filings.toolsItem 15. Exhibits, Financial Statement Schedules.
254K characters. Original on sec.gov · Markdown
Item 15. Exhibits, Financial Statement Schedules.
(a) 1., 2. Financial Statements and Financial Statement Schedules. See index on Page F-1.
- Exhibits
| 71 |
| 72 |
Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibits shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934.
| * | Filed herewith. |
| † | Management contract or compensatory plan or arrangement. |
| 73 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RALPH LAUREN CORPORATION | ||
| By: | /S/ JANE HAMILTON NIELSEN | |
| Jane Hamilton Nielsen | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| Date: May 23, 2018 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /S/ RALPH LAUREN | Executive Chairman, Chief Creative Officer, and Director | May 23, 2018 | ||
| Ralph Lauren | ||||
| /S/ PATRICE LOUVET | President, Chief Executive Officer, and Director (Principal Executive Officer) | May 23, 2018 | ||
| Patrice Louvet | ||||
| /S/ JANE HAMILTON NIELSEN | Chief Financial Officer (Principal Financial and Accounting Officer) | May 23, 2018 | ||
| Jane Hamilton Nielsen | ||||
| /s/ DAVID LAUREN | Vice Chairman, Chief Innovation Officer, Strategic Advisor to the CEO, and Director | May 23, 2018 | ||
| David Lauren | ||||
| /S/ JOHN R. ALCHIN | Director | May 23, 2018 | ||
| John R. Alchin | ||||
| /S/ ARNOLD H. ARONSON | Director | May 23, 2018 | ||
| Arnold H. Aronson | ||||
| /S/ FRANK A. BENNACK, JR. | Director | May 23, 2018 | ||
| Frank A. Bennack, Jr. | ||||
| /S/ DR. JOYCE F. BROWN | Director | May 23, 2018 | ||
| Dr. Joyce F. Brown | ||||
| /S/ JOEL L. FLEISHMAN | Director | May 23, 2018 | ||
| Joel L. Fleishman | ||||
| /s/ MICHAEL A. GEORGE | Director | May 23, 2018 | ||
| Michael A. George |
| 74 |
| Signature | Title | Date | ||
| /S/ HUBERT JOLY | Director | May 23, 2018 | ||
| Hubert Joly | ||||
| /S/ JUDITH MCHALE | Director | May 23, 2018 | ||
| Judith McHale | ||||
| /S/ ROBERT C. WRIGHT | Director | May 23, 2018 | ||
| Robert C. Wright |
| 75 |
RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
| Page | ||
| Consolidated Financial Statements: | ||
| Consolidated Balance Sheets | F-2 | |
| Consolidated Statements of Operations | F-3 | |
| Consolidated Statements of Comprehensive Income (Loss) | F-4 | |
| Consolidated Statements of Cash Flows | F-5 | |
| Consolidated Statements of Equity | F-6 | |
| Notes to Consolidated Financial Statements | F-7 | |
| Management's Report on Responsibility For Financial Statements | F-52 | |
| Reports of Independent Registered Public Accounting Firm | F-53 | |
| Supplementary Information: | ||
| Selected Financial Information | F-55 | |
| Quarterly Financial Information | F-57 | |
| EX-12.1 | ||
| EX-21.1 | ||
| EX-23.1 | ||
| EX-31.1 | ||
| EX-31.2 | ||
| EX-32.1 | ||
| EX-32.2 | ||
| EX-101 | INSTANCE DOCUMENT | |
| EX-101 | SCHEMA DOCUMENT | |
| EX-101 | CALCULATION LINKBASE DOCUMENT | |
| EX-101 | LABELS LINKBASE DOCUMENT | |
| EX-101 | PRESENTATION LINKBASE DOCUMENT | |
| EX-101 | DEFINITION LINKBASE DOCUMENT |
| F-1 |
RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,304.6 | $ | 668.3 | ||||
| Short-term investments | 699.4 | 684.7 | ||||||
| Accounts receivable, net of allowances of $222.2 million and $214.4 million | 421.4 | 450.2 | ||||||
| Inventories | 761.3 | 791.5 | ||||||
| Income tax receivable | 38.0 | 79.4 | ||||||
| Prepaid expenses and other current assets | 323.7 | 280.4 | ||||||
| Total current assets | 3,548.4 | 2,954.5 | ||||||
| Property and equipment, net | 1,186.3 | 1,316.0 | ||||||
| Deferred tax assets | 86.6 | 125.9 | ||||||
| Goodwill | 950.5 | 904.6 | ||||||
| Intangible assets, net | 188.0 | 219.8 | ||||||
| Other non-current assets | 183.5 | 131.2 | ||||||
| Total assets | $ | 6,143.3 | $ | 5,652.0 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Short-term debt | $ | 10.1 | $ | — | ||||
| Current portion of long-term debt | 298.1 | — | ||||||
| Accounts payable | 165.6 | 147.7 | ||||||
| Income tax payable | 30.0 | 29.5 | ||||||
| Accrued expenses and other current liabilities | 1,083.4 | 982.7 | ||||||
| Total current liabilities | 1,587.2 | 1,159.9 | ||||||
| Long-term debt | 288.0 | 588.2 | ||||||
| Income tax payable | 124.8 | — | ||||||
| Non-current liability for unrecognized tax benefits | 79.2 | 62.7 | ||||||
| Other non-current liabilities | 606.7 | 541.6 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Total liabilities | 2,685.9 | 2,352.4 | ||||||
| Equity: | ||||||||
| Class A common stock, par value $.01 per share; 102.0 million and 101.5 million shares issued; 55.4 million and 55.1 million shares outstanding | 1.0 | 0.9 | ||||||
| Class B common stock, par value $.01 per share; 25.9 million shares issued and outstanding | 0.3 | 0.3 | ||||||
| Additional paid-in-capital | 2,383.4 | 2,308.8 | ||||||
| Retained earnings | 5,752.2 | 5,751.9 | ||||||
| Treasury stock, Class A, at cost; 46.6 million and 46.4 million shares | (4,581.0 | ) | (4,563.9 | ) | ||||
| Accumulated other comprehensive loss | (98.5 | ) | (198.4 | ) | ||||
| Total equity | 3,457.4 | 3,299.6 | ||||||
| Total liabilities and equity | $ | 6,143.3 | $ | 5,652.0 |
See accompanying notes.
| F-2 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions, except per share data) | ||||||||||||
| Net revenues | $ | 6,182.3 | $ | 6,652.8 | $ | 7,405.2 | ||||||
| Cost of goods sold | (2,430.6 | ) | (3,001.7 | ) | (3,218.5 | ) | ||||||
| Gross profit | 3,751.7 | 3,651.1 | 4,186.7 | |||||||||
| Selling, general, and administrative expenses | (3,095.5 | ) | (3,171.0 | ) | (3,412.5 | ) | ||||||
| Impairment of assets | (50.0 | ) | (253.8 | ) | (48.8 | ) | ||||||
| Restructuring and other charges | (108.0 | ) | (318.6 | ) | (142.6 | ) | ||||||
| Total other operating expenses, net | (3,253.5 | ) | (3,743.4 | ) | (3,603.9 | ) | ||||||
| Operating income (loss) | 498.2 | (92.3 | ) | 582.8 | ||||||||
| Interest expense | (18.2 | ) | (12.4 | ) | (21.0 | ) | ||||||
| Interest income | 12.3 | 7.3 | 6.3 | |||||||||
| Other expense, net | (3.1 | ) | (7.5 | ) | (16.3 | ) | ||||||
| Income (loss) before income taxes | 489.2 | (104.9 | ) | 551.8 | ||||||||
| Income tax benefit (provision) | (326.4 | ) | 5.6 | (155.4 | ) | |||||||
| Net income (loss) | $ | 162.8 | $ | (99.3 | ) | $ | 396.4 | |||||
| Net income (loss) per common share: | ||||||||||||
| Basic | $ | 1.99 | $ | (1.20 | ) | $ | 4.65 | |||||
| Diluted | $ | 1.97 | $ | (1.20 | ) | $ | 4.62 | |||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 81.7 | 82.7 | 85.2 | |||||||||
| Diluted | 82.5 | 82.7 | 85.9 | |||||||||
| Dividends declared per share | $ | 2.00 | $ | 2.00 | $ | 2.00 |
See accompanying notes.
