goal is deemed probable, net of estimated forfeitures. The Company recognizes compensation expense on an accelerated basis for all awards with graded vesting terms, including stock options, restricted stock, and certain RSUs. For RSU awards with cliff vesting terms, compensation expense is recognized on a straight-line basis. For certain RSU awards granted to retirement-eligible employees, or employees who will become retirement-eligible prior to the end of the awards' respective stated vesting periods, the related stock-based compensation expense is recognized on an accelerated basis over a term commensurate with the period that the employee is required to provide service in order to vest in the award. See
Note 18
for further discussion of the Company's stock-based compensation plans.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less, including investments in debt securities and money market funds. Investments in debt securities are diversified among high-credit quality securities in accordance with the Company's risk-management policies.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Cash
The Company is periodically required to place cash in escrow with various banks as collateral, primarily to secure guarantees of corresponding amounts made by the banks to international tax authorities on behalf of the Company, such as to secure refunds of value-added tax payments in certain international tax jurisdictions or in the case of certain international tax audits. Such cash is classified as restricted cash and reported as a component of either prepaid expenses and other current assets or other non-current assets in the Company's consolidated balance sheets. The cash inflows and outflows related to restricted cash are classified as investing activities in the Company's consolidated statements of cash flows.
Investments
The Company's investment objectives include capital preservation, maintaining adequate liquidity, diversification to minimize liquidity and credit risk, and achievement of maximum returns within the guidelines set forth in the Company's investment policy.
Short-term investments consist of investments which the Company expects to convert into cash within one year, including time deposits, which have original maturities greater than 90 days. Non-current investments, which are classified within other non-current assets in the consolidated balance sheets, consist of those investments which the Company does not expect to convert into cash within one year.
The Company classifies all of its investments at the time of purchase as available-for-sale. These investments are recorded at fair value with unrealized gains or losses classified as a component of AOCI in the consolidated balance sheets, and related realized gains or losses classified as a component of interest and other income, net, in the consolidated statements of operations. Cash inflows and outflows related to the sale and purchase of investments are classified as investing activities in the Company's consolidated statements of cash flows.
Equity-method Investments
Investments in companies in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method. Significant influence is generally presumed to exist when the Company owns between 20% and 50% of the investee.
Under the equity method of accounting, the following amounts are recorded in the Company's consolidated financial statements: the Company's investment in and amounts due to and from the investee are included in the consolidated balance sheets; the Company's share of the investee's earnings (losses) is included in the consolidated statements of operations; and dividends, cash distributions, loans, or other cash received from the investee and additional cash investments, loan repayments, or other cash paid to the investee are included in the consolidated statements of cash flows.
The Company's equity-method investments include its
50%
interest in the Ralph Lauren Watch and Jewelry Company, Sárl, a joint venture formed with Compagnie Financière Richemont SA, the Swiss luxury goods group, in March 2007. This joint venture is a Swiss corporation whose purpose is to design, develop, manufacture, sell, and distribute luxury watches and fine jewelry through Ralph Lauren stores, as well as through fine independent jewelry and luxury watch retailers around the world.
Impairment Assessment
The Company evaluates investments held in unrealized loss positions, if any, for other-than-temporary impairment on a quarterly basis. Such evaluation involves a variety of considerations, including assessments of the risks and uncertainties associated with general economic conditions and distinct conditions affecting specific issuers. Factors considered by the Company include (i) the length of time and the extent to which the fair value has been below cost; (ii) the financial condition, credit worthiness, and near-term prospects of the issuer; (iii) the length of time to maturity; (iv) future economic conditions and market forecasts; (v) the Company's intent and ability to retain its investment for a period of time sufficient to allow for recovery of market value; and (vi) an assessment of whether it is more likely than not that the Company will be required to sell its investment before recovery of market value. See
Note 14
for further information relating to the Company's investments.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable
In the normal course of business, the Company extends credit to wholesale customers that satisfy defined credit criteria. Accounts receivable is recorded at carrying value, which approximates fair value, and is presented in the Company's consolidated balance sheets net of certain reserves and allowances. These reserves and allowances consist of (i) reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances (see the
Revenue Recognition
section above for further discussion of related accounting policies) and (ii) allowances for doubtful accounts.
A rollforward of the activity in the Company's reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances is presented below:
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|
|
|
|
|
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Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Beginning reserve balance
|
|
$
|
239.7
|
|
|
$
|
239.7
|
|
|
$
|
253.9
|
|
Amount charged against revenue to increase reserve
|
|
666.6
|
|
|
749.0
|
|
|
755.3
|
|
Amount credited against customer accounts to decrease reserve
|
|
(698.8
|
)
|
|
(753.0
|
)
|
|
(748.8
|
)
|
Foreign currency translation
|
|
(4.7
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)
|
|
4.0
|
|
|
(20.7
|
)
|
Ending reserve balance
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$
|
202.8
|
|
|
$
|
239.7
|
|
|
$
|
239.7
|
|
An allowance for doubtful accounts is determined through an analysis of accounts receivable aging, assessments of collectability based on an evaluation of historical and anticipated trends, the financial condition of the Company's customers, and an evaluation of the impact of economic conditions, among other factors.
A rollforward of the activity in the Company's allowance for doubtful accounts is presented below:
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|
|
|
|
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Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Beginning reserve balance
|
|
$
|
14.5
|
|
|
$
|
11.4
|
|
|
$
|
15.7
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|
Amount recorded to expense to increase (decrease) reserve
(a)
|
|
6.2
|
|
|
6.8
|
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|
(0.2
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)
|
Amount written-off against customer accounts to decrease reserve
|
|
(8.5
|
)
|
|
(4.1
|
)
|
|
(2.0
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)
|
Foreign currency translation
|
|
(0.6
|
)
|
|
0.4
|
|
|
(2.1
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)
|
Ending reserve balance
|
|
$
|
11.6
|
|
|
$
|
14.5
|
|
|
$
|
11.4
|
|
|
|
(a)
|
Amounts recorded to bad debt expense are included within SG&A expenses in the consolidated statements of operations.
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Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department and specialty stores around the world, and extends credit based on an evaluation of each customer's financial capacity and condition, usually without requiring collateral. In the Company's wholesale business, concentration of credit risk is relatively limited due to the large number of customers and their dispersion across many geographic areas. However, the Company has
three
key wholesale customers that generate significant sales volume. During
Fiscal 2017
, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately
10%
of total net revenues, and the Company's sales to its
three
largest wholesale customers (including Macy's) accounted for approximately
21%
of total net revenues. Substantially all of the Company's sales to its three largest wholesale customers related to its North America segment. As of
April 1, 2017
, these
three
key wholesale customers constituted approximately
34%
of total gross accounts receivable.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories
The Company holds inventory that is sold through wholesale distribution channels to major department stores and specialty retail stores. The Company also holds retail inventory that is sold in its own stores and e-commerce sites directly to consumers. Substantially all of the Company's inventories are comprised of finished goods, which are stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average cost basis.
The estimated realizable value of inventory is determined based on an analysis of historical sales trends of the Company's individual product lines, the impact of market trends and economic conditions, and a forecast of future demand, giving consideration to the value of current in-house orders for future sales of inventory, as well as plans to sell inventory through the Company's factory stores, among other liquidation channels. Actual results may differ from estimates due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, and market conditions. Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. The Company's historical estimates of these costs and its related provisions have not differed materially from actual results.
Property and Equipment, Net
Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method based upon the estimated useful lives of depreciable assets, which range from
three
to
seven
years for furniture and fixtures, machinery and equipment, and capitalized software; and from
ten
to
forty
years for buildings and improvements. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the respective assets or the term of the related lease.
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. In evaluating long-lived assets for recoverability, including finite-lived intangibles as described below, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. Assets to be disposed of and for which there is a committed plan for disposal are reported at the lower of carrying value or fair value, less costs to sell.
Goodwill and Other Intangible Assets
At acquisition, the Company estimates and records the fair value of purchased intangible assets, which typically consist of reacquired license agreements, customer relationships, non-compete agreements, and/or order backlog. The fair values of these intangible assets are estimated based on management's assessment, considering independent third-party appraisals when necessary. The excess of the purchase consideration over the fair value of net assets acquired, both tangible and intangible, is recorded as goodwill. Goodwill and certain other intangible assets deemed to have indefinite useful lives are not amortized. Rather, goodwill and such indefinite-lived intangible assets are assessed for impairment at least annually. The Company generally performs its annual goodwill and indefinite-lived intangible assets impairment analyses using a qualitative approach to determine whether it is more likely than not that the fair values of such assets are less than their respective carrying values. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of the asset exceeds its carrying value, a quantitative test is performed. Under the quantitative test, if the carrying value of the asset exceeds its fair value, an impairment loss is recognized in the amount of the excess. The Company also periodically performs a quantitative test to assess its goodwill for impairment in lieu of using the qualitative approach in order to reassess the fair values of its reporting units.
Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets as noted above, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. See discussion of the Company's accounting policy for long-lived asset impairment as previously described under the caption "
Property and Equipment, Net.
"
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
Income taxes are provided using the asset and liability method. Under this method, income taxes (i.e., deferred tax assets and liabilities, current taxes payable/refunds receivable, and tax expense) are recorded based on amounts refundable or payable in the current year and include the results of any difference between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of certain net operating losses, capital losses, general business credit carryforwards, and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The Company accounts for the financial effect of changes in tax laws or rates in the period of enactment.
In addition, valuation allowances are established when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed periodically and adjusted as events occur or circumstances change that warrant adjustments.
In determining the income tax benefit (provision) for financial reporting purposes, the Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and the Company often obtains assistance from external advisors. To the extent that the Company's estimates change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax benefit (provision) in the period in which such determinations are made. If the initial assessment fails to result in the recognition of a tax benefit, the Company regularly monitors its position and subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) the statute of limitations expires; or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax positions are classified as current only when the Company expects to pay cash within the next twelve months. Interest and penalties are recorded within the income tax benefit (provision) in the Company's consolidated statements of operations and are classified on the consolidated balance sheets together with the related liability for unrecognized tax benefits.
See
Note 11
for further discussion of the Company's income taxes.
Leases
The Company leases certain facilities and equipment, including the vast majority of its retail stores. Certain of the Company's lease agreements contain renewal options, rent escalation clauses, and/or landlord incentives. Renewal terms generally reflect market rates at the time of renewal. Rent expense for noncancelable operating leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the earlier of the lease commencement date or the date the Company takes control of the leased space. The excess of straight-line rent expense over the scheduled payment amounts and landlord incentives is recorded as a deferred rent obligation. As of the end of
Fiscal 2017
and
Fiscal 2016
, deferred rent obligations of
$246.3 million
and
$256.8 million
, respectively, were classified primarily within other non-current liabilities in the Company's consolidated balance sheets.
In certain lease arrangements, the Company is involved with the construction of the building or leasehold improvements (generally on property owned by the landlord). If the Company concludes that it has substantively all of the risks of ownership during construction of a leased property and therefore is deemed the owner of the project for accounting purposes, it records an asset and related financing obligation in the amount of the total project costs related to construction-in-progress and the fair value of the pre-existing building. Once construction is complete, the Company considers the requirements for sale-leaseback treatment, including the transfer back of all risks of ownership and whether the Company has any continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback treatment, the Company continues to amortize the financing obligation and depreciate the building over the lease term.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Financial Instruments
The Company records all derivative financial instruments on its consolidated balance sheets at fair value. For derivative instruments that qualify for hedge accounting, the effective portion of changes in their fair value is either (i) offset against the changes in fair value of the related hedged assets, liabilities, or firm commitments through earnings or (ii) recognized in equity as a component of AOCI until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge against changes in fair value or cash flows and net investments, respectively.