| F-3 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Net income (loss) | $ | 162.8 | $ | (99.3 | ) | $ | 396.4 | |||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation gains (losses) | 126.9 | (48.6 | ) | 36.4 | ||||||||
| Net gains (losses) on cash flow hedges | (30.6 | ) | 26.6 | (55.2 | ) | |||||||
| Net gains on defined benefit plans | 3.6 | 5.1 | 2.9 | |||||||||
| Other comprehensive income (loss), net of tax | 99.9 | (16.9 | ) | (15.9 | ) | |||||||
| Total comprehensive income (loss) | $ | 262.7 | $ | (116.2 | ) | $ | 380.5 |
See accompanying notes.
| F-4 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 162.8 | $ | (99.3 | ) | $ | 396.4 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization expense | 295.2 | 307.5 | 309.4 | |||||||||
| Deferred income tax expense (benefit) | 84.1 | (38.9 | ) | (7.9 | ) | |||||||
| Equity in losses of equity-method investees | 4.5 | 5.2 | 10.9 | |||||||||
| Non-cash stock-based compensation expense | 74.5 | 63.6 | 97.0 | |||||||||
| Non-cash impairment of assets | 50.0 | 253.8 | 48.8 | |||||||||
| Non-cash restructuring-related inventory charges | 7.6 | 197.9 | 20.4 | |||||||||
| Other non-cash charges | 7.4 | 29.2 | 19.7 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 34.5 | 54.1 | 129.4 | |||||||||
| Inventories | 57.8 | 120.4 | (90.9 | ) | ||||||||
| Prepaid expenses and other current assets | (15.1 | ) | (27.8 | ) | 30.2 | |||||||
| Accounts payable and accrued liabilities | 64.6 | 112.9 | 90.1 | |||||||||
| Income tax receivables and payables | 165.1 | (34.0 | ) | (14.6 | ) | |||||||
| Deferred income | 1.4 | (20.7 | ) | (7.9 | ) | |||||||
| Other balance sheet changes | (19.3 | ) | 28.7 | (14.3 | ) | |||||||
| Net cash provided by operating activities | 975.1 | 952.6 | 1,016.7 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (161.6 | ) | (284.0 | ) | (417.7 | ) | ||||||
| Purchases of investments | (1,605.6 | ) | (860.4 | ) | (1,085.0 | ) | ||||||
| Proceeds from sales and maturities of investments | 1,582.7 | 942.4 | 942.7 | |||||||||
| Acquisitions and ventures | (4.6 | ) | (6.1 | ) | (16.3 | ) | ||||||
| Net cash used in investing activities | (189.1 | ) | (208.1 | ) | (576.3 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of short-term debt | 10.1 | 3,735.2 | 4,343.9 | |||||||||
| Repayments of short-term debt | — | (3,851.3 | ) | (4,462.6 | ) | |||||||
| Proceeds from issuance of long-term debt | — | — | 299.4 | |||||||||
| Payments of capital lease obligations | (28.2 | ) | (27.3 | ) | (24.3 | ) | ||||||
| Payments of dividends | (162.4 | ) | (164.8 | ) | (170.3 | ) | ||||||
| Repurchases of common stock, including shares surrendered for tax withholdings | (17.1 | ) | (215.2 | ) | (500.4 | ) | ||||||
| Proceeds from exercise of stock options | 0.1 | 5.0 | 33.2 | |||||||||
| Other financing activities | — | — | (1.9 | ) | ||||||||
| Net cash used in financing activities | (197.5 | ) | (518.4 | ) | (483.0 | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 55.2 | (16.4 | ) | 7.2 | ||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 643.7 | 209.7 | (35.4 | ) | ||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 711.8 | 502.1 | 537.5 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,355.5 | $ | 711.8 | $ | 502.1 |
See accompanying notes.
| F-5 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
| Additional | Treasury Stock | |||||||||||||||||||||||||||||
| Common Stock(a) | Paid-in | Retained | at Cost | Total | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Shares | Amount | AOCI(b) | Equity | |||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||
| Balance at March 28, 2015 | 125.9 | $ | 1.2 | $ | 2,117.1 | $ | 5,787.2 | 39.6 | $ | (3,848.3 | ) | $ | (165.6 | ) | $ | 3,891.6 | ||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 396.4 | |||||||||||||||||||||||||||||
| Other comprehensive loss | (15.9 | ) | ||||||||||||||||||||||||||||
| Total comprehensive income | 380.5 | |||||||||||||||||||||||||||||
| Dividends declared | (168.6 | ) | (168.6 | ) | ||||||||||||||||||||||||||
| Repurchases of common stock | 4.4 | (500.4 | ) | (500.4 | ) | |||||||||||||||||||||||||
| Stock-based compensation | 97.0 | 97.0 | ||||||||||||||||||||||||||||
| Shares issued and tax benefits recognized pursuant to stock-based compensation plans(c) | 1.0 | — | 43.4 | 43.4 | ||||||||||||||||||||||||||
| Balance at April 2, 2016 | 126.9 | $ | 1.2 | $ | 2,257.5 | $ | 6,015.0 | 44.0 | $ | (4,348.7 | ) | $ | (181.5 | ) | $ | 3,743.5 | ||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||
| Net loss | (99.3 | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss | (16.9 | ) | ||||||||||||||||||||||||||||
| Total comprehensive loss | (116.2 | ) | ||||||||||||||||||||||||||||
| Dividends declared | (163.8 | ) | (163.8 | ) | ||||||||||||||||||||||||||
| Repurchases of common stock | 2.4 | (215.2 | ) | (215.2 | ) | |||||||||||||||||||||||||
| Stock-based compensation | 63.6 | 63.6 | ||||||||||||||||||||||||||||
| Shares issued and tax shortfalls recognized pursuant to stock-based compensation plans(c) | 0.5 | — | (12.3 | ) | (12.3 | ) | ||||||||||||||||||||||||
| Balance at April 1, 2017 | 127.4 | $ | 1.2 | $ | 2,308.8 | $ | 5,751.9 | 46.4 | $ | (4,563.9 | ) | $ | (198.4 | ) | $ | 3,299.6 | ||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 162.8 | |||||||||||||||||||||||||||||
| Other comprehensive income | 99.9 | |||||||||||||||||||||||||||||
| Total comprehensive income | 262.7 | |||||||||||||||||||||||||||||
| Dividends declared | (162.5 | ) | (162.5 | ) | ||||||||||||||||||||||||||
| Repurchases of common stock | 0.2 | (17.1 | ) | (17.1 | ) | |||||||||||||||||||||||||
| Stock-based compensation | 74.5 | 74.5 | ||||||||||||||||||||||||||||
| Shares issued pursuant to stock-based compensation plans(c) | 0.5 | 0.1 | 0.1 | 0.2 | ||||||||||||||||||||||||||
| Balance at March 31, 2018 | 127.9 | $ | 1.3 | $ | 2,383.4 | $ | 5,752.2 | 46.6 | $ | (4,581.0 | ) | $ | (98.5 | ) | $ | 3,457.4 |
| (a) | Includes Class A and Class B common stock. |
| (b) | Accumulated other comprehensive income (loss). |
| (c) | Includes an excess tax shortfall relating to stock-based compensation plans of $17.3 million in Fiscal 2017 and an excess tax benefit of $10.2 million in Fiscal 2016. In Fiscal 2018, the Company adopted ASU 2016-09 (as defined in Note 4), which requires such excess tax benefits and shortfalls be reflected prospectively as income tax benefit (provision) in the statements of operations. See Note 4 for further discussion of the Company's adoption of ASU 2016-09. |
See accompanying notes.
| F-6 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Description of Business |
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 diversifies 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 digital 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.
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 19 for further discussion of the Company's segment reporting structure.
| 2. | Basis of Presentation |
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 2018 ended on March 31, 2018 and was a 52-week period ("Fiscal 2018"); 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"); and fiscal year 2019 will end on March 30, 2019 and will be a 52-week period ("Fiscal 2019").
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 notes 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.
| F-7 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 3. | Summary of Significant Accounting Policies |
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. Revenue from sales of products ordered through the Company's digital commerce sites and those of third-party digital partners 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 and handling costs (described above) billed to customers are included in revenue. A summary of shipping and handling costs is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Shipping costs | $ | 39.1 | $ | 42.8 | $ | 44.6 | ||||||
| Handling costs | 155.4 | 170.1 | 181.2 |
| F-8 |
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 $241.1 million, $219.9 million, and $280.0 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, 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 $6.8 million and $4.1 million at the end of Fiscal 2018 and Fiscal 2017, 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. Such foreign currency transaction gains and losses are recognized in earnings within other expense, net, in the consolidated statements of operations, inclusive of the effects of any related hedging activities, and reflected net gains of $4.5 million and $1.1 million in Fiscal 2018 and Fiscal 2017, respectively, and net losses of $3.8 million in Fiscal 2016.
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 units ("RSUs"), and any other potentially dilutive instruments, only in the periods in which such effects are dilutive.
| F-9 |
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:
| Fiscal Years Ended | |||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | |||||||
| (millions) | |||||||||
| Basic shares | 81.7 | 82.7 | 85.2 | ||||||
| Dilutive effect of stock options and RSUs | 0.8 | — | (a) | 0.7 | |||||
| Diluted shares | 82.5 | 82.7 | 85.9 |
| (a) | Incremental shares of 0.7 million attributable to outstanding stock options 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. |
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 2018, Fiscal 2017, and Fiscal 2016, there were 2.0 million, 2.2 million, and 2.6 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 forfeitures which are estimated based on an analysis of historical experience and expected future trends. 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 17 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 time deposits and debt securities. Investments in debt securities are diversified among high-credit quality securities in accordance with the Company's risk-management policies.
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
| F-10 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 and debt securities, 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 other expense, 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 ten-year term joint venture formed with Compagnie Financière Richemont SA, the Swiss luxury goods group, which expired in March 2018. This joint venture is a Swiss corporation whose purpose was 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. As a result of its expiration, the joint venture's operations will wind-down during Fiscal 2019.
During Fiscal 2018, Fiscal 2017, and Fiscal 2016, equity in losses of equity-method investees were $4.5 million, $5.2 million, and $10.9 million, respectively, and were recorded within other expense, net, in the Company's consolidated statements of operations.
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 13 for further information relating to the Company's investments.
| F-11 |
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:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Beginning reserve balance | $ | 202.8 | $ | 239.7 | $ | 239.7 | ||||||
| Amount charged against revenue to increase reserve | 585.0 | 666.6 | 749.0 | |||||||||
| Amount credited against customer accounts to decrease reserve | (596.6 | ) | (698.8 | ) | (753.0 | ) | ||||||
| Foreign currency translation | 11.3 | (4.7 | ) | 4.0 | ||||||||
| Ending reserve balance | $ | 202.5 | $ | 202.8 | $ | 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:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Beginning reserve balance | $ | 11.6 | $ | 14.5 | $ | 11.4 | ||||||
| Amount recorded to expense to increase reserve(a) | 10.2 | 6.2 | 6.8 | |||||||||
| Amount written-off against customer accounts to decrease reserve | (3.2 | ) | (8.5 | ) | (4.1 | ) | ||||||
| Foreign currency translation | 1.1 | (0.6 | ) | 0.4 | ||||||||
| Ending reserve balance | $ | 19.7 | $ | 11.6 | $ | 14.5 |
| (a) | Amounts recorded to bad debt expense are included within SG&A expenses in the consolidated statements of operations. |
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 2018, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately 8% of total net revenues. Further, during Fiscal 2018, sales to the Company's three largest wholesale customers, including Macy's, accounted for approximately 19% of total net revenues, as compared to approximately 21% during Fiscal 2017. Substantially all of the Company's sales to its three largest wholesale customers related to its North America segment. As of March 31, 2018, these three key wholesale customers constituted approximately 29% of total gross accounts receivable.
| F-12 |
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 digital 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 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."
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
| F-13 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 10 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 2018 and Fiscal 2017, deferred rent obligations of $249.5 million and $246.3 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.
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
| F-14 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 other expense, net, 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 other expense, net. 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 other expense, net. 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 other expense, net.
Hedge of a Net Investment in a Foreign Operation
The Company periodically uses cross-currency swap contracts and forward foreign currency exchange 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.
| F-15 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 other expense, net.
See Note 13 for further discussion of the Company's derivative financial instruments.
| 4. | Recently Issued Accounting Standards |
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 amends existing hedge accounting guidance by better aligning an entity's financial reporting with its risk management activities and by simplifying its application. Among its provisions, ASU 2017-12 eliminates the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting, and generally requires that the entire change in fair value of such instruments ultimately be presented in the same income statement line as the respective hedged item. Additionally, the updated guidance reduces complexity in the accounting for certain hedging relationships, eases documentation and effectiveness assessment requirements, broadens the scope of risk components eligible to qualify for hedge accounting, and modifies certain disclosure requirements. ASU 2017-12 is effective for the Company beginning in its fiscal year ending March 28, 2020 ("Fiscal 2020"), with early adoption permitted, and is to be applied using a modified retrospective transition approach, except for the amended presentation and disclosure requirements, which are to be applied prospectively. The Company is currently evaluating the impact that ASU 2017-12 will have on its consolidated financial statements and related disclosures.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). Among its provisions, ASU 2017-07 requires that for defined benefit plans, an employer present only the service cost component of net pension expense within the same income statement line item used to reflect other compensation costs arising from services rendered by employees during the period. All other components of net periodic pension and postretirement benefit expense must be presented separately from the service cost component, outside of operating income.
The Company early-adopted ASU 2017-07 during the fourth quarter of Fiscal 2018 and applied its provisions on a retrospective basis by reclassifying $2.5 million and $0.9 million from SG&A expenses to other expense, net, in its consolidated statements of operations for Fiscal 2017 and Fiscal 2016, respectively, representing the non-service cost components of net pension expense for its international defined benefit plans during these periods. The service cost component of net pension expense for these periods remains presented within SG&A expenses. Other than this change in presentation, the adoption of ASU 2017-07 did not have an impact on the Company's consolidated financial statements. See Note 18 for further discussion of the Company's international defined benefit plans, including a summary of net pension expense for the fiscal years presented.
Restricted Cash
In November 2016, the FASB issued 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 presented on the statement of cash flows. The Company early-adopted ASU 2016-18 during the first quarter of Fiscal 2018 and applied its provisions retrospectively. Other than the change in presentation within the statement of cash flows,
| F-16 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the adoption of ASU 2016-18 did not have an impact on the Company's consolidated financial statements. See Note 20 for a reconciliation of cash, cash equivalents, and restricted cash from the consolidated balance sheets to the consolidated statements of cash flows.
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 upon award settlement and forfeitures, and the classification of excess tax benefits and shares surrendered for tax withholdings in the statement of cash flows.
The Company adopted ASU 2016-09 during the first quarter of Fiscal 2018. Among its various provisions, ASU 2016-09 impacts the accounting for income taxes upon award settlement by requiring 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 previous practice, which generally required that such activity be recorded in equity as additional paid-in-capital. This change, which was applied prospectively in the Company's consolidated financial statements, increased the Company's income tax provision by $15.4 million during Fiscal 2018. Future impacts of this guidance on the Company's income tax benefit (provision) will depend largely on unpredictable events and other factors, including the timing of both employee stock option exercises and cancellations, if any, 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. This increase in volatility is expected to be more pronounced during the first half of the Company's fiscal year due to the timing of annual stock-based compensation award vestings and stock option expirations.
Additionally, ASU 2016-09 changes the classification of excess tax benefits presented in the Company's consolidated statements of cash flows from a financing activity to an operating activity. The Company applied this change in classification on a retrospective basis by reclassifying excess tax benefits of $0.3 million and $10.2 million from cash flows from financing activities to cash flows from operating activities for Fiscal 2017 and Fiscal 2016, respectively.
Lastly, as permitted, the Company has elected to continue to estimate the impact of expected forfeitures when determining the amount of compensation cost to be recognized each period, as opposed to reflecting the impact of forfeitures only as they occur.
The remaining provisions of ASU 2016-09 did not 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 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. However, the FASB recently approved an optional transition alternative, which allows for application of the guidance at the beginning of the period in which it is adopted, rather than 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 gathering 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.
| F-17 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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's process and efforts for assessing the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures have involved reviewing current revenue-related accounting policies, processes, arrangements, and disclosures to identify differences that will arise from its application. Based on these efforts, the Company has concluded 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 will continue to recognize the related revenue, including any contractually-guaranteed minimum royalty amounts, over time consistent with current practice.
Overall, the adoption of ASU 2014-09 will not have a significant impact on the Company's consolidated financial statements, although the accounting for certain ancillary items will be impacted. Specifically, revenue relating to estimated unredeemed gift card balances will be recognized over time in proportion to the amounts ultimately redeemed by customers, rather than when the likelihood of redemption becomes remote. Additionally, certain costs associated with the marketing of merchandise to wholesale customers for a particular selling season will be expensed as incurred, rather than deferred and expensed over the course of the related season. Finally, inventory amounts associated with estimated sales returns will be presented within prepaid expenses and other current assets in the consolidated balance sheets, rather than within inventories.