Each derivative instrument that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged. For each derivative instrument that is designated as a hedge, the Company formally documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item, and the risk exposure, as well as how hedge effectiveness will be assessed prospectively and retrospectively over the instrument's term. To assess hedge effectiveness, the Company generally uses regression analysis, a statistical method, to compare the change in the fair value of the derivative instrument to the change in fair value or cash flows of the related hedged item. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.
As a result of its use of derivative instruments, the Company is exposed to the risk that counterparties to such contracts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. The Company's established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of its counterparties' creditworthiness. The Company also enters into master netting arrangements with counterparties, when possible, to mitigate credit risk associated with its derivative instruments. In the event of default or termination (as such terms are defined within the respective master netting arrangement), these arrangements allow the Company to net-settle amounts payable and receivable related to multiple derivative transactions with the same counterparty. The master netting arrangements specify a number of events of default and termination, including, among others, the failure to make timely payments.
The fair values of the Company's derivative instruments are recorded on its consolidated balance sheets on a gross basis. For cash flow reporting purposes, proceeds received or amounts paid upon the settlement of a derivative instrument are classified in the same manner as the related item being hedged, primarily within cash flows from operating activities.
Cash Flow Hedges
The Company uses forward foreign currency exchange contracts to reduce its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, and the settlement of foreign currency-denominated operational balances. To the extent forward foreign currency exchange contracts are designated as cash flow hedges and are highly effective in offsetting changes in the value of the hedged items, the related gains or losses are initially deferred in equity as a component of AOCI and are subsequently recognized in the consolidated statements of operations as follows:
|
|
•
|
Forecasted Inventory Transactions
— recognized as part of the cost of the inventory being hedged within cost of goods sold when the related inventory is sold to a third party.
|
|
|
•
|
Intercompany Royalties/Settlement of Foreign Currency Balances
— recognized within foreign currency gains (losses) during the period that the hedged balance is remeasured through earnings, generally through its settlement when the related payment occurs.
|
To the extent that a derivative instrument designated as a cash flow hedge is not considered effective, any change in its fair value relating to such ineffectiveness is immediately recognized in earnings within foreign currency gains (losses). If it is determined that a derivative instrument has not been highly effective, and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued and further gains (losses) are immediately recognized in earnings within foreign currency gains (losses). Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the originally-documented hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings within foreign currency gains (losses).
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hedge of a Net Investment in a Foreign Operation
The Company periodically uses cross-currency swap contracts to reduce risk associated with exchange rate fluctuations on certain of its net investments in foreign subsidiaries. Changes in the fair values of such derivative instruments that are designated as hedges of net investments in foreign operations are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments, to the extent they are effective as a hedge. To assess effectiveness, the Company uses a method based on changes in spot rates to measure the impact of foreign currency exchange rate fluctuations on both its foreign subsidiary net investment and the related derivative hedging instrument. Accordingly, changes in fair value of the hedging instrument other than those due to changes in the spot rate are excluded from the assessment of hedge effectiveness and are recorded in the consolidated statement of operations with any other ineffectiveness as interest expense. Amounts associated with the effective portion of net investment hedges are released from AOCI and recognized in earnings only upon the sale or liquidation of the hedged net investment.
Fair Value Hedges
Changes in the fair value of a derivative instrument that is designated as a fair value hedge, along with offsetting changes in the fair value of the related hedged item attributable to the hedged risk, are recorded in earnings. Hedge ineffectiveness is recorded in earnings to the extent that the change in the fair value of the hedged item does not offset the change in the fair value of the hedging instrument.
Undesignated Hedges
All of the Company's undesignated hedges are entered into to hedge specific economic risks, particularly foreign currency exchange rate risk related to foreign currency-denominated balances. Changes in the fair value of undesignated derivative instruments are immediately recognized in earnings within foreign currency gains (losses).
See
Note 14
for further discussion of the Company's derivative financial instruments.
|
|
4.
|
Recently Issued Accounting Standards
|
Restricted Cash
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, "Restricted Cash" ("ASU 2016-18"). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Accordingly, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for the Company beginning in its fiscal year ending March 30, 2019 ("Fiscal 2019"), with early adoption permitted, and must be adopted using a retrospective approach. Other than this change in presentation within the statement of cash flows, ASU 2016-18 will not have an impact on the Company's consolidated financial statements.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for and financial statement presentation of share-based payments, including the accounting for income taxes at award settlement and forfeitures, and the classification of excess tax benefits and shares surrendered for tax withholdings in the statement of cash flows. ASU 2016-09 is effective for the Company beginning in its Fiscal 2018. The adoption methodology (i.e., prospective, retrospective, or modified-retrospective) varies by amendment.
With respect to the accounting for income taxes at award settlement, ASU 2016-09 requires that all excess tax benefits and shortfalls be reflected in the income tax benefit (provision) in the statement of operations in the period that they are realized. This reflects a change from current practice, which generally requires that such activity be recorded in equity as additional paid-in-capital. The impact of this change, which will be applied prospectively in the Company's consolidated financial statements, will depend largely on unpredictable future events and other factors, including the timing of employee stock option exercises and the value realized upon vesting or exercise of shares compared to the grant date fair value of those shares, and will likely result in increased volatility in the income tax benefit (provision). Additionally, ASU 2016-09 will change the classification of excess tax
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
benefits from a financing activity to an operating activity in the Company's consolidated statements of cash flows. The Company anticipates applying this change in classification on a retrospective basis. The other amendments of ASU 2016-09 are not expected to have a material impact on the Company's consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02 requires that a lessee's rights and fixed payment obligations under most leases be recognized as right-of-use assets and lease liabilities on the consolidated balance sheet. ASU 2016-02 retains a dual model for classifying leases as either financing or operating, which governs the pattern of expense recognition to be reflected in the consolidated statement of operations. Variable lease payments based on performance, such as percentage-of-sales-based payments, will not be included in the measurement of right-of-use assets and lease liabilities. Rather, consistent with current practice, such amounts will be recognized as an expense in the period incurred. ASU 2016-02 is effective for the Company beginning in its fiscal year ending March 28, 2020 ("Fiscal 2020"), with early adoption permitted, and is to be adopted using a modified retrospective transition approach, which requires application of the guidance at the beginning of the earliest comparative period presented.
The Company is currently in the process of evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures. The Company's assessment efforts to date have included reviewing the standard's provisions and beginning to gather information to evaluate the landscape of its real estate, personal property, and other arrangements that may meet the definition of a lease. Based on these efforts, the Company currently anticipates that the adoption of ASU 2016-02 will result in a significant increase to its long-term assets and liabilities as, at a minimum, most of its current operating lease commitments will be subject to balance sheet recognition. The standard is also expected to result in enhanced quantitative and qualitative lease-related disclosures. Recognition of lease expense in the consolidated statement of operations is not anticipated to significantly change.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that will supersede most existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue, representing the amount to which an entity expects to be entitled in exchange for providing promised goods or services (i.e., performance obligations), is recognized upon control of promised goods or services transferring to a customer. ASU 2014-09 also requires enhanced qualitative and quantitative revenue-related disclosures. Since its original issuance, the FASB has issued several additional related ASUs to address implementation concerns and further amend and clarify certain guidance within ASU 2014-09. ASU 2014-09 may be adopted on a full retrospective basis and applied to all prior periods presented, or on a modified retrospective basis through a cumulative adjustment recorded to opening retained earnings in the year of initial application.
The Company is currently in the process of evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company's assessment efforts to date have included reviewing current accounting policies, processes, and arrangements to identify potential differences that could arise from the application of ASC 2014-09. Based on these efforts, the Company currently anticipates that the performance obligations underlying its core revenue streams (i.e., its retail and wholesale businesses), and the timing of recognition thereof, will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continue to be recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated returns, end-of-season markdowns, and other allowances that are variable in nature. For its licensing business, which has historically comprised approximately
2%
of total revenues, the Company is currently assessing whether the timing of recognizing contractually guaranteed minimum royalty amounts will change. Beyond its core revenue streams, the Company is also currently evaluating the impact of ASU 2014-09 on certain ancillary transactions and arrangements.
The Company will adopt ASU 2014-09 in its Fiscal 2019 and anticipates doing so using the modified retrospective method through a cumulative adjustment recorded to the opening Fiscal 2019 retained earnings balance.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
5.
|
Property and Equipment
|
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Land and improvements
|
|
$
|
16.8
|
|
|
$
|
16.8
|
|
Buildings and improvements
|
|
457.2
|
|
|
460.4
|
|
Furniture and fixtures
|
|
687.2
|
|
|
726.8
|
|
Machinery and equipment
|
|
414.0
|
|
|
359.2
|
|
Capitalized software
|
|
549.0
|
|
|
460.4
|
|
Leasehold improvements
|
|
1,179.1
|
|
|
1,247.9
|
|
Construction in progress
|
|
33.4
|
|
|
215.7
|
|
|
|
3,336.7
|
|
|
3,487.2
|
|
Less: accumulated depreciation
|
|
(2,020.7
|
)
|
|
(1,904.0
|
)
|
Property and equipment, net
|
|
$
|
1,316.0
|
|
|
$
|
1,583.2
|
|
|
|
6.
|
Goodwill and Other Intangible Assets
|
Goodwill
The following table details the changes in goodwill for each of the Company's segments during
Fiscal 2017
and
Fiscal 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
Retail
|
|
Licensing
|
|
North America
|
|
Europe
|
|
Asia
|
|
Other Non-reportable Segments
|
|
Total
|
|
|
(millions)
|
Balance at March 28, 2015
|
|
$
|
571.4
|
|
|
$
|
199.9
|
|
|
$
|
131.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
902.8
|
|
Foreign currency translation
|
|
10.4
|
|
|
2.9
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.1
|
|
Balance at April 2, 2016
|
|
581.8
|
|
|
202.8
|
|
|
133.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
917.9
|
|
Foreign currency translation
|
|
(14.3
|
)
|
|
(2.6
|
)
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18.2
|
)
|
Balance at December 31, 2016
|
|
567.5
|
|
|
200.2
|
|
|
132.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
899.7
|
|
Segment reallocation
(a)
|
|
(567.5
|
)
|
|
(200.2
|
)
|
|
(132.0
|
)
|
|
421.8
|
|
|
269.2
|
|
|
71.5
|
|
|
137.2
|
|
|
—
|
|
Impairments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.2
|
)
|
|
(5.2
|
)
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.7
|
|
|
3.4
|
|
|
—
|
|
|
10.1
|
|
Balance at April 1, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
421.8
|
|
|
$
|
275.9
|
|
|
$
|
74.9
|
|
|
$
|
132.0
|
|
|
$
|
904.6
|
|
|
|
(a)
|
In connection with the realignment of the Company's segment reporting structure, the Company reallocated the carrying amount of goodwill to its new reporting units based upon each reporting unit's relative fair value as of the first day of its fourth quarter of Fiscal 2017. See
Note 20
for further discussion of the Company's segment reporting structure.
|
Based on the results of the Company's goodwill impairment testing, the Company recorded an impairment charge of
$5.2 million
during
Fiscal 2017
to fully write off the carrying value of reallocated goodwill related to one of its reporting units. No goodwill impairment charges were recorded during
Fiscal 2016
or
Fiscal 2015
. See
Note 13
for further discussion of the Company's goodwill impairment testing.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Intangible Assets
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
April 2, 2016
|
|
|
Gross Carrying Amount
|
|
Accum. Amort.
|
|
Net
|
|
Gross Carrying Amount
|
|
Accum. Amort.