The Company will adopt ASU 2014-09 in the first quarter of its Fiscal 2019 using the modified retrospective method, under which the cumulative effect of initially applying the standard will be recognized as an adjustment to opening Fiscal 2019 retained earnings, which is not expected to be material.
| 5. | Property and Equipment |
Property and equipment, net consists of the following:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Land and improvements | $ | 16.8 | $ | 16.8 | ||||
| Buildings and improvements | 460.5 | 457.2 | ||||||
| Furniture and fixtures | 671.0 | 687.2 | ||||||
| Machinery and equipment | 430.4 | 414.0 | ||||||
| Capitalized software | 578.4 | 549.0 | ||||||
| Leasehold improvements | 1,181.2 | 1,179.1 | ||||||
| Construction in progress | 41.5 | 33.4 | ||||||
| 3,379.8 | 3,336.7 | |||||||
| Less: accumulated depreciation | (2,193.5 | ) | (2,020.7 | ) | ||||
| Property and equipment, net | $ | 1,186.3 | $ | 1,316.0 |
Depreciation expense was $271.2 million, $283.4 million, and $285.7 million during Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively, and is recorded primarily within SG&A expenses in the consolidated statements of operations.
| F-18 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 6. | Goodwill and Other Intangible Assets |
Goodwill
The following table details the changes in goodwill for each of the Company's segments during Fiscal 2018 and Fiscal 2017:
| Wholesale | Retail | Licensing | North America | Europe | Asia | Other Non-reportable Segments | Total | |||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | 42.0 | 3.9 | — | 45.9 | ||||||||||||||||||||||||
| Balance at March 31, 2018 | $ | — | $ | — | $ | — | $ | 421.8 | $ | 317.9 | $ | 78.8 | $ | 132.0 | $ | 950.5 |
| (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. |
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 2018 or Fiscal 2016. See Note 12 for further discussion of the Company's goodwill impairment testing.
Other Intangible Assets
Other intangible assets consist of the following:
| March 31, 2018 | April 1, 2017 | |||||||||||||||||||||||
| Gross Carrying Amount | Accum. Amort. | Net | Gross Carrying Amount | Accum. Amort. | Net | |||||||||||||||||||
| (millions) | ||||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||
| Re-acquired licensed trademarks | $ | 232.7 | $ | (140.0 | ) | $ | 92.7 | $ | 231.1 | $ | (130.2 | ) | $ | 100.9 | ||||||||||
| Customer relationships | 256.5 | (171.4 | ) | 85.1 | 252.1 | (152.9 | ) | 99.2 | ||||||||||||||||
| Other | 10.1 | (7.2 | ) | 2.9 | 26.9 | (14.5 | ) | 12.4 | ||||||||||||||||
| Total intangible assets subject to amortization | 499.3 | (318.6 | ) | 180.7 | 510.1 | (297.6 | ) | 212.5 | ||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||
| Trademarks and brands | 7.3 | N/A | 7.3 | 7.3 | N/A | 7.3 | ||||||||||||||||||
| Total intangible assets | $ | 506.6 | $ | (318.6 | ) | $ | 188.0 | $ | 517.4 | $ | (297.6 | ) | $ | 219.8 |
| F-19 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization
Amortization expense was $24.0 million, $24.1 million, and $23.7 million during Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively, and is recorded within SG&A expenses in the consolidated statements of operations.
Based on the balance of the Company's intangible assets subject to amortization as of March 31, 2018, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:
| Amortization Expense | ||||
| (millions) | ||||
| Fiscal 2019 | $ | 23.6 | ||
| Fiscal 2020 | 22.9 | |||
| Fiscal 2021 | 20.1 | |||
| Fiscal 2022 | 18.1 | |||
| Fiscal 2023 | 14.4 | |||
| Fiscal 2024 and thereafter | 81.6 | |||
| Total | $ | 180.7 |
The expected future amortization expense above reflects weighted-average estimated remaining useful lives of 11.8 years for re-acquired licensed trademarks, 8.6 years for customer relationships, and 10.4 years for the Company's finite-lived intangible assets in total.
| 7. | Other Assets and Liabilities |
Prepaid expenses and other current assets consist of the following:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Other taxes receivable | $ | 171.4 | $ | 127.8 | ||||
| Prepaid rent expense | 37.0 | 37.4 | ||||||
| Restricted cash | 15.5 | 9.8 | ||||||
| Derivative financial instruments | 12.3 | 23.0 | ||||||
| Prepaid samples | 11.2 | 5.9 | ||||||
| Prepaid software maintenance | 8.7 | 6.5 | ||||||
| Prepaid advertising and marketing | 6.8 | 4.1 | ||||||
| Tenant allowances receivable | 4.3 | 16.4 | ||||||
| Other prepaid expenses and current assets | 56.5 | 49.5 | ||||||
| Total prepaid expenses and other current assets | $ | 323.7 | $ | 280.4 |
| F-20 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other non-current assets consist of the following:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Non-current investments | $ | 86.2 | $ | 21.4 | ||||
| Restricted cash | 35.4 | 33.7 | ||||||
| Security deposits | 27.3 | 26.5 | ||||||
| Derivative financial instruments | — | 9.6 | ||||||
| Other non-current assets | 34.6 | 40.0 | ||||||
| Total other non-current assets | $ | 183.5 | $ | 131.2 |
Accrued expenses and other current liabilities consist of the following:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Accrued payroll and benefits | $ | 227.8 | $ | 173.5 | ||||
| Accrued operating expenses | 225.8 | 188.0 | ||||||
| Other taxes payable | 194.2 | 172.2 | ||||||
| Accrued inventory | 174.0 | 154.9 | ||||||
| Restructuring reserve | 69.6 | 140.8 | ||||||
| Derivative financial instruments | 60.8 | 12.3 | ||||||
| Dividends payable | 40.6 | 40.5 | ||||||
| Accrued capital expenditures | 37.0 | 45.7 | ||||||
| Deferred income | 30.4 | 29.7 | ||||||
| Capital lease obligations | 19.5 | 22.6 | ||||||
| Other accrued expenses and current liabilities | 3.7 | 2.5 | ||||||
| Total accrued expenses and other current liabilities | $ | 1,083.4 | $ | 982.7 |
Other non-current liabilities consist of the following:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Capital lease obligations | $ | 236.4 | $ | 250.9 | ||||
| Deferred rent obligations | 212.2 | 211.1 | ||||||
| Derivative financial instruments | 49.2 | 9.4 | ||||||
| Deferred tax liabilities | 36.5 | 11.8 | ||||||
| Deferred compensation | 7.0 | 7.8 | ||||||
| Other non-current liabilities | 65.4 | 50.6 | ||||||
| Total other non-current liabilities | $ | 606.7 | $ | 541.6 |
| F-21 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 8. | Impairment of Assets |
During Fiscal 2018, the Company recorded non-cash impairment charges of $41.2 million to write off certain fixed assets related to its domestic and international stores, shop-within-shops, and corporate offices, of which $16.0 million was recorded in connection with the Way Forward Plan (see Note 9) and $25.2 million was recorded in connection with underperforming stores and shop-within-shops as a result of its on-going store portfolio evaluation. Additionally, as a result of a change in the planned usage of a certain intangible asset, the Company recorded a non-cash impairment charge of $8.8 million to reduce the carrying value of the intangible asset to its estimated fair value.
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 digital commerce platform which was in development, of which $234.6 million was recorded in connection with the Way Forward Plan (see Note 9) and $14.0 million was recorded in connection with underperforming stores that were 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.
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 stores and shop-within-shops, of which $27.2 million was recorded in connection with the Global Reorganization Plan (see Note 9) and $21.6 million was recorded in connection with underperforming stores that were subject to potential future closure.
See Note 12 for further discussion of the non-cash impairment charges recorded during the fiscal years presented.
| 9. | 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 is refocusing on its core brands and evolving its product, marketing, and shopping experience to increase desirability and relevance. It is also evolving 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 is rightsizing its cost structure and implementing 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, which were substantially completed during Fiscal 2017, resulted in a reduction in workforce and the closure of certain stores and shop-within-shops.
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 digital commerce platform which was in development and shifting to a more cost-effective, flexible 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 were largely completed during Fiscal 2018 and resulted in a further reduction in workforce and the closure of certain corporate office and store locations. The remaining activities, which are primarily lease-related, are expected to be completed during Fiscal 2019.
| F-22 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 charges incurred since inception were $669.2 million and the Company expects to incur the remaining charges of approximately $100 million during Fiscal 2019. 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 Fiscal 2018 and Fiscal 2017, as well as the cumulative charges recorded since its inception, is as follows:
| Fiscal Year Ended | Cumulative Charges | |||||||||||
| March 31, 2018 | April 1, 2017 | |||||||||||
| (millions) | ||||||||||||
| Cash-related restructuring charges: | ||||||||||||
| Severance and benefits costs | $ | 39.0 | $ | 182.7 | $ | 221.7 | ||||||
| Lease termination and store closure costs | 33.2 | 87.3 | 120.5 | |||||||||
| Other cash charges | 6.3 | 19.1 | 25.4 | |||||||||
| Total cash-related restructuring charges | 78.5 | 289.1 | 367.6 | |||||||||
| Non-cash charges: | ||||||||||||
| Impairment of assets (see Note 8) | 16.0 | 234.6 | 250.6 | |||||||||
| Inventory-related charges(a) | 7.6 | 197.9 | 205.5 | |||||||||
| Accelerated stock-based compensation expense(b) | 0.7 | — | 0.7 | |||||||||
| Total non-cash charges | 24.3 | 432.5 | 456.8 | |||||||||
| Total charges | $ | 102.8 | $ | 721.6 | $ | 824.4 |
| (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. |
| (b) | 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. |
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 | ||||||||||||
| Additions charged to expense | 39.0 | 33.2 | 6.3 | 78.5 | ||||||||||||
| Cash payments charged against reserve | (97.9 | ) | (22.8 | ) | (11.1 | ) | (131.8 | ) | ||||||||
| Non-cash adjustments | 2.2 | 8.8 | — | 11.0 | ||||||||||||
| Balance at March 31, 2018 | $ | 37.6 | $ | 53.5 | $ | 1.8 | $ | 92.9 |
| F-23 |
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"). The Global Reorganization Plan resulted in a reduction in workforce and the closure of certain stores and shop-within-shops.
Actions associated with the Global Reorganization Plan were completed by the end of the first quarter of Fiscal 2017 and no additional charges are expected to be incurred in relation to this plan. 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 8) | — | 27.2 | 27.2 | |||||||||
| Inventory-related charges(a) | — | 20.4 | 20.4 | |||||||||
| Accelerated stock-based compensation expense(b) | — | 8.9 | 8.9 | |||||||||
| Total non-cash charges | — | 56.5 | 56.5 | |||||||||
| Total charges | $ | 4.9 | $ | 142.5 | $ | 147.4 |
| (a) | Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations. |
| (b) | 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. |
A summary of the 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 | ||||||||||||
| Cash payments charged against reserve | (5.5 | ) | (1.9 | ) | (0.2 | ) | (7.6 | ) | ||||||||
| Balance at March 31, 2018 | $ | 3.1 | $ | 1.5 | $ | — | $ | 4.6 |
| F-24 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Charges
During Fiscal 2018, the Company recorded other charges of $14.1 million related to depreciation expense associated with the Company's former Polo store at 711 Fifth Avenue in New York City, recorded after the store closed during the first quarter of Fiscal 2018 in connection with the Way Forward Plan. Although the Company is no longer generating revenue or has any other economic activity associated with its former Polo store, it continues to incur depreciation expense due to its involvement at the time of construction.
Additionally, during Fiscal 2018, the Company recorded other charges of $10.2 million related to its pending customs audit (see Note 14) and $6.7 million (inclusive of accelerated stock-based compensation expense of $2.1 million) primarily related to the departure of Mr. Stefan Larsson as the Company's President and Chief Executive Officer and as a member of its Board of Directors, effective as of May 1, 2017. Refer to the Form 8-K filed on February 2, 2017 for additional discussion regarding the departure of Mr. Larsson.
These other charges recorded in Fiscal 2018 were partially offset by the favorable impact of $2.2 million related to the reversal of reserves associated with the settlement of certain non-income tax issues.
During Fiscal 2017, the Company recorded other charges of $13.2 million related to the anticipated settlement of certain non-income tax issues and $11.4 million (inclusive of accelerated stock-based compensation expense of $4.3 million) related to Mr. Larsson's departure.
During Fiscal 2016, the Company recorded other charges of $34.1 million related to its pending customs audit (see Note 14) and $13.6 million primarily related to the settlement of certain litigation claims.
| 10. | Income Taxes |
U.S. Tax Reform
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effective January 1, 2018. The TCJA significantly revised U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21%, creating a territorial tax system that includes a one-time mandatory transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.
ASC Topic 740, "Income Taxes," requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.
During the third quarter of Fiscal 2018, the Company recorded charges of $231.3 million within its income tax provision in connection with the TCJA, of which $215.5 million related to the mandatory transition tax, which it expects to pay over an eight-year period (see Note 14) and $15.8 million related to the revaluation of the Company's deferred tax assets and liabilities. Subsequently, as a result of finalizing its full Fiscal 2018 operating results, the issuance of new interpretive guidance, and other analyses performed, the Company recorded immaterial measurement period adjustments during the fourth quarter of Fiscal 2018, whereby it reversed $6.2 million of the charges related to the mandatory transition tax and $5.5 million related to the revaluation of its deferred taxes. These reversals were partially offset by an incremental charge of $1.8 million related to the expected future remittance of certain previously deferred foreign earnings. Collectively, these net charges of $221.4 million, which were recorded on a provisional basis, negatively impacted the Company's effective tax rate by 4,520 basis points and lowered its diluted earnings per share by $2.68 during Fiscal 2018. The provisional amounts were based on the Company's present interpretations of the TCJA, current available information, and assumptions about future events, and are subject to further refinement as additional information becomes available, including potential new or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies, and as further analyses are completed.
| F-25 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additionally, the Company reevaluated its permanent reinvestment assertion and determined that undistributed foreign earnings that were subject to the one-time mandatory transition tax were no longer considered to be permanently reinvested, effective December 31, 2017. In connection with this decision, the Company repatriated $252.0 million of cash to the U.S. from certain of its foreign subsidiaries during the fourth quarter of Fiscal 2018, and it repatriated an additional $400.0 million during the first quarter of Fiscal 2019. The mandatory transition tax does not apply to undistributed foreign earnings generated after December 31, 2017, and therefore the Company intends to permanently reinvest such earnings. See "Deferred Taxes" for additional discussion.
The Company is also in the process of assessing various international taxation provisions of the TCJA that are effective for the Company beginning in the first quarter of Fiscal 2019, including a minimum tax on global intangible low-taxed income ("GILTI"). The Company has tentatively decided to account for GILTI tax in the period in which it is incurred and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for Fiscal 2018. The Company will continue to evaluate this policy election during Fiscal 2019.