|
|
Net
|
|
|
(millions)
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-acquired licensed trademarks
|
|
$
|
231.1
|
|
|
$
|
(130.2
|
)
|
|
$
|
100.9
|
|
|
$
|
231.3
|
|
|
$
|
(122.2
|
)
|
|
$
|
109.1
|
|
Customer relationships
|
|
252.1
|
|
|
(152.9
|
)
|
|
99.2
|
|
|
251.6
|
|
|
(137.6
|
)
|
|
114.0
|
|
Other
|
|
26.9
|
|
|
(14.5
|
)
|
|
12.4
|
|
|
27.7
|
|
|
(14.2
|
)
|
|
13.5
|
|
Total intangible assets subject to amortization
|
|
510.1
|
|
|
(297.6
|
)
|
|
212.5
|
|
|
510.6
|
|
|
(274.0
|
)
|
|
236.6
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brands
|
|
7.3
|
|
|
N/A
|
|
|
7.3
|
|
|
7.3
|
|
|
N/A
|
|
|
7.3
|
|
Total intangible assets
|
|
$
|
517.4
|
|
|
$
|
(297.6
|
)
|
|
$
|
219.8
|
|
|
$
|
517.9
|
|
|
$
|
(274.0
|
)
|
|
$
|
243.9
|
|
Amortization
Based on the balance of the Company's intangible assets subject to amortization as of
April 1, 2017
, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:
|
|
|
|
|
|
|
|
Amortization Expense
|
|
|
(millions)
|
Fiscal 2018
|
|
$
|
23.9
|
|
Fiscal 2019
|
|
23.9
|
|
Fiscal 2020
|
|
23.2
|
|
Fiscal 2021
|
|
21.0
|
|
Fiscal 2022
|
|
17.5
|
|
Fiscal 2023 and thereafter
|
|
103.0
|
|
Total
|
|
$
|
212.5
|
|
The expected future amortization expense above reflects weighted-average estimated useful lives of
12.5 years
for re-acquired licensed trademarks,
7.9 years
for customer relationships, and
10.3 years
for the Company's finite-lived intangible assets in total.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
7.
|
Other Current and Non-Current Assets
|
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Other taxes receivable
|
|
$
|
127.8
|
|
|
$
|
111.7
|
|
Prepaid rent expense
|
|
37.4
|
|
|
37.0
|
|
Derivative financial instruments
|
|
23.0
|
|
|
16.1
|
|
Tenant allowances receivable
|
|
16.4
|
|
|
12.6
|
|
Restricted cash
|
|
9.8
|
|
|
16.6
|
|
Prepaid samples
|
|
5.9
|
|
|
9.4
|
|
Prepaid advertising and marketing
|
|
4.1
|
|
|
7.2
|
|
Other prepaid expenses and current assets
|
|
56.0
|
|
|
57.5
|
|
Total prepaid expenses and other current assets
|
|
$
|
280.4
|
|
|
$
|
268.1
|
|
Other non-current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Restricted cash
|
|
$
|
33.7
|
|
|
$
|
29.2
|
|
Security deposits
|
|
26.5
|
|
|
31.8
|
|
Non-current investments
|
|
21.4
|
|
|
186.6
|
|
Derivative financial instruments
|
|
9.6
|
|
|
6.3
|
|
Other non-current assets
|
|
40.0
|
|
|
42.8
|
|
Total other non-current assets
|
|
$
|
131.2
|
|
|
$
|
296.7
|
|
|
|
8.
|
Other Current and Non-Current Liabilities
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Accrued operating expenses
|
|
$
|
188.0
|
|
|
$
|
186.2
|
|
Accrued payroll and benefits
|
|
173.5
|
|
|
148.8
|
|
Other taxes payable
|
|
172.2
|
|
|
138.6
|
|
Accrued inventory
|
|
154.9
|
|
|
176.2
|
|
Restructuring reserve
|
|
140.8
|
|
|
40.3
|
|
Accrued capital expenditures
|
|
45.7
|
|
|
65.2
|
|
Dividends payable
|
|
40.5
|
|
|
41.4
|
|
Deferred income
|
|
29.7
|
|
|
50.1
|
|
Capital lease obligations
|
|
22.6
|
|
|
20.7
|
|
Derivative financial instruments
|
|
12.3
|
|
|
25.9
|
|
Other accrued expenses and current liabilities
|
|
2.5
|
|
|
4.8
|
|
Total accrued expenses and other current liabilities
|
|
$
|
982.7
|
|
|
$
|
898.2
|
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Capital lease obligations
|
|
$
|
250.9
|
|
|
$
|
265.7
|
|
Deferred rent obligations
|
|
211.1
|
|
|
221.7
|
|
Deferred tax liabilities
|
|
11.8
|
|
|
16.3
|
|
Derivative financial instruments
|
|
9.4
|
|
|
33.5
|
|
Deferred compensation
|
|
7.8
|
|
|
8.4
|
|
Other non-current liabilities
|
|
50.6
|
|
|
48.1
|
|
Total other non-current liabilities
|
|
$
|
541.6
|
|
|
$
|
593.7
|
|
During
Fiscal 2017
, the Company recorded non-cash impairment charges of
$248.6 million
to write off certain fixed assets related to its domestic and international stores, shop-within-shops, and corporate offices, as well as its in-house global e-commerce platform which was in development, of which
$234.6 million
was recorded in connection with the Way Forward Plan (see
Note 10
) and
$14.0 million
was recorded in connection with underperforming stores subject to potential future closure. Additionally, as a result of the realignment of its segment reporting structure, the Company recorded a non-cash goodwill impairment charge of
$5.2 million
during Fiscal 2017 (see
Note 13
).
During
Fiscal 2016
, the Company recorded non-cash impairment charges of
$48.8 million
, primarily to write off certain fixed assets related to its domestic and international retail stores and shop-within-shops, of which
$27.2 million
was recorded in connection with the Global Reorganization Plan (see
Note 10
) and
$21.6 million
was recorded in connection with underperforming stores that were subject to potential future closure.
During
Fiscal 2015
, the Company recorded non-cash impairment charges of
$6.9 million
, primarily to write off certain fixed assets related to its domestic and international retail stores.
|
|
10.
|
Restructuring and Other Charges
|
A description of significant restructuring and other activities and related costs is included below.
Way Forward Plan
On June 2, 2016, the Company's Board of Directors approved a restructuring plan with the objective of delivering sustainable, profitable sales growth and long-term value creation for shareholders (the "Way Forward Plan"). The Company plans to refocus on its core brands and evolve its product, marketing, and shopping experience to increase desirability and relevance. It also intends to evolve its operating model to enable sustainable, profitable sales growth by significantly improving quality of sales, reducing supply chain lead times, improving its sourcing, and executing a disciplined multi-channel distribution and expansion strategy. As part of the Way Forward Plan, the Company plans to rightsize its cost structure and implement a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Way Forward Plan includes strengthening the Company's leadership team and creating a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan also includes the discontinuance of the Company's Denim & Supply brand and the integration of its denim product offerings into its Polo Ralph Lauren brand. Collectively, these actions resulted in a reduction in workforce and the closure of certain stores and shop-within-shops during Fiscal 2017.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 30, 2017, the Company's Board of Directors approved the following additional restructuring-related activities associated with its Way Forward Plan: (i) the restructuring of its in-house global e-commerce platform which was in development and shift to a more cost-effective, flexible e-commerce platform through a new agreement with Salesforce's Commerce Cloud, formerly known as Demandware; (ii) the closure of its Polo store at 711 Fifth Avenue in New York City; and (iii) the further streamlining of the organization and the execution of other key corporate actions in line with the Company's Way Forward Plan. Together, these actions are an important part of the Company's efforts to achieve its stated objective to return to sustainable, profitable growth and invest in the future. These additional restructuring-related activities will result in a further reduction in workforce and the closure of certain corporate office and store locations, and are expected to be substantially completed by the end of Fiscal 2018.
In connection with the Way Forward Plan, the Company currently expects to incur total estimated charges of approximately
$770 million
, comprised of cash-related restructuring charges of approximately
$450 million
and non-cash charges of approximately
$320 million
. Cumulative cash and non-cash charges incurred during Fiscal 2017 were
$289.1 million
and
$277.3 million
, respectively. In addition to these charges, the Company also incurred an additional non-cash charge of
$155.2 million
during Fiscal 2017 associated with the destruction of inventory out of current liquidation channels in line with its Way Forward Plan.
A summary of the charges recorded in connection with the Way Forward Plan during the Fiscal 2017 is as follows:
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
April 1, 2017
|
|
|
(millions)
|
Cash-related restructuring charges:
|
|
|
Severance and benefits costs
|
|
$
|
182.7
|
|
Lease termination and store closure costs
|
|
87.3
|
|
Other cash charges
|
|
19.1
|
|
Total cash-related restructuring charges
|
|
289.1
|
|
Non-cash charges:
|
|
|
Impairment of assets (see Note 9)
|
|
234.6
|
|
Inventory-related charges
(a)
|
|
197.9
|
|
Total non-cash charges
|
|
432.5
|
|
Total charges
|
|
$
|
721.6
|
|
|
|
(a)
|
Includes charges of
$155.2 million
associated with the destruction of inventory out of current liquidation channels during Fiscal 2017. Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
|
A summary of the activity in the restructuring reserve related to the Way Forward Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Benefits Costs
|
|
Lease Termination
and Store
Closure Costs
|
|
Other Cash Charges
|
|
Total
|
|
|
(millions)
|
Balance at April 2, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions charged to expense
|
|
182.7
|
|
|
87.3
|
|
|
19.1
|
|
|
289.1
|
|
Cash payments charged against reserve
|
|
(87.4
|
)
|
|
(52.2
|
)
|
|
(11.5
|
)
|
|
(151.1
|
)
|
Non-cash adjustments
|
|
(1.0
|
)
|
|
(0.8
|
)
|
|
(1.0
|
)
|
|
(2.8
|
)
|
Balance at April 1, 2017
|
|
$
|
94.3
|
|
|
$
|
34.3
|
|
|
$
|
6.6
|
|
|
$
|
135.2
|
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Global Reorganization Plan
On May 12, 2015, the Company's Board of Directors approved a reorganization and restructuring plan comprised of the following major actions: (i) the reorganization of the Company's operating structure in order to streamline the Company's business processes to better align its cost structure with its long-term growth strategy; (ii) a strategic store and shop-within-shop performance review conducted by region and brand; (iii) a targeted corporate functional area review; and (iv) the consolidation of certain of the Company's luxury lines (collectively, the "Global Reorganization Plan"). Actions associated with the Global Reorganization Plan resulted in a reduction in workforce and the closure of certain stores and shop-within-shops.
A summary of the charges recorded in connection with the Global Reorganization Plan during Fiscal 2017 and Fiscal 2016, as well as the cumulative charges recorded since its inception, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Cumulative Charges
|
|
|
April 1, 2017
|
|
April 2, 2016
|
|
|
|
(millions)
|
Cash-related restructuring charges:
|
|
|
|
|
|
|
Severance and benefits costs
|
|
$
|
4.7
|
|
|
$
|
64.4
|
|
|
$
|
69.1
|
|
Lease termination and store closure costs
|
|
0.2
|
|
|
7.8
|
|
|
8.0
|
|
Other cash charges
|
|
—
|
|
|
13.8
|
|
|
13.8
|
|
Total cash-related restructuring charges
|
|
4.9
|
|
|
86.0
|
|
|
90.9
|
|
Non-cash charges:
|
|
|
|
|
|
|
Impairment of assets (see Note 9)
|
|
—
|
|
|
27.2
|
|
|
27.2
|
|
Accelerated stock-based compensation expense
(a)
|
|
—
|
|
|
8.9
|
|
|
8.9
|
|
Inventory-related charges
(b)
|
|
—
|
|
|
20.4
|
|
|
20.4
|
|
Total non-cash charges
|
|
—
|
|
|
56.5
|
|
|
56.5
|
|
Total charges
|
|
$
|
4.9
|
|
|
$
|
142.5
|
|
|
$
|
147.4
|
|
|
|
(a)
|
Accelerated stock-based compensation expense, which is recorded within restructuring and other charges in the consolidated statements of operations, was recorded in connection with vesting provisions associated with certain separation agreements.
|
|
|
(b)
|
Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
|
Actions associated with the Global Reorganization Plan are now complete and no additional charges are expected to be incurred in relation to this plan.