Taxes on Income (Loss)
Domestic and foreign pretax income (loss) are as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Domestic | $ | 16.4 | $ | (155.3 | ) | $ | 274.8 | |||||
| Foreign | 472.8 | 50.4 | 277.0 | |||||||||
| Total income (loss) before income taxes | $ | 489.2 | $ | (104.9 | ) | $ | 551.8 |
Benefits (provisions) for current and deferred income taxes are as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Current: | ||||||||||||
| Federal(a) | $ | (154.6 | ) | $ | 29.1 | $ | (87.9 | ) | ||||
| State and local(a) | (5.0 | ) | 2.3 | 3.2 | ||||||||
| Foreign | (82.7 | ) | (64.7 | ) | (78.6 | ) | ||||||
| (242.3 | ) | (33.3 | ) | (163.3 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | (64.1 | ) | 25.1 | 4.6 | ||||||||
| State and local | (12.6 | ) | 2.9 | 1.4 | ||||||||
| Foreign | (7.4 | ) | 10.9 | 1.9 | ||||||||
| (84.1 | ) | 38.9 | 7.9 | |||||||||
| Total income tax benefit (provision) | $ | (326.4 | ) | $ | 5.6 | $ | (155.4 | ) |
| (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 in Fiscal 2016 resulting from stock-based compensation arrangements. Such amounts were recorded within equity. In Fiscal 2018, the Company adopted ASU 2016-09, which requires such excess tax benefits and shortfalls be reflected prospectively in the income tax benefit (provision) in the statement of operations. See Note 4 for further discussion of the Company's adoption of ASU 2016-09. |
| F-26 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as set forth below:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Benefit (provision) for income taxes at the U.S. federal statutory rate(a) | $ | (154.3 | ) | $ | 36.7 | $ | (193.2 | ) | ||||
| Change due to: | ||||||||||||
| State and local income taxes, net of federal benefit | (1.6 | ) | 2.7 | (10.9 | ) | |||||||
| Foreign income taxed at different rates, net of U.S. foreign tax credits | 74.7 | (25.4 | ) | 33.6 | ||||||||
| Unrecognized tax benefits and settlements of tax examinations | (14.4 | ) | 0.5 | 12.7 | ||||||||
| Changes in valuation allowance on deferred tax assets | 2.5 | (7.3 | ) | — | ||||||||
| TCJA enactment-related charges | (221.4 | ) | — | — | ||||||||
| Stock-based compensation | (15.4 | ) | — | — | ||||||||
| Other | 3.5 | (1.6 | ) | 2.4 | ||||||||
| Total income tax benefit (provision) | $ | (326.4 | ) | $ | 5.6 | $ | (155.4 | ) | ||||
| Effective tax rate(b) | 66.7 | % | 5.3 | % | 28.2 | % |
| (a) | The U.S. federal statutory income tax rate for the Company's Fiscal 2017 and Fiscal 2016 was 35.0%. The TCJA reduced the statutory tax rate from 35.0% to 21.0%, effective January 1, 2018, and resulted in a blended statutory rate of 31.5% for the Company's Fiscal 2018. |
| (b) | Effective tax rate is calculated by dividing the income tax benefit (provision) by income (loss) before income taxes. |
The Company's Fiscal 2018 effective tax rate was higher than the blended statutory rate primarily due to the enactment-related charges recorded in connection with the TCJA, as previously discussed, the negative impact of the adoption of ASU 2016-09 (see Note 4), and the unfavorable impact of additional income tax reserves associated with certain income tax audits, partially offset by the favorable impact of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S. and tax benefits associated with adjustments recorded on deferred tax assets and provision to tax return adjustments. The Company's Fiscal 2017 effective tax rate was 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, and 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 effective tax rate was lower than the statutory tax rate primarily due to the tax impact of earnings in foreign jurisdictions and the favorable impact of 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.
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.
| F-27 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Taxes
Significant components of the Company's deferred tax assets and liabilities are as follows:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Goodwill and other intangible assets | $ | (149.2 | ) | $ | (217.1 | ) | ||
| Property and equipment | (36.2 | ) | (61.6 | ) | ||||
| Undistributed foreign earnings | (7.1 | ) | — | |||||
| Net operating loss carryforwards | 54.8 | 64.1 | ||||||
| Lease obligations | 49.6 | 80.7 | ||||||
| Deferred compensation | 45.7 | 141.6 | ||||||
| Receivable allowances and reserves | 38.5 | 65.8 | ||||||
| Inventory basis difference | 16.0 | 21.8 | ||||||
| Cumulative translation adjustment and hedges | 15.0 | (10.8 | ) | |||||
| Accrued expenses | 12.1 | 9.8 | ||||||
| Unrecognized tax benefits | 10.8 | 16.0 | ||||||
| Transfer pricing | 9.0 | 5.6 | ||||||
| Deferred rent | 6.9 | 14.3 | ||||||
| Deferred income | 5.2 | 9.0 | ||||||
| Excess foreign tax credits | — | 7.9 | ||||||
| Other | 14.4 | 5.1 | ||||||
| Valuation allowance | (35.4 | ) | (38.1 | ) | ||||
| Net deferred tax assets(a) | $ | 50.1 | $ | 114.1 |
| (a) | The net deferred tax balances as of March 31, 2018 and April 1, 2017 were comprised of non-current deferred tax assets of $86.6 million and $125.9 million, respectively, recorded within deferred tax assets, and non-current deferred tax liabilities of $36.5 million and $11.8 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 $237.4 million and $71.5 million, respectively, for tax purposes to offset future taxable income. The net operating loss carryforwards expire beginning in Fiscal 2019.
The Company also has available state and foreign net operating loss carryforwards of $44.2 million and $204.6 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 allowances relating to state and foreign net operating loss carryforwards increased by $5.3 million and $2.3 million, respectively, largely 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.
In connection with the Company's decision to no longer permanently reinvest undistributed foreign earnings that were subject to the TCJA's one-time mandatory transition tax, the Company recorded a deferred tax liability of $7.1 million on a provisional basis for the expected future remittance of previously taxed foreign earnings. The mandatory transition tax does not apply to undistributed foreign earnings generated after December 31, 2017. Accordingly, provision has not been made for U.S. or additional foreign taxes on approximately $98 million of undistributed earnings of foreign subsidiaries generated after December 31, 2017, as such earnings are expected 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.
| F-28 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Uncertain Income Tax Benefits
Fiscal 2018, Fiscal 2017, and Fiscal 2016 Activity
Reconciliations of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for Fiscal 2018, Fiscal 2017, and Fiscal 2016 are presented below:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Unrecognized tax benefits beginning balance | $ | 49.9 | $ | 49.7 | $ | 68.0 | ||||||
| Additions related to current period tax positions | 6.8 | 5.3 | 5.0 | |||||||||
| Additions related to prior period tax positions | 9.5 | 15.3 | 6.9 | |||||||||
| Reductions related to prior period tax positions | (1.3 | ) | (3.4 | ) | (11.3 | ) | ||||||
| Reductions related to expiration of statutes of limitations | (3.3 | ) | (4.1 | ) | (7.2 | ) | ||||||
| Reductions related to settlements with taxing authorities | (0.7 | ) | (12.0 | ) | (12.0 | ) | ||||||
| Additions (reductions) related to foreign currency translation | 3.3 | (0.9 | ) | 0.3 | ||||||||
| Unrecognized tax benefits ending balance | $ | 64.2 | $ | 49.9 | $ | 49.7 |
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 2018, Fiscal 2017, and Fiscal 2016 are presented below:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Accrued interest and penalties beginning balance | $ | 12.8 | $ | 30.9 | $ | 47.6 | ||||||
| Net additions charged to expense | 3.8 | 2.3 | 4.0 | |||||||||
| Reductions related to prior period tax positions | (1.6 | ) | (18.3 | ) | (a) | (15.4 | ) | |||||
| Reductions related to settlements with taxing authorities | (0.3 | ) | (0.8 | ) | (5.3 | ) | ||||||
| Additions (reductions) related to foreign currency translation | 0.3 | (1.3 | ) | — | ||||||||
| Accrued interest and penalties ending balance | $ | 15.0 | $ | 12.8 | $ | 30.9 |
| (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 $79.2 million and $62.7 million as of March 31, 2018 and April 1, 2017, 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 $68.4 million and $46.7 million as of March 31, 2018 and April 1, 2017, respectively.
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.
| F-29 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 3, 2010.
| 11. | Debt |
Debt consists of the following:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| $300 million 2.125% Senior Notes(a) | $ | 298.1 | $ | 298.1 | ||||
| $300 million 2.625% Senior Notes(b) | 288.0 | 290.1 | ||||||
| Borrowings outstanding under credit facilities | 10.1 | — | ||||||
| Total debt | 596.2 | 588.2 | ||||||
| Less: short-term debt and current portion of long-term debt | 308.2 | — | ||||||
| Total long-term debt | $ | 288.0 | $ | 588.2 |
| (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 13). Accordingly, the carrying value of the 2.125% Senior Notes as of March 31, 2018 and April 1, 2017 reflects adjustments of $1.6 million and $1.2 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 $0.3 million and $0.7 million as of March 31, 2018 and April 1, 2017, 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 13). Accordingly, the carrying value of the 2.625% Senior Notes as of March 31, 2018 and April 1, 2017 reflects adjustments of $10.8 million and $8.2 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 $1.2 million and $1.7 million as of March 31, 2018 and April 1, 2017, 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.
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.
| F-30 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 March 31, 2018, 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 March 31, 2018, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $8.3 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.
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 March 31, 2018, 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.
| F-31 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to 50 million Chinese Renminbi (approximately $8 million) through April 3, 2019, which is also able to 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 $44 million) through October 31, 2018. |
As of March 31, 2018, borrowings outstanding under the Pan-Asia Credit Facilities were $10.1 million, which have been classified as short-term debt in the Company's consolidated balance sheet.
| 12. | 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:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Investments in commercial paper(a)(b) | $ | 234.2 | $ | — | ||||
| Derivative assets(a) | 12.3 | 32.6 | ||||||
| Derivative liabilities(a) | 110.0 | 21.7 |
| (a) | Based on Level 2 measurements. |
| (b) | $15.0 million included within cash and cash equivalents and $219.2 million included within short-term investments in the consolidated balance sheet as of March 31, 2018. |
| F-32 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's investments in commercial paper are classified as available-for-sale and recorded at fair value in its consolidated balance sheets using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's investments. To the extent the Company invests in bonds, such investments are also classified as available-for-sale and recorded at fair value in its consolidated balance sheets based on 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, if any, 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, if any, generally approximate their carrying values.
The following table summarizes the carrying values and the estimated fair values of the Company's debt instruments:
| March 31, 2018 | April 1, 2017 | |||||||||||||||
| Carrying Value | Fair Value(a) | Carrying Value | Fair Value(a) | |||||||||||||
| (millions) | ||||||||||||||||
| $300 million 2.125% Senior Notes | $ | 298.1 | (b) | $ | 299.4 | $ | 298.1 | (b) | $ | 302.2 | ||||||
| $300 million 2.625% Senior Notes | 288.0 | (b) | 298.7 | 290.1 | (b) | 302.8 | ||||||||||
| Borrowings outstanding under credit facilities | 10.1 | 10.1 | — | — |
| (a) | Based on Level 2 measurements. |
| (b) | See Note 11 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 assets are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions.
During Fiscal 2018, Fiscal 2017, and Fiscal 2016, the Company recorded non-cash impairment charges of $41.2 million, $248.6 million, and $48.8 million, respectively, to fully write off the carrying values of certain long-lived assets based upon their assumed fair values of zero. Additionally, as a result of a change in the planned usage of a certain intangible asset, the Company recorded a non-cash impairment charge of $8.8 million to reduce the carrying value of the intangible asset from $11.7 million to its estimated fair value of $2.9 million. The fair values of these long-lived and intangible 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 8 for further discussion of the non-cash impairment charges recorded by the Company during the fiscal years presented.
| F-33 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In Fiscal 2018, 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 with allocated goodwill. 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 expected financial performance. Additionally, the results of the Company's most recent quantitative goodwill impairment test indicated that the fair values of these 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. 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.
| 13. | 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 March 31, 2018 and April 1, 2017:
| Notional Amounts | Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||
| Derivative Instrument(a) | March 31, 2018 | April 1, 2017 | March 31, 2018 | April 1, 2017 | March 31, 2018 | April 1, 2017 | ||||||||||||||||||||||||||
| 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 | $ | 514.5 | $ | 533.2 | PP | $ | 1.1 | PP | $ | 17.7 | (e) | $ | 13.5 | AE | $ | 3.7 | ||||||||||||||||
| IRS — Fixed-rate debt | 600.0 | 600.0 | — | — | (f) | 12.4 | ONCL | 9.4 | ||||||||||||||||||||||||
| Net investment hedges(c) | 1,081.2 | 591.2 | PP | 0.1 | ONCA | 9.6 | (g) | 82.6 | — | |||||||||||||||||||||||
| Total Designated Hedges | 2,195.7 | 1,724.4 | 1.2 | 27.3 | 108.5 | 13.1 | ||||||||||||||||||||||||||
| Undesignated Hedges: | ||||||||||||||||||||||||||||||||
| FC — Undesignated hedges(d) | 459.2 | 375.1 | PP | 11.1 | PP | 5.3 | AE | 1.5 | AE | 8.6 | ||||||||||||||||||||||
| Total Hedges | $ | 2,654.9 | $ | 2,099.5 | $ | 12.3 | $ | 32.6 | $ | 110.0 | $ | 21.7 |
| (a) | FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contracts. |
| (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. |
| F-34 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (c) | Includes cross-currency swaps and forward foreign currency exchange contracts designated as hedges of the Company's net investment in certain foreign operations. |
| (d) | Primarily includes undesignated hedges of foreign currency-denominated intercompany loans and other intercompany balances. |
| (e) | $12.9 million included within accrued expenses and other current liabilities and $0.6 million included within other non-current liabilities. |
| (f) | $1.6 million included within accrued expenses and other current liabilities and $10.8 million included within other non-current liabilities. |
| (g) | $44.8 million included within accrued expenses and other current liabilities and $37.8 million included within other non-current liabilities. |
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 March 31, 2018 and April 1, 2017 would be adjusted from the current gross presentation as detailed in the following table:
| March 31, 2018 | April 1, 2017 | |||||||||||||||||||||||
| 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 | $ | 12.3 | $ | (10.7 | ) | $ | 1.6 | $ | 32.6 | $ | (18.3 | ) | $ | 14.3 | ||||||||||
| Derivative liabilities | 110.0 | (10.7 | ) | 99.3 | 21.7 | (18.3 | ) | 3.4 |
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 | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Designated Hedges: | ||||||||||||
| FC — Cash flow hedges | $ | (45.5 | ) | $ | 30.4 | $ | (20.5 | ) | ||||
| Net investment hedges(a) | (90.9 | ) | 37.7 | (28.4 | ) | |||||||
| Total Designated Hedges | $ | (136.4 | ) | $ | 68.1 | $ | (48.9 | ) |
| Gains (Losses) Reclassified from AOCI to Earnings | Location of Gains (Losses) Reclassified from AOCI to Earnings | |||||||||||||
| Fiscal Years Ended | ||||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||||
| (millions) | ||||||||||||||
| Designated Hedges: | ||||||||||||||
| FC — Cash flow hedges | $ | (8.2 | ) | $ | 0.5 | $ | 43.7 | Cost of goods sold | ||||||
| FC — Cash flow hedges | (2.9 | ) | 0.5 | (4.7 | ) | Other expense, net | ||||||||
| Total Designated Hedges | $ | (11.1 | ) | $ | 1.0 | $ | 39.0 |
| (a) | Amounts recognized in OCI would be recognized in earnings only upon the sale or liquidation of the hedged net investment. |
| F-35 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2018, it is estimated that $17.6 million of pretax net losses 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 | ||||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||||
| (millions) | ||||||||||||||
| Undesignated Hedges: | ||||||||||||||
| FC — Undesignated hedges | $ | 2.4 | $ | (3.6 | ) | $ | (6.6 | ) | Other expense, net | |||||
| Total Undesignated Hedges | $ | 2.4 | $ | (3.6 | ) | $ | (6.6 | ) |
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, the settlement of foreign currency-denominated balances, and the translation of certain foreign operations' net assets into U.S. Dollars. 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, the Swiss Franc, the Swedish Krona, the Chinese Renminbi, the New Taiwan Dollar, 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 any of the fiscal years presented.
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 any of the fiscal years presented.
| F-36 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.
Investments
As of March 31, 2018, the Company's short-term investments consisted of $480.2 million of time deposits and $219.2 million of commercial paper, and its non-current investments consisted of $86.2 million of time deposits. As of April 1, 2017, the Company held short-term investments of $684.7 million and non-current investments of $21.4 million, both consisting 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.
| 14. | 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 $443.1 million, $460.5 million, and $472.4 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively. Such amounts include contingent rental charges of $175.9 million, $164.0 million, and $163.4 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, 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 March 31, 2018, future minimum rental payments under noncancelable operating leases with lease terms in excess of one year were as follows:
| Minimum Operating Lease Payments(a) | ||||
| (millions) | ||||
| Fiscal 2019 | $ | 343.8 | ||
| Fiscal 2020 | 318.1 | |||
| Fiscal 2021 | 262.6 | |||
| Fiscal 2022 | 220.1 | |||
| Fiscal 2023 | 199.1 | |||
| Fiscal 2024 and thereafter | 504.5 | |||
| Total net minimum rental payments | $ | 1,848.2 |
| (a) | Net of sublease income, which is not significant in any period. |
| F-37 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital Leases
Assets under capital leases, including build-to-suit leases, amounted to $243.2 million and $264.9 million at the end of Fiscal 2018 and Fiscal 2017, respectively, net of accumulated depreciation of $104.5 million and $77.6 million, respectively. Such assets are classified within property and equipment, net in the consolidated balance sheets based on their nature.