A summary of current period activity in the restructuring reserve related to the Global Reorganization Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Benefits Costs
|
|
Lease Termination and Store Closure Costs
|
|
Other Cash Charges
|
|
Total
|
|
|
(millions)
|
Balance at March 28, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions charged to expense
|
|
64.4
|
|
|
7.8
|
|
|
13.8
|
|
|
86.0
|
|
Cash payments charged against reserve
|
|
(33.2
|
)
|
|
(2.5
|
)
|
|
(10.7
|
)
|
|
(46.4
|
)
|
Non-cash adjustments
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Balance at April 2, 2016
|
|
31.2
|
|
|
6.0
|
|
|
3.1
|
|
|
40.3
|
|
Additions charged to expense
|
|
4.7
|
|
|
0.2
|
|
|
—
|
|
|
4.9
|
|
Cash payments charged against reserve
|
|
(27.3
|
)
|
|
(2.8
|
)
|
|
(2.9
|
)
|
|
(33.0
|
)
|
Balance at April 1, 2017
|
|
$
|
8.6
|
|
|
$
|
3.4
|
|
|
$
|
0.2
|
|
|
$
|
12.2
|
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Restructuring Plans
During Fiscal 2015, the Company recorded restructuring charges of
$10.1 million
, primarily related to severance and benefits costs associated with certain of its retail and wholesale businesses and corporate operations. As of March 28, 2015, the related aggregate remaining restructuring liability was
$5.0 million
. As of both April 1, 2017 and April 2, 2016, the related aggregate remaining restructuring liability was not material.
Other Charges
Consistent with the Company's announcement on February 2, 2017, Mr. Stefan Larsson departed as the Company's President and Chief Executive Officer and as a member of its Board of Directors, effective as of May 1, 2017. In connection with Mr. Larsson's departure, the Company and Mr. Larsson entered into an employment separation agreement and release (the "Larsson Agreement"), pursuant to which Mr. Larsson will receive severance-related payments of
$10.0 million
, to be paid over two years. He will also receive his bonus under the Company's Executive Officer Annual Incentive Plan ("EOAIP") for the Company's Fiscal 2017, as well as a pro-rated EOAIP bonus for Fiscal 2018 through May 1, 2017, each based on the Company's actual performance during the related fiscal year. The Fiscal 2017 and Fiscal 2018 EOAIP bonuses will be paid on the dates that bonuses under the EOAIP are paid to the Company's eligible employees. Mr. Larsson also vested in all time-based equity awards as of the date of termination and will vest in all performance-based equity awards based on the Company's actual performance on the dates those awards were scheduled to vest without regard to his continued employment. He was required to provide the Company with transition services and must comply with confidentiality, non-competition, non-disparagement, and non-solicitation restrictive covenants. Mr. Larsson has also agreed to a release of claims against the Company.
In connection with Mr. Larsson's departure, the Company recorded other charges of
$11.4 million
during Fiscal 2017, inclusive of accelerated stock-based compensation expense of
$4.3 million
, and expects to incur additional charges of approximately
$6 million
during Fiscal 2018.
The Company also recorded other charges of
$13.2 million
during Fiscal 2017 related to the anticipated settlement of certain non-income tax issues.
During Fiscal 2016, the Company recorded other charges of
$34.1 million
related to its pending customs audit (see
Note 15
) and
$13.6 million
primarily related to the settlement of certain litigation claims.
Taxes on Income (Loss)
Domestic and foreign pretax income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Domestic
|
|
$
|
(155.3
|
)
|
|
$
|
274.8
|
|
|
$
|
620.5
|
|
Foreign
|
|
50.4
|
|
|
277.0
|
|
|
366.9
|
|
Total income (loss) before income taxes
|
|
$
|
(104.9
|
)
|
|
$
|
551.8
|
|
|
$
|
987.4
|
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Benefits (provisions) for current and deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Current:
|
|
|
|
|
|
|
Federal
(a)
|
|
$
|
29.1
|
|
|
$
|
(87.9
|
)
|
|
$
|
(161.2
|
)
|
State and local
(a)
|
|
2.3
|
|
|
3.2
|
|
|
(35.1
|
)
|
Foreign
|
|
(64.7
|
)
|
|
(78.6
|
)
|
|
(78.4
|
)
|
|
|
(33.3
|
)
|
|
(163.3
|
)
|
|
(274.7
|
)
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
25.1
|
|
|
4.6
|
|
|
(21.5
|
)
|
State and local
|
|
2.9
|
|
|
1.4
|
|
|
(2.6
|
)
|
Foreign
|
|
10.9
|
|
|
1.9
|
|
|
13.6
|
|
|
|
38.9
|
|
|
7.9
|
|
|
(10.5
|
)
|
Total income tax benefit (provision)
|
|
$
|
5.6
|
|
|
$
|
(155.4
|
)
|
|
$
|
(285.2
|
)
|
|
|
(a)
|
Excludes federal, state, and local tax provisions of
$17.3 million
in
Fiscal 2017
and federal, state, and local tax benefits of
$10.2 million
and
$7.7 million
in
Fiscal 2016
and
Fiscal 2015
, respectively, resulting from stock-based compensation arrangements. Such amounts were recorded within equity.
|
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate of
35%
and income taxes provided are as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Benefit (provision) for income taxes at the U.S. federal statutory rate
|
|
$
|
36.7
|
|
|
$
|
(193.2
|
)
|
|
$
|
(345.6
|
)
|
Change due to:
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
|
2.7
|
|
|
(10.9
|
)
|
|
(20.9
|
)
|
Foreign income taxed at different rates, net of U.S. foreign tax credits
|
|
(25.4
|
)
|
|
33.6
|
|
|
96.1
|
|
Unrecognized tax benefits and settlements of tax examinations
|
|
0.5
|
|
|
12.7
|
|
|
(11.5
|
)
|
Changes in valuation allowance on deferred tax assets
|
|
(7.3
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
(1.6
|
)
|
|
2.4
|
|
|
(3.3
|
)
|
Total income tax benefit (provision)
|
|
$
|
5.6
|
|
|
$
|
(155.4
|
)
|
|
$
|
(285.2
|
)
|
Effective tax rate
(a)
|
|
5.3
|
%
|
|
28.2
|
%
|
|
28.9
|
%
|
|
|
(a)
|
Effective tax rate is calculated by dividing the income tax benefit (provision) by income (loss) before income taxes.
|
The Company's Fiscal 2017 effective tax rate is lower than the statutory rate primarily due to the tax impact of earnings in foreign jurisdictions, valuation allowances and adjustments recorded on deferred tax assets, income tax reserves largely associated with an income tax settlement and certain income tax audits, partially offset by the reversal of an income tax reserve resulting from a change in tax law that impacted an interest assessment on a prior year withholding tax. The Company's Fiscal 2016 and Fiscal 2015 effective tax rates were lower than the statutory tax rate primarily due to the tax impact of earnings in foreign jurisdictions. The Fiscal 2016 effective tax rate was also favorably impacted by a change to the assessment period associated with certain tax liabilities, partially offset by the reversal of certain deferred tax assets that were determined to not be realizable. In addition, the
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company's effective tax rate during Fiscal 2015 was favorably impacted by income tax benefits resulting from the legal entity restructuring of certain of the Company's foreign operations.
During the second quarter of Fiscal 2016, the Company concluded, with the assistance of a third-party consultant, that based on recent audit settlements and taxpayer audit trends, the assessment period associated with certain tax liabilities established under ASC Topic 740, "Income Taxes," should be reduced. This change is considered a change in estimate for accounting purposes and the related impact was recorded during the second quarter of Fiscal 2016. This change lowered the Company's provision for income taxes by
$7.7 million
, including interest and penalties, and net of deferred tax asset reversals, and increased basic and diluted earnings per share by
$0.09
for Fiscal 2016.
Deferred Taxes
Significant components of the Company's net deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Goodwill and other intangible assets
|
|
$
|
(217.1
|
)
|
|
$
|
(217.0
|
)
|
Property and equipment
|
|
(61.6
|
)
|
|
(89.4
|
)
|
Cumulative translation adjustment and hedges
|
|
(10.8
|
)
|
|
7.6
|
|
Deferred compensation
|
|
141.6
|
|
|
126.2
|
|
Lease obligations
|
|
80.7
|
|
|
87.9
|
|
Receivable allowances and reserves
|
|
65.8
|
|
|
66.1
|
|
Net operating loss carryforwards
|
|
64.1
|
|
|
21.4
|
|
Inventory basis difference
|
|
21.8
|
|
|
29.5
|
|
Unrecognized tax benefits
|
|
16.0
|
|
|
20.9
|
|
Deferred rent
|
|
14.3
|
|
|
17.4
|
|
Accrued expenses
|
|
9.8
|
|
|
8.8
|
|
Deferred income
|
|
9.0
|
|
|
15.2
|
|
Excess foreign tax credits
|
|
7.9
|
|
|
—
|
|
Transfer pricing
|
|
5.6
|
|
|
5.9
|
|
Other
|
|
5.1
|
|
|
11.9
|
|
Valuation allowance
|
|
(38.1
|
)
|
|
(10.0
|
)
|
Net deferred tax assets (liabilities)
(a)
|
|
$
|
114.1
|
|
|
$
|
102.4
|
|
|
|
(a)
|
The net deferred tax balances as of
April 1, 2017
and
April 2, 2016
were comprised of non-current deferred tax assets of
$125.9 million
and
$118.7 million
, respectively, recorded within deferred tax assets, and non-current deferred tax liabilities of
$11.8 million
and
$16.3 million
, respectively, recorded within other non-current liabilities in the consolidated balance sheets.
|
The Company has available state and foreign net operating loss carryforwards of
$3.4 million
and
$156.6 million
, respectively, for tax purposes to offset future taxable income. The net operating loss carryforwards expire beginning in Fiscal
2018
.
The Company also has available state and foreign net operating loss carryforwards of
$38.9 million
and
$202.3 million
, respectively, for which no net deferred tax asset has been recognized. A full valuation allowance has been recorded against these carryforwards since management does not believe that the Company will more likely than not be able to utilize these carryforwards to offset future taxable income. Subsequent recognition of these deferred tax assets would result in an income tax benefit in the year of such recognition. The valuation allowance relating to state net operating loss carryforwards remained consistent with the prior year. The valuation allowance relating to foreign net operating loss carryforwards increased by
$185.7 million
mainly as a result of additional net operating losses in certain jurisdictions where management does not believe that the Company will more likely than not be able to utilize these carryforwards in the future.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Provision has not been made for U.S. or additional foreign taxes on
$2.298 billion
of undistributed earnings of foreign subsidiaries. Those historical earnings have been and are expected to continue to be permanently reinvested. These earnings could become subject to tax if they were remitted as dividends, if foreign earnings were lent to RLC, a subsidiary or a U.S. affiliate of RLC, or if the stock of the subsidiaries were sold. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not practicable. Management believes that the amount of the additional taxes that might be payable on the earnings of foreign subsidiaries, if remitted, would be partially offset by U.S. foreign tax credits.
Uncertain Income Tax Benefits
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
Activity
Reconciliations of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
|
(millions)
|
|
Unrecognized tax benefits beginning balance
|
|
$
|
49.7
|
|
|
$
|
68.0
|
|
|
$
|
82.6
|
|
|
Additions related to current period tax positions
|
|
5.3
|
|
|
5.0
|
|
|
4.7
|
|
|
Additions related to prior period tax positions
|
|
15.3
|
|
|
6.9
|
|
|
10.0
|
|
|
Reductions related to prior period tax positions
|
|
(3.4
|
)
|
|
(11.3
|
)
|
|
(1.1
|
)
|
|
Reductions related to expiration of statutes of limitations
|
|
(4.1
|
)
|
|
(7.2
|
)
|
|
(0.7
|
)
|
|
Reductions related to settlements with taxing authorities
|
|
(12.0
|
)
|
|
(12.0
|
)
|
|
(25.0
|
)
|
(a)
|
Additions (reductions) related to foreign currency translation
|
|
(0.9
|
)
|
|
0.3
|
|
|
(2.5
|
)
|
|
Unrecognized tax benefits ending balance
|
|
$
|
49.9
|
|
|
$
|
49.7
|
|
|
$
|
68.0
|
|
|
|
|
(a)
|
Includes a
$20.0 million
decline in unrecognized tax benefits as a result of the Company's tax settlement agreement reached in Fiscal 2015 for the taxable years ended April 2, 2011 and April 3, 2012.
|
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. Reconciliations of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Accrued interest and penalties beginning balance
|
|
$
|
30.9
|
|
|
$
|
47.6
|
|
|
$
|
49.7
|
|
Net additions charged to expense
|
|
2.3
|
|
|
4.0
|
|
|
6.3
|
|
Reductions related to prior period tax positions
|
|
(18.3
|
)
|
(a)
|
(15.4
|
)
|
|
(1.3
|
)
|
Reductions related to settlements with taxing authorities
|
|
(0.8
|
)
|
|
(5.3
|
)
|
|
(5.3
|
)
|
Additions (reductions) related to foreign currency translation
|
|
(1.3
|
)
|
|
—
|
|
|
(1.8
|
)
|
Accrued interest and penalties ending balance
|
|
$
|
12.8
|
|
|
$
|
30.9
|
|
|
$
|
47.6
|
|
|
|
(a)
|
Includes a
$15.9 million
reversal of an income tax reserve resulting from a change in tax law that impacted an interest assessment on a prior year withholding tax.
|
The total amount of unrecognized tax benefits, including interest and penalties, was
$62.7 million
and
$80.6 million
as of
April 1, 2017
and
April 2, 2016
, respectively, and is included within the non-current liability for unrecognized tax benefits in the consolidated balance sheets. The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was
$46.7 million
and
$59.6 million
as of
April 1, 2017
and
April 2, 2016
, respectively.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended April 1, 2006.
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
$300 million 2.125% Senior Notes
(a)
|
|
$
|
298.1
|
|
|
$
|
300.8
|
|
$300 million 2.625% Senior Notes
(b)
|
|
290.1
|
|
|
296.2
|
|
Commercial paper notes
|
|
—
|
|
|
90.0
|
|
Borrowings outstanding under credit facilities
|
|
—
|
|
|
26.1
|
|
Total debt
|
|
588.2
|
|
|
713.1
|
|
Less: short-term debt
|
|
—
|
|
|
116.1
|
|
Total long-term debt
|
|
$
|
588.2
|
|
|
$
|
597.0
|
|
|
|
(a)
|
During Fiscal 2016, the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.125% Senior Notes (see
Note 14
). Accordingly, the carrying value of the 2.125% Senior Notes as of
April 1, 2017
and
April 2, 2016
reflects an adjustment of
$1.2 million
and
$2.0 million
, respectively, for the change in fair value attributable to the benchmark interest rate. The carrying value of the 2.125% Senior Notes is also net of unamortized debt issuance costs and discount of
$0.7 million
and
$1.2 million
as of
April 1, 2017
and
April 2, 2016
, respectively.
|
|
|
(b)
|
During Fiscal 2016, the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.625% Senior Notes (see
Note 14
). Accordingly, the carrying value of the 2.625% Senior Notes as of
April 1, 2017
and
April 2, 2016
reflects an adjustment of
$8.2 million
and
$1.5 million
, respectively, for the change in fair value attributable to the benchmark interest rate. The carrying value of the 2.625% Senior Notes is also net of unamortized debt issuance costs and discount of
$1.7 million
and
$2.3 million
as of
April 1, 2017
and
April 2, 2016
, respectively.
|
Senior Notes
In September 2013, the Company completed a registered public debt offering and issued
$300 million
aggregate principal amount of unsecured senior notes due
September 26, 2018
, which bear interest at a fixed rate of
2.125%
, payable semi-annually (the "2.125% Senior Notes"). The 2.125% Senior Notes were issued at a price equal to
99.896%
of their principal amount. The proceeds from this offering were used for general corporate purposes, including repayment of the Company's previously outstanding
€209 million
principal amount of
4.5%
Euro-denominated notes, which matured on
October 4, 2013
.
In August 2015, the Company completed a second registered public debt offering and issued an additional
$300 million
aggregate principal amount of unsecured senior notes due
August 18, 2020
, which bear interest at a fixed rate of
2.625%
, payable semi-annually (the "2.625% Senior Notes"). The 2.625% Senior Notes were issued at a price equal to
99.795%
of their principal amount. The proceeds from this offering were used for general corporate purposes.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has the option to redeem the 2.125% Senior Notes and 2.625% Senior Notes (collectively, the "Senior Notes"), in whole or in part, at any time at a price equal to accrued and unpaid interest on the redemption date, plus the greater of (i)
100%
of the principal amount of the series of Senior Notes to be redeemed or (ii) the sum of the present value of Remaining Scheduled Payments, as defined in the supplemental indentures governing such Senior Notes (together with the indenture governing the Senior Notes, the "Indenture").
The Indenture contains certain covenants that restrict the Company's ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of the Company's property or assets to another party. However, the Indenture does not contain any financial covenants.
Commercial Paper
In May 2014, the Company initiated a commercial paper borrowing program (the "Commercial Paper Program") that allowed it to issue up to
$300 million
of unsecured commercial paper notes through private placement using third-party broker-dealers. In May 2015, the Company expanded its Commercial Paper Program to allow for a total issuance of up to
$500 million
of unsecured commercial paper notes.
Borrowings under the Commercial Paper Program are supported by the Global Credit Facility, as defined below. Accordingly, the Company does not expect combined borrowings outstanding under the Commercial Paper Program and Global Credit Facility to exceed
$500 million
. Commercial Paper Program borrowings may be used to support the Company's general working capital and corporate needs. Maturities of commercial paper notes vary, but cannot exceed
397
days from the date of issuance. Commercial paper notes issued under the Commercial Paper Program rank equally with the Company's other forms of unsecured indebtedness. As of
April 1, 2017
, there were
no
borrowings outstanding under the Commercial Paper Program.
Revolving Credit Facilities
Global Credit Facility
In February 2015, the Company entered into an amended and restated credit facility (which was further amended in March 2016) that provides for a
$500 million
senior unsecured revolving line of credit through
February 11, 2020
(the "Global Credit Facility") under terms and conditions substantially similar to those previously in effect. The Global Credit Facility is also used to support the issuance of letters of credit and the maintenance of the Commercial Paper Program. Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and other currencies, including Euros, Hong Kong Dollars, and Japanese Yen. The Company has the ability to expand its borrowing availability under the Global Credit Facility to
$750 million
, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility. As of
April 1, 2017
, there were
no
borrowings outstanding under the Global Credit Facility and the Company was contingently liable for
$8.4 million
of outstanding letters of credit.
U.S. Dollar-denominated borrowings under the Global Credit Facility bear interest, at the Company's option, either at (a) a base rate, by reference to the greatest of: (i) the annual prime commercial lending rate of JPMorgan Chase Bank, N.A. in effect from time to time, (ii) the weighted-average overnight Federal funds rate plus
50 basis points
, or (iii) the one-month London Interbank Offered Rate ("LIBOR") plus
100 basis points
; or (b) LIBOR, adjusted for the Federal Reserve Board's Eurocurrency liabilities maximum reserve percentage, plus a spread of
87.5 basis points
, subject to adjustment based on the Company's credit ratings ("Adjusted LIBOR"). Foreign currency-denominated borrowings bear interest at Adjusted LIBOR.
In addition to paying interest on any outstanding borrowings under the Global Credit Facility, the Company is required to pay a commitment fee to the lenders under the Global Credit Facility with respect to the unutilized commitments. The commitment fee rate of
7
basis points under the terms of the Global Credit Facility is subject to adjustment based on the Company's credit ratings.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Global Credit Facility contains a number of covenants that, among other things, restrict the Company's ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve itself; engage in businesses that are not in a related line of business; make loans, advances, or guarantees; engage in transactions with affiliates; and make certain investments. The Global Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the "leverage ratio") of no greater than 3.75 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding plus four times consolidated rent expense for the four most recent consecutive fiscal quarters. Consolidated EBITDAR is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense, (iv) consolidated rent expense, (v) restructuring and other non-recurring expenses, and (vi) acquisition-related costs.
As of
April 1, 2017
,
no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company's Global Credit Facility
.
Upon the occurrence of an Event of Default under the Global Credit Facility, the lenders may cease making loans, terminate the Global Credit Facility, and declare all amounts outstanding to be immediately due and payable. The Global Credit Facility specifies a number of events of default (many of which are subject to applicable grace periods), including, among others, the failure to make timely principal, interest, and fee payments or to satisfy the covenants, including the financial covenant described above. Additionally, the Global Credit Facility provides that an Event of Default will occur if Mr. Ralph Lauren, the Company's Executive Chairman and Chief Creative Officer, and entities controlled by the Lauren family fail to maintain a specified minimum percentage of the voting power of the Company's common stock.
Pan-Asia Credit Facilities
Certain of the Company's subsidiaries in Asia have uncommitted credit facilities with regional branches of JPMorgan Chase (the "Banks") in China and South Korea (the "Pan-Asia Credit Facilities"). These credit facilities are subject to annual renewal and may be used to fund general working capital and corporate needs of the Company's operations in the respective countries. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the parent company and are granted at the sole discretion of the Banks, subject to availability of the Banks' funds and satisfaction of certain regulatory requirements. The Pan-Asia Credit Facilities do not contain any financial covenants. The Company's Pan-Asia Credit Facilities by country are as follows:
|
|
•
|
China Credit Facility
— provided Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to
100 million
Chinese Renminbi (approximately
$15 million
) through
April 6, 2017
. During the first quarter of Fiscal 2018, the Company renewed the China Credit Facility through
April 5, 2018
, with a borrowing capacity of up to
50 million
Chinese Renminbi (approximately
$7 million
), which may also be used to support bank guarantees.
|
|
|
•
|
South Korea Credit Facility
— provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to
47 billion
South Korean Won (approximately
$42 million
) through
October 31, 2017
.
|
During Fiscal 2017, the Company repaid
$26.1 million
in borrowings that were previously outstanding under the Pan-Asia Credit Facilities. As of
April 1, 2017
, there were
no
borrowings outstanding under the Pan-Asia Credit Facilities.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
13.
|
Fair Value Measurements
|
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
|
|
•
|
Level 1
— inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
•
|
Level 2
— inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.
|
|
|
•
|
Level 3
— inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.
|
The following table summarizes the Company's financial assets and liabilities that are measured and recorded at fair value on a recurring basis, excluding accrued interest components:
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
(millions)
|
Financial assets recorded at fair value:
|
|
|
|
|
Corporate bonds — non-U.S.
(a)
|
|
$
|
—
|
|
|
$
|
8.0
|
|
Derivative financial instruments
(b)
|
|
32.6
|
|
|
22.4
|
|
Total
|
|
$
|
32.6
|
|
|
$
|
30.4
|
|
Financial liabilities recorded at fair value:
|
|
|
|
|
Derivative financial instruments
(b)
|
|
$
|
21.7
|
|
|
$
|
59.4
|
|
Total
|
|
$
|
21.7
|
|
|
$
|
59.4
|
|
|
|
(a)
|
Based on Level 1 measurements.
|
|
|
(b)
|
Based on Level 2 measurements.
|
To the extent the Company invests in bonds, such investments are classified as available-for-sale and recorded at fair value in its consolidated balance sheets based upon quoted prices in active markets.