As of March 31, 2018, 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 2019 | $ | 29.6 | ||
| Fiscal 2020 | 31.9 | |||
| Fiscal 2021 | 30.5 | |||
| Fiscal 2022 | 29.4 | |||
| Fiscal 2023 | 28.9 | |||
| Fiscal 2024 and thereafter | 78.5 | |||
| Total net minimum rental payments | 228.8 | |||
| Less: amount representing interest | (73.4 | ) | ||
| Present value of net minimum rental payments | $ | 155.4 |
| (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 $135.1 million as of March 31, 2018, comprised of a $41.2 million operating lease obligation related to the land portion of the lease (included in the minimum operating lease payments table above) and a $93.9 million obligation related to the building portion of the lease (included in this minimum capital lease payments table). |
U.S. Tax Reform
In connection with the TCJA's provision that subjects previously deferred foreign earnings to a one-time mandatory transition tax, the Company recorded net charges of $209.3 million within its income tax provision during Fiscal 2018 on a provisional basis (as described in Note 10). The related income tax payable obligation of $147.8 million, which is net of foreign tax credits and other federal income tax activity of $61.5 million that the Company expects to utilize to partially reduce this tax obligation, is expected to be paid over an eight-year period as follows:
| Mandatory Transition Tax Payments(a) | ||||
| (millions) | ||||
| Fiscal 2019 | $ | 23.0 | ||
| Fiscal 2020 | 11.6 | |||
| Fiscal 2021 | 11.6 | |||
| Fiscal 2022 | 11.6 | |||
| Fiscal 2023 | 19.2 | |||
| Fiscal 2024 and thereafter | 70.8 | |||
| Total mandatory transition tax payments | $ | 147.8 |
| (a) | Included within current and non-current income tax payable in the consolidated balance sheets based upon the estimating timing of payments. |
See Note 10 for further discussion of the TCJA and its enactment-related impacts on the Company's consolidated financial statements.
| F-38 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $880.9 million as of March 31, 2018, including inventory purchase commitments of $741.7 million, outstanding letters of credit of $9.3 million, interest payments related to the Company's Senior Notes of $22.9 million, and other commitments of $107.0 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.
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 9). 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.
In October 2017, the tax tribunal presiding over the Company's appeal instructed the customs officials to reconsider their assertions under the alternative duty method and conduct a second re-audit to evaluate the facts and circumstances noted in the pre-assessment notice. In March 2018, the Company received the results of the second re-audit conducted and a related net refund in the amount of $15.6 million. Also in March 2018, the Company filed voluntary disclosure requests to the relevant customs authorities for certain post-audit periods and made related payments of $40.6 million, which included recoverable value-added tax of $14.8 million. In connection with the re-audit refund received and the non-tax portion of the voluntary disclosure payment made, the Company recorded a net charge of $10.2 million within restructuring and other charges in its consolidated statements of operations during the fourth quarter of Fiscal 2018 (see Note 9).
The Company continues to maintain its original filing position and is assessing its options to contest the proposed methodology asserted by the customs officials, including further appeal of the re-audit decision within the courts. 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. 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.
| F-39 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
| 15. | Equity |
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.
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 | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (in millions) | ||||||||||||
| Cost of shares repurchased | $ | — | $ | 200.0 | $ | 479.9 | ||||||
| Number of shares repurchased | 0.0 | 2.2 | 4.2 |
As of March 31, 2018, the remaining availability under the Company's Class A common stock repurchase program was approximately $100 million. Repurchases of shares of Class A common stock are subject to overall business and market conditions.
In addition, during each of Fiscal 2018, Fiscal 2017, and Fiscal 2016, 0.2 million shares of Class A common stock at a cost of $17.1 million, $15.2 million, and $20.5 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. During Fiscal 2018, Fiscal 2017, and Fiscal 2016, the quarterly cash dividend was $0.50 per share. Dividends paid amounted to $162.4 million, $164.8 million, and $170.3 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively.
| F-40 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 16. | 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 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 | ) | |||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| OCI before reclassifications | 126.9 | (40.5 | ) | 0.9 | 87.3 | |||||||||||
| Amounts reclassified from AOCI to earnings | — | 9.9 | 2.7 | 12.6 | ||||||||||||
| Other comprehensive income (loss), net of tax | 126.9 | (30.6 | ) | 3.6 | 99.9 | |||||||||||
| Balance at March 31, 2018 | $ | (79.3 | ) | $ | (16.0 | ) | $ | (3.2 | ) | $ | (98.5 | ) |
| (a) | OCI before reclassifications to earnings related to foreign currency translation gains (losses) includes income tax benefits of $23.3 million and $10.7 million for Fiscal 2018 and Fiscal 2016, respectively, and includes an income tax provision of $15.0 million for Fiscal 2017. OCI before reclassifications to earnings includes losses of $59.6 million (net of a $31.3 million income tax benefit) and $17.4 million (net of an $11.0 million income tax benefit) for Fiscal 2018 and Fiscal 2016, respectively, and includes a gain of $23.4 million (net of a $14.3 million income tax provision) for Fiscal 2017, related to the effective portion of changes in the fair values of instruments designated as hedges of the Company's net investment in certain foreign operations (see Note 13). |
| (b) | OCI before reclassifications to earnings related to net unrealized gains (losses) on cash flow hedges are presented net of income tax benefits of $5.0 million and $1.7 million for Fiscal 2018 and Fiscal 2016, respectively, and are presented net of an income tax provision of $2.2 million for Fiscal 2017. The tax effects on amounts reclassified from AOCI to earnings are presented in a table below. |
| (c) | Activity is presented net of taxes, which were immaterial for all periods presented. |
The following table presents reclassifications from AOCI to earnings for cash flow hedges, by component:
| Fiscal Years Ended | ||||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | Location of Gains (Losses) Reclassified from AOCI to Earnings | |||||||||||
| (millions) | ||||||||||||||
| Gains (losses) on cash flow hedges(a): | ||||||||||||||
| FC — Cash flow hedges | $ | (8.2 | ) | $ | 0.5 | $ | 43.7 | Cost of goods sold | ||||||
| FC — Cash flow hedges | (2.9 | ) | 0.5 | (4.7 | ) | Other expense, net | ||||||||
| Tax effect | 1.2 | 0.6 | (2.6 | ) | Income tax benefit (provision) | |||||||||
| Net of tax | $ | (9.9 | ) | $ | 1.6 | $ | 36.4 |
| (a) | FC = Forward foreign currency exchange contracts. |
| F-41 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 17. | 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 March 31, 2018, 3.1 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. Beginning in Fiscal 2016, 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 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 stock-based compensation expense and the related income tax benefits recognized is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Compensation expense(a) | $ | 74.5 | $ | 63.6 | $ | 97.0 | ||||||
| Income tax benefit | (25.3 | ) | (22.6 | ) | (36.8 | ) |
| (a) | Fiscal 2018, Fiscal 2017, and Fiscal 2016 includes $2.8 million, $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 9). All other stock-based compensation expense was recorded within SG&A expenses. |
The Company issues its annual grants of stock-based compensation awards in the first half of each fiscal year. Due to the timing of the annual grants and other 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 period is not indicative of the level of compensation expense expected to be incurred in future periods.
Stock Options
Stock options are 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. No stock options were granted during any of the fiscal years presented.
| F-42 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity during Fiscal 2018 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 1, 2017 | 1,720 | $ | 146.35 | 2.6 | $ | 1.0 | |||||||
| Granted | — | N/A | |||||||||||
| Exercised | — | N/A | |||||||||||
| Cancelled/Forfeited | (569 | ) | 122.91 | ||||||||||
| Options outstanding at March 31, 2018 | 1,151 | $ | 157.86 | 2.1 | $ | — | |||||||
| Options vested at March 31, 2018(b) | 1,151 | $ | 157.86 | 2.1 | $ | — | |||||||
| Options exercisable at March 31, 2018 | 1,151 | $ | 157.86 | 2.1 | $ | — |
| (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) | There were no nonvested stock options as of March 31, 2018. Accordingly, there was no related unrecognized compensation expense as of March 31, 2018. |
Additional information pertaining to the Company's stock option plans is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Aggregate intrinsic value of stock options exercised(a) | $ | — | $ | 3.0 | $ | 43.8 | ||||||
| Cash received from the exercise of stock options | 0.1 | 5.0 | 33.2 | |||||||||
| Tax benefits realized on exercise of stock options | — | 1.0 | 16.8 |
| (a) | Aggregate intrinsic value is the amount by which the market price of the Company's Class A common stock exceeded the stock option's exercise price when exercised, multiplied by the number of options. |
Restricted Stock Awards and Service-based RSUs
Restricted shares granted to non-employee directors vest ratably over a three-year period, subject to the director's continued service to the Company. The fair values of restricted stock awards are based on the fair value of the Company's Class A common stock on the date of grant. Holders of restricted shares are entitled to receive cash dividends in