The Company's derivative financial instruments are recorded at fair value in its consolidated balance sheets and are valued using pricing models that are primarily based on market observable external inputs, including spot and forward currency exchange rates, benchmark interest rates, and discount rates consistent with the instrument's tenor, and consider the impact of the Company's own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments.
The Company's cash and cash equivalents, restricted cash, and time deposits are recorded at carrying value, which approximates fair value based on Level 1 measurements.
The Company's debt instruments are recorded at their carrying values in its consolidated balance sheets, which may differ from their respective fair values. The fair values of the Senior Notes are estimated based on external pricing data, including available quoted market prices, and with reference to comparable debt instruments with similar interest rates, credit ratings, and trading frequency, among other factors. The fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities are estimated using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's outstanding borrowings. Due to their short-term nature, the fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities at April 2, 2016 approximated their carrying values.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the carrying values and the estimated fair values of the Company's debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
April 2, 2016
|
|
|
Carrying Value
|
|
Fair Value
(a)
|
|
Carrying Value
|
|
Fair Value
(a)
|
|
|
(millions)
|
$300 million 2.125% Senior Notes
|
|
$
|
298.1
|
|
(b)
|
$
|
302.2
|
|
|
$
|
300.8
|
|
(b)
|
$
|
306.0
|
|
$300 million 2.625% Senior Notes
|
|
290.1
|
|
(b)
|
302.8
|
|
|
296.2
|
|
(b)
|
308.3
|
|
Commercial paper notes
|
|
—
|
|
|
—
|
|
|
90.0
|
|
|
90.0
|
|
Borrowings outstanding under credit facilities
|
|
—
|
|
|
—
|
|
|
26.1
|
|
|
26.1
|
|
|
|
(a)
|
Based on Level 2 measurements.
|
|
|
(b)
|
See
Note 12
for discussion of the carrying values of the Company's Senior Notes.
|
Unrealized gains or losses resulting from changes in the fair value of the Company's debt do not result in the realization or expenditure of cash, unless the debt is retired prior to its maturity.
Non-financial Assets and Liabilities
The Company's non-financial assets, which primarily consist of goodwill, other intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions.
During
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
, the Company recorded non-cash impairment charges of
$248.6 million
,
$48.8 million
, and
$6.9 million
, respectively, to fully write off the carrying values of certain long-lived assets based upon their assumed fair values of
zero
. The fair values of these assets were determined based on Level 3 measurements. Inputs to these fair value measurements included estimates of the amount and timing of the assets' net future discounted cash flows based on historical experience, current trends, and market conditions. See
Note 9
for further discussion of the non-cash impairment charges recorded by the Company during the fiscal years presented.
In
Fiscal 2017
, the Company performed its annual goodwill impairment assessment as of the beginning of the second quarter of the fiscal year using a qualitative approach. In performing the assessment, the Company identified and considered the significance of relevant key factors, events, and circumstances that affected the fair values and/or carrying amounts of its reporting units. These factors included external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as the Company's actual and planned financial performance. Additionally, the results of the Company's most recent quantitative goodwill impairment test indicated that the fair values of its reporting units significantly exceeded their respective carrying values. Based on the results of its qualitative goodwill impairment assessment, the Company concluded that it is not more likely than not that the fair values of its reporting units are less than their respective carrying values, and there were no reporting units at risk of impairment.
No
goodwill impairment charges were recorded during any of the three fiscal years presented in connection with the Company's annual goodwill impairment assessments.
Subsequent to the Company's
Fiscal 2017
annual goodwill impairment assessment, the Company realigned its segment reporting structure during the fourth quarter of Fiscal 2017 as a result of significant organizational changes implemented in connection with the Way Forward Plan (see
Note 20
). As a result of the realignment of its segment reporting structure, the Company reallocated the carrying amount of goodwill to its new reporting units based upon each reporting unit's relative fair value as of the first day of the Company's fourth quarter of Fiscal 2017. In connection with this reallocation, the Company performed an interim assessment of the recoverability of goodwill assigned to its new reporting units using a quantitative approach. The estimated fair values of the Company's new reporting units were determined using discounted cash flows and market comparisons. Based on the results of the quantitative impairment assessment performed, the Company concluded that the fair value of one of its new reporting units was less than its carrying value. As a result, a goodwill impairment charge of
$5.2 million
was recorded to fully write off the carrying value of the reporting unit's reallocated goodwill. The fair values of the remaining new reporting units significantly exceeded their respective carrying values and were not at risk of impairment.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
14.
|
Financial Instruments
|
Derivative Financial Instruments
The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows and the value of the reported net assets of its international operations, as well as changes in the fair value of its fixed-rate debt attributed to changes in the benchmark interest rate. Consequently, the Company uses derivative financial instruments to manage and mitigate such risks. The Company does not enter into derivative transactions for speculative or trading purposes.
The following table summarizes the Company's outstanding derivative instruments on a gross basis as recorded in its consolidated balance sheets as of
April 1, 2017
and
April 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amounts
|
|
Derivative Assets
|
|
Derivative Liabilities
|
Derivative Instrument
(a)
|
|
April 1, 2017
|
|
April 2, 2016
|
|
April 1,
2017
|
|
April 2,
2016
|
|
April 1,
2017
|
|
April 2,
2016
|
|
|
|
|
|
|
Balance
Sheet
Line
(b)
|
|
Fair
Value
|
|
Balance
Sheet
Line
(b)
|
|
Fair
Value
|
|
Balance
Sheet
Line
(b)
|
|
Fair
Value
|
|
Balance
Sheet
Line
(b)
|
|
Fair
Value
|
|
|
(millions)
|
Designated Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC — Cash flow hedges
|
|
$
|
533.2
|
|
|
$
|
741.6
|
|
|
PP
|
|
$
|
17.7
|
|
|
PP
|
|
$
|
1.1
|
|
|
AE
|
|
$
|
3.7
|
|
|
(d)
|
|
$
|
22.9
|
|
IRS — Fixed-rate debt
|
|
600.0
|
|
|
600.0
|
|
|
|
|
—
|
|
|
ONCA
|
|
2.0
|
|
|
ONCL
|
|
9.4
|
|
|
ONCL
|
|
1.5
|
|
CCS — NI
|
|
591.2
|
|
|
630.3
|
|
|
ONCA
|
|
9.6
|
|
|
—
|
|
—
|
|
|
|
|
—
|
|
|
ONCL
|
|
31.5
|
|
Total Designated Hedges
|
|
$
|
1,724.4
|
|
|
$
|
1,971.9
|
|
|
|
|
$
|
27.3
|
|
|
|
|
$
|
3.1
|
|
|
|
|
$
|
13.1
|
|
|
|
|
$
|
55.9
|
|
Undesignated Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC — Undesignated hedges
(c)
|
|
$
|
375.1
|
|
|
$
|
540.8
|
|
|
PP
|
|
$
|
5.3
|
|
|
(e)
|
|
$
|
19.3
|
|
|
AE
|
|
$
|
8.6
|
|
|
AE
|
|
$
|
3.5
|
|
Total Hedges
|
|
$
|
2,099.5
|
|
|
$
|
2,512.7
|
|
|
|
|
$
|
32.6
|
|
|
|
|
$
|
22.4
|
|
|
|
|
$
|
21.7
|
|
|
|
|
$
|
59.4
|
|
|
|
(a)
|
FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contracts; CCS = Cross-currency swap contracts; NI = Net investment hedges.
|
|
|
(b)
|
PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCA = Other non-current assets; ONCL = Other non-current liabilities.
|
|
|
(c)
|
Primarily includes undesignated hedges of foreign currency-denominated intercompany loans and other intercompany balances.
|
|
|
(d)
|
$22.4 million
included within accrued expenses and other current liabilities and
$0.5 million
included within other non-current liabilities.
|
|
|
(e)
|
$15.0 million
included within prepaid expenses and other current assets and
$4.3 million
included within other non-current assets.
|
The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheets on a gross basis, even when they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its derivative instruments on a net basis in accordance with the terms of each of its master netting arrangements, spread across
eight
separate counterparties, the amounts presented in the consolidated balance sheets as of
April 1, 2017
and
April 2, 2016
would be adjusted from the current gross presentation as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
April 2, 2016
|
Derivative Instrument
|
|
Gross Amounts Presented in the Balance Sheet
|
|
Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements
|
|
Net
Amount
|
|
Gross Amounts Presented in the Balance Sheet
|
|
Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements
|
|
Net
Amount
|
|
|
(millions)
|
Derivative assets
|
|
$
|
32.6
|
|
|
$
|
(18.3
|
)
|
|
$
|
14.3
|
|
|
$
|
22.4
|
|
|
$
|
(11.3
|
)
|
|
$
|
11.1
|
|
Derivative liabilities
|
|
21.7
|
|
|
(18.3
|
)
|
|
3.4
|
|
|
59.4
|
|
|
(11.3
|
)
|
|
48.1
|
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. See
Note 3
for further discussion of the Company's master netting arrangements.
The following tables summarize the pretax impact of the effective portion of gains and losses from the Company's designated derivative instruments on its consolidated financial statements for the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
Recognized in OCI
|
|
|
Fiscal Years Ended
|
Derivative Instrument
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Designated Hedges:
|
|
|
|
|
|
|
FC — Cash flow hedges
|
|
$
|
30.4
|
|
|
$
|
(20.5
|
)
|
|
$
|
68.2
|
|
CCS — NI
(a)
|
|
37.7
|
|
|
(28.4
|
)
|
|
—
|
|
Total Designated Hedges
|
|
$
|
68.1
|
|
|
$
|
(48.9
|
)
|
|
$
|
68.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified
from AOCI to Earnings
|
|
Location of Gains (Losses) Reclassified from
AOCI to Earnings
|
|
|
Fiscal Years Ended
|
|
Derivative Instrument
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
|
(millions)
|
|
|
Designated Hedges:
|
|
|
|
|
|
|
|
|
FC — Cash flow hedges
|
|
$
|
0.5
|
|
|
$
|
43.7
|
|
|
$
|
3.0
|
|
|
Cost of goods sold
|
FC — Cash flow hedges
|
|
0.5
|
|
|
(4.7
|
)
|
|
14.4
|
|
|
Foreign currency gains (losses)
|
Total Designated Hedges
|
|
$
|
1.0
|
|
|
$
|
39.0
|
|
|
$
|
17.4
|
|
|
|
|
|
(a)
|
Amounts recognized in OCI would be recognized in earnings only upon the sale or liquidation of the hedged net investment.
|
As of
April 1, 2017
, it is estimated that
$16.0 million
of pretax net gains on both outstanding and matured derivative instruments
deferred in AOCI
will be recognized in earnings over the next twelve months. The amounts ultimately recognized in earnings will depend on exchange rates in effect when outstanding derivative instruments are settled.
No
material gains or losses relating to ineffective cash flow hedges were recognized during any of the fiscal years presented.
The following table summarizes the pretax impact of gains and losses from the Company's undesignated derivative instruments on its consolidated financial statements for the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
Recognized in Earnings
|
|
Location of Gains (Losses)
Recognized in Earnings
|
|
|
Fiscal Years Ended
|
|
Derivative Instrument
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
|
(millions)
|
|
|
Undesignated Hedges:
|
|
|
|
|
|
|
|
|
FC — Undesignated hedges
|
|
$
|
(3.6
|
)
|
|
$
|
(6.6
|
)
|
|
$
|
18.1
|
|
|
Foreign currency gains (losses)
|
Total Undesignated Hedges
|
|
$
|
(3.6
|
)
|
|
$
|
(6.6
|
)
|
|
$
|
18.1
|
|
|
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Risk Management Strategies
Forward Foreign Currency Exchange Contracts
The Company uses forward foreign currency exchange contracts to reduce its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, and the settlement of foreign currency-denominated balances. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, and the Hong Kong Dollar, the Company hedges a portion of its foreign currency exposures anticipated over a
two
-year period. In doing so, the Company uses forward foreign currency exchange contracts that generally have maturities of
two months
to
two years
to provide continuing coverage throughout the hedging period of the respective exposure.
Interest Rate Swap Contracts
During Fiscal 2016, the Company entered into two pay-floating rate, receive-fixed rate interest rate swap contracts which it designated as hedges against changes in the respective fair values of its fixed-rate
2.125%
Senior Notes and its fixed-rate
2.625%
Senior Notes attributed to changes in the benchmark interest rate (the "Interest Rate Swaps"). The Interest Rate Swaps, which mature on
September 26, 2018
and
August 18, 2020
, respectively, both have notional amounts of
$300 million
and swap the fixed interest rates on the Company's
2.125%
Senior Notes and
2.625%
Senior Notes for variable interest rates based on the 3-month LIBOR plus a fixed spread. Changes in the fair values of the Interest Rate Swaps were offset by changes in the fair values of the
2.125%
Senior Notes and
2.625%
Senior Notes attributed to changes in the benchmark interest rate, with
no
resulting ineffectiveness recognized in earnings during Fiscal 2017 or Fiscal 2016.
Cross-Currency Swap Contracts
During Fiscal 2016, the Company entered into two pay-floating rate, receive-floating rate cross-currency swap contracts, with notional amounts of
€280 million
and
€274 million
, which it designated as hedges of its net investment in certain of its European subsidiaries (the "Cross-Currency Swaps"). The Cross-Currency Swaps, which mature on
September 26, 2018
and
August 18, 2020
, respectively, swap the U.S. Dollar-denominated variable interest rate payments based on 3-month LIBOR plus a fixed spread (as paid under the Interest Rate Swaps described above) for Euro-denominated variable interest rate payments based on the 3-month Euro Interbank Offered Rate plus a fixed spread. As a result, the Cross-Currency Swaps, in conjunction with the Interest Rate Swaps, economically convert the Company's
$300 million
fixed-rate
2.125%
and
$300 million
fixed-rate
2.625%
obligations to
€280 million
and
€274 million
floating-rate Euro-denominated liabilities, respectively. No material gains or losses related to the ineffective portion, or the amount excluded from effectiveness testing, were recognized in interest expense within the consolidated statements of operations during Fiscal 2017 or Fiscal 2016.
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.
Investments
As of
April 1, 2017
, the Company's short-term investments consisted of
$684.7 million
of time deposits, and its non-current investments consisted of
$21.4 million
of time deposits. As of
April 2, 2016
, the Company's short-term investments consisted of
$621.4 million
of time deposits and
$8.0 million
of non-U.S. corporate bonds, and its non-current investments consisted of
$186.6 million
of time deposits.
No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded in any of the fiscal years presented.
See Note 3 for further discussion of the Company's accounting policies relating to its investments.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
15.
|
Commitments and Contingencies
|
Leases
The Company operates most of its retail stores under various leasing arrangements. The Company also occupies various office and warehouse facilities and uses certain equipment under numerous lease agreements. Such leasing arrangements are accounted for as either operating leases or capital leases. In this context, capital leases include leases whereby the Company is considered to have the substantive risks of ownership during construction of a leased property. Information on the Company's operating and capital leasing activities is set forth below.
Operating Leases
The Company is typically required to make minimum rental payments, and often contingent rental payments, under its operating leases. Many of the Company's retail store leases provide for contingent rental payments based upon sales, and certain rental agreements require payment based solely on a percentage of sales. Terms of the Company's leases generally contain renewal options, rent escalation clauses, and landlord incentives. Rent expense, net of sublease income, was
$460.5 million
,
$472.4 million
, and
$465.9 million
in
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
, respectively. Such amounts include contingent rental charges of
$164.0 million
,
$163.4 million
, and
$172.2 million
in
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
, respectively. In addition to such amounts, the Company is normally required to pay taxes, insurance, and certain occupancy costs relating to the leased real estate properties.
As of
April 1, 2017
, future minimum rental payments under noncancelable operating leases with lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
|
Minimum Operating
Lease Payments
(a)(b)
|
|
|
(millions)
|
Fiscal 2018
|
|
$
|
318.1
|
|
Fiscal 2019
|
|
311.2
|
|
Fiscal 2020
|
|
284.9
|
|
Fiscal 2021
|
|
232.2
|
|
Fiscal 2022
|
|
189.2
|
|
Fiscal 2023 and thereafter
|
|
533.4
|
|
Total net minimum rental payments
|
|
$
|
1,869.0
|
|
|
|
(a)
|
Net of sublease income, which is not significant in any period.
|
|
|
(b)
|
Includes a
$49.5 million
operating lease obligation related to the land portion of the build-to-suit lease agreement for the Company's former Polo store on Fifth Avenue in New York City, as further described below.
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital Leases
Assets under capital leases, including build-to-suit leases, amounted to
$264.9 million
and
$278.4 million
at the end of
Fiscal 2017
and
Fiscal 2016
, respectively, net of accumulated depreciation of
$77.6 million
and
$52.9 million
, respectively. Such assets are classified within property and equipment, net in the consolidated balance sheets based on their nature.
As of
April 1, 2017
, future minimum rental payments under noncancelable capital leases, including build-to-suit leases, with lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
|
Minimum Capital
Lease Payments
(a)(b)
|
|
|
(millions)
|
Fiscal 2018
|
|
$
|
29.8
|
|
Fiscal 2019
|
|
28.3
|
|
Fiscal 2020
|
|
30.5
|
|
Fiscal 2021
|
|
28.3
|
|
Fiscal 2022
|
|
24.9
|
|
Fiscal 2023 and thereafter
|
|
81.2
|
|
Total net minimum rental payments
|
|
223.0
|
|
Less: amount representing interest
|
|
(49.5
|
)
|
Present value of net minimum rental payments
|
|
$
|
173.5
|
|
|
|
(a)
|
Net of sublease income, which is not significant in any period.
|
|
|
(b)
|
Includes lease payments related to the Company's build-to-suit lease agreement for its former Polo store on Fifth Avenue in New York City, which was closed during the first quarter of Fiscal 2018. The total remaining commitment related to this lease was
$160.2 million
as of
April 1, 2017
, comprised of a
$49.5 million
operating lease obligation related to the land portion of the lease (included in the minimum operating lease payments table above) and a
$110.7 million
obligation related to the building portion of the lease (included in this minimum capital lease payments table).
|
Employee Agreements
The Company has employment agreements with certain executives in the normal course of business which provide for compensation and certain other benefits. These agreements also provide for severance payments under certain circumstances.
Other Commitments
Other off-balance sheet firm commitments amounted to
$854.8 million
as of
April 1, 2017
, including inventory purchase commitments of
$674.8 million
, outstanding letters of credit of
$9.7 million
, interest payments related to the Company's Senior Notes of
$37.1 million
, and other commitments of
$133.2 million
, comprised of the Company's legally-binding obligations under sponsorship, licensing, and other marketing and advertising agreements, distribution-related agreements, information technology-related service agreements, and pension-related obligations.
Customs Audit
In September 2014, one of the Company's international subsidiaries received a pre-assessment notice from the relevant customs officials concerning the method used to determine the dutiable value of imported inventory. The notice communicated the customs officials' assertion that the Company should have applied an alternative duty method, which could result in up to
$46 million
in incremental duty and non-creditable value-added tax, including
$11 million
in interest and penalties. The Company believes that the alternative duty method claimed by the customs officials is not applicable to the Company's facts and circumstances and is vigorously contesting their asserted methodology.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 2014, the Company filed an appeal of the pre-assessment notice in accordance with the standard procedures established by the relevant customs authorities. In response to the filing of the Company's appeal of the pre-assessment notice, the review committee instructed the customs officials to reconsider their assertion of the alternative duty method and conduct a re-audit to evaluate the facts and circumstances noted in the pre-assessment notice. In December 2015, the Company received the results of the re-audit conducted and a customs audit assessment notice in the amount of
$34.1 million
, which the Company recorded within restructuring and other charges in its consolidated statements of operations during the third quarter of Fiscal 2016 (see
Note 10
). Although the Company disagrees with the assessment notice, in order to secure the Company's rights, the Company was required to pay the assessment amount and then subsequently file an appeal with the customs authorities. The Company continues to maintain its original filing position and will vigorously contest any other proposed methodology asserted by the customs officials. Should the Company be successful in its merits, a full refund for the amounts paid plus interest will be required to be paid by the customs authorities. If the Company is unsuccessful in its current appeal with the customs authorities, it may further appeal this decision within the courts. At this time, while the Company believes that the customs officials' claims are not meritorious and that the Company should prevail, the outcome of the appeals process is subject to risk and uncertainty.
Other Matters
The Company is involved, from time to time, in litigation, other legal claims, and proceedings involving matters associated with or incidental to its business, including, among other things, matters involving credit card fraud, trademark and other intellectual property, licensing, importation and exportation of its products, taxation, unclaimed property, and employee relations. The Company believes at present that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on its consolidated financial statements. However, the Company's assessment of the current litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims.
In the normal course of business, the Company enters into agreements that provide general indemnifications. The Company has not made any significant indemnification payments under such agreements in the past, and does not currently anticipate incurring any material indemnification payments.
Capital Stock
The Company's capital stock consists of
two
classes of common stock. There are
500 million
shares of Class A common stock and
100 million
shares of Class B common stock authorized to be issued. Shares of Class A and Class B common stock have substantially identical rights, except with respect to voting rights. Holders of Class A common stock are entitled to
one
vote per share and holders of Class B common stock are entitled to
ten
votes per share. Holders of both classes of stock vote together as a single class on all matters presented to the stockholders for their approval, except with respect to the election and removal of directors or as otherwise required by applicable law. All outstanding shares of Class B common stock are owned by Mr. Ralph Lauren, the Company's Executive Chairman and Chief Creative Officer, and entities controlled by the Lauren family, and are convertible at any time into shares of Class A common stock on a
one-for-one
basis.
Class B Common Stock Conversions
During Fiscal 2015, the Lauren Family, L.L.C., a limited liability company managed by the children of Mr. R. Lauren, converted
1.0 million
shares of Class B common stock into an equal number of shares of Class A common stock pursuant to the terms of the security, which were subsequently sold on the open market as part of a pre-determined, systematic trading plan.
These transactions resulted in reclassifications within equity, and had no other effect on the Company's consolidated balance sheets.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock Repurchase Program
In June 2016, as part of its common stock repurchase program, the Company entered into an accelerated share repurchase program with a third-party financial institution under which it made an upfront payment of
$100 million
in exchange for an initial delivery of
0.9 million
shares of its Class A common stock, representing
90%
of the total shares ultimately expected to be delivered over the program's term (the "ASR Program"). The initial shares received, which had an aggregate cost of
$90 million
based on the June 20, 2016 closing share price, were immediately retired and recorded as an increase to treasury stock.
In September 2016, at the ASR Program's conclusion, the Company received
0.1 million
additional shares and recorded a related
$10 million
increase to treasury stock. The number of additional shares delivered was based on the volume-weighted average price per share of the Company's Class A common stock over the term of the ASR Program, less an agreed upon discount. The average price per share paid for all of the shares delivered under the ASR Program was
$98.48
.
A summary of the Company's repurchases of Class A common stock under its common stock repurchase program, including the ASR Program, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(in millions)
|
Cost of shares repurchased
|
|
$
|
200.0
|
|
|
$
|
479.9
|
|
|
$
|
499.9
|
|
Number of shares repurchased
|
|
2.2
|
|
|
4.2
|
|
|
3.2
|
|
As of
April 1, 2017
, the remaining availability under the Company's Class A common stock repurchase program was approximately
$100 million
, reflecting the May 11, 2016 approval by the Company's Board of Directors to expand the program by up to an additional
$200 million
of Class A common stock repurchases. Repurchases of shares of Class A common stock are subject to overall business and market conditions.
In addition, during each of
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
,
0.2 million
shares of Class A common stock at a cost of
$15.2 million
,
$20.5 million
, and
$31.7 million
, respectively, were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company's 1997 Long-Term Stock Incentive Plan, as amended (the "1997 Incentive Plan"), and its Amended and Restated 2010 Long-Term Stock Incentive Plan (the "2010 Incentive Plan").
Repurchased and surrendered shares are accounted for as treasury stock at cost and held in treasury for future use.
Dividends
Since 2003, the Company has maintained a regular quarterly cash dividend program on its common stock. On February 3, 2015, the Company's Board of Directors approved an increase to the Company's quarterly cash dividend on its common stock from
$0.45
per share to
$0.50
per share. Dividends paid amounted to
$164.8 million
,
$170.3 million
, and
$158.2 million
in
Fiscal 2017
,
Fiscal 2016
, and
Fiscal 2015
, respectively.
Conversion of Stock-based Compensation Awards
During Fiscal 2015, in connection with employment agreements with certain of its executive officers, the Company converted certain fully-vested and expensed stock-based compensation awards to a cash contribution into a deferred compensation account. The Company recorded the excess of these awards' then current redemption values over their original grant-date fair values to retained earnings, with a corresponding increase to other non-current liabilities in the consolidated balance sheet.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
17.
|
Accumulated Other Comprehensive Income (Loss)
|
The following table presents OCI activity, net of tax, which is accumulated in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Gains (Losses)
(a)
|
|
Net Unrealized Gains (Losses) on Cash Flow Hedges
(b)
|
|
Net Unrealized Gains (Losses) on Defined Benefit Plans
(c)
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
|
(millions)
|
Balance at March 29, 2014
|
|
$
|
124.5
|
|
|
$
|
(4.3
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
113.2
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
(318.5
|
)
|
|
62.4
|
|
|
(8.2
|
)
|
|
(264.3
|
)
|
Amounts reclassified from AOCI to earnings
|
|
—
|
|
|
(14.9
|
)
|
|
0.4
|
|
|
(14.5
|
)
|
Other comprehensive income (loss), net of tax
|
|
(318.5
|
)
|
|
47.5
|
|
|
(7.8
|
)
|
|
(278.8
|
)
|
Balance at March 28, 2015
|
|
(194.0
|
)
|
|
43.2
|
|
|
(14.8
|
)
|
|
(165.6
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
36.4
|
|
|
(18.8
|
)
|
|
1.4
|
|
|
19.0
|
|
Amounts reclassified from AOCI to earnings
|
|
—
|
|
|
(36.4
|
)
|
|
1.5
|
|
|
(34.9
|
)
|
Other comprehensive income (loss), net of tax
|
|
36.4
|
|
|
(55.2
|
)
|
|
2.9
|
|
|
(15.9
|
)
|
Balance at April 2, 2016
|
|
(157.6
|
)
|
|
(12.0
|
)
|
|
(11.9
|
)
|
|
(181.5
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
(48.6
|
)
|
|
28.2
|
|
|
1.8
|
|
|
(18.6
|
)
|
Amounts reclassified from AOCI to earnings
|
|
—
|
|
|
(1.6
|
)
|
|
3.3
|
|
|
1.7
|
|
Other comprehensive income (loss), net of tax
|
|
(48.6
|
)
|
|
26.6
|
|
|
5.1
|
|
|
(16.9
|
)
|
Balance at April 1, 2017
|
|
$
|
(206.2
|
)
|
|
$
|
14.6
|
|
|
$
|
(6.8
|
)
|
|
$
|
(198.4
|
)
|
|
|
(a)
|
OCI before reclassifications to earnings related to foreign currency translation gains (losses) includes an income tax provision of
$15.0 million
for
Fiscal 2017
, and includes income tax benefits of
$10.7 million
and
$4.5 million
for
Fiscal 2016
and
Fiscal 2015
, respectively. OCI before reclassifications to earnings for
Fiscal 2017
and
Fiscal 2016
include a gain of
$23.4 million
(net of a
$14.3 million
income tax provision) and a loss of
$17.4 million
(net of an
$11.0 million
income tax benefit), respectively, related to the effective portion of changes in the fair values of the Cross-Currency Swaps designated as hedges of the Company's net investment in certain of its European subsidiaries (see
Note 14
).
|
|
|
(b)
|
OCI before reclassifications to earnings related to net unrealized gains (losses) on cash flow hedges is net of income tax provisions of
$2.2 million
and
$5.8 million
for
Fiscal 2017
and
Fiscal 2015
, respectively, and is net of an income tax benefit of
$1.7 million
for
Fiscal 2016
. The tax effects on amounts reclassified from AOCI to earnings are presented in a table below.
|
|
|
(c)
|
OCI before reclassifications to earnings related to net unrealized gains (losses) on defined benefit plans is net of an income tax benefit of
$0.9 million
for
Fiscal 2015
. The tax effects for both Fiscal 2017 and Fiscal 2016 were not material. The tax effects on amounts reclassified from AOCI to earnings were not material for any period presented.
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents reclassifications from AOCI to earnings for cash flow hedges, by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
Location of Gains (Losses)
Reclassified from AOCI
to Earnings
|
|
|
(millions)
|
|
|
Gains (losses) on cash flow hedges
(a)
:
|
|
|
|
|
|
|
|
|
FC — Cash flow hedges
|
|
$
|
0.5
|
|
|
$
|
43.7
|
|
|
$
|
3.0
|
|
|
Cost of goods sold
|
FC — Cash flow hedges
|
|
0.5
|
|
|
(4.7
|
)
|
|
14.4
|
|
|
Foreign currency gains (losses)
|
Tax effect
|
|
0.6
|
|
|
(2.6
|
)
|
|
(2.5
|
)
|
|
Income tax benefit (provision)
|
Net of tax
|
|
$
|
1.6
|
|
|
$
|
36.4
|
|
|
$
|
14.9
|
|
|
|
|
|
(a)
|
FC = Forward foreign currency exchange contracts.
|
|
|
18.
|
Stock-based Compensation
|
Long-term Stock Incentive Plans
The Company's stock-based compensation awards are currently issued under the 2010 Incentive Plan, which was approved by its stockholders on August 5, 2010. However, any prior awards granted under the 1997 Incentive Plan remain subject to the terms of that plan. Any awards that expire, are forfeited, or are surrendered to the Company in satisfaction of taxes are available for issuance under the 2010 Incentive Plan. On September 1, 2016, the Company registered with the Securities and Exchange Commission an additional
0.9 million
shares of its Class A common stock for issuance pursuant to the 2010 Incentive Plan. As of
April 1, 2017
,
3.3 million
shares remained available for future issuance under the Company's incentive plans.
Stock-based compensation awards that may be made under the 2010 Incentive Plan include, but are not limited to, (i) stock options, (ii) restricted stock, and (iii) RSUs. In recent years, the Company's annual grants of stock-based compensation awards to its employees primarily consisted of stock options and RSUs. However, beginning in Fiscal 2016, the annual grants consisted entirely of RSUs, as the Company elected to issue service-based RSUs in lieu of stock options. Additionally, new vesting provisions for certain awards granted to retirement-eligible employees were introduced. Specifically, beginning in Fiscal 2016, for certain service-based and performance-based RSUs granted to retirement-eligible employees, or employees who will become retirement-eligible prior to the end of the awards' respective stated vesting periods, vesting continues post-retirement for all or a portion of the remaining unvested RSUs.
Impact on Results
A summary of the total expense and the associated income tax benefits recognized related to stock-based compensation arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
March 28,
2015
|
|
|
(millions)
|
Compensation expense
|
|
$
|
63.6
|
|
(a)
|
$
|
97.0
|
|
(a)
|
$
|
80.5
|
|
Income tax benefit
|
|
$
|
(22.6
|
)
|
|
$
|
(36.8
|
)
|
|
$
|
(30.0
|
)
|
|
|
(a)
|
Fiscal 2017 and Fiscal 2016 include
$4.3 million
and
$8.9 million
, respectively, of accelerated stock-based compensation expense recorded within restructuring and other charges in the consolidated statements of operations (see
Note 10
). All other stock-based compensation expense was recorded within SG&A expenses.
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to various factors, including the timing and magnitude of forfeiture and performance goal achievement adjustments, as well as changes to the size and composition of the eligible employee population, stock-based compensation expense recognized during any given fiscal year is not indicative of the level of compensation expense expected to be incurred in future periods.
Stock Options
Stock options have been granted to employees and non-employee directors with exercise prices equal to the fair market value of the Company's Class A common stock on the date of grant. Generally, options become exercisable ratably (graded-vesting schedule) over a
three
-year vesting period, subject to the employee's continuing employment. Stock options generally expire
seven years
from the date of grant.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions including the following:
Expected Term
—
The estimate of expected term is based on the historical exercise behavior of employees and non-employee directors, as well as the contractual life of the option grants.
Expected Volatility
—
The expected volatility factor is based on the historical volatility of the Company's Class A common stock for a period equal to the stock option's expected term.
Expected Dividend Yield
—
The expected dividend yield is based on the Company's quarterly cash dividend rate in effect on the date of grant.
Risk-free Interest Rate
—
The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the option's expected term.
The Company's weighted average assumptions used to estimate the fair value of stock options granted during the fiscal years presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 1,
2017
(a)
|
|
April 2,
2016
(a)
|
|
March 28,
2015
|
Expected term (years)
|
|
N/A
|
|
N/A
|
|
4.2
|
|
Expected volatility
|
|
N/A
|
|
N/A
|
|
30.2
|
%
|
Expected dividend yield
|
|
N/A
|
|
N/A
|
|
1.10
|
%
|
Risk-free interest rate
|
|
N/A
|
|
N/A
|
|
1.4
|
%
|
Weighted-average option grant date fair value
|
|
N/A
|
|
N/A
|
|
$37.91
|
|
|
|
(a)
|
No stock options were granted during Fiscal 2017 or Fiscal 2016.
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity during
Fiscal 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
(a)
|
|
|
(thousands)
|
|
|
|
(years)
|
|
(millions)
|
Options outstanding at April 2, 2016
|
|
2,418
|
|
|
$
|
146.58
|
|
|
3.7
|
|
$
|
6.5
|
|
Granted
|
|
—
|
|
|
N/A
|
|
|
|
|
|
Exercised
|
|
(88
|
)
|
|
63.03
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(610
|
)
|
|
159.07
|
|
|
|
|
|
Options outstanding at April 1, 2017
|
|
1,720
|
|
|
$
|
146.35
|
|
|
2.6
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at April 1, 2017
(b)
|
|
1,719
|
|
|
$
|
146.35
|
|
|
2.6
|
|
$
|
1.0
|
|
Options exercisable at April 1, 2017
|
|
1,572
|
|
|
$
|
145.08
|
|
|
2.5
|
|
$
|
1.0
|
|
|
|
(a)
|
Aggregate intrinsic value is the amount by which the market price of the Company's Class A common stock at the end of the period exceeds the exercise price of the stock option, multiplied by the number of options.
|
|
|
(b)
|
The number of options expected to vest takes into consideration expected forfeitures.
|
Additional information pertaining to the Company's stock option plans is as follows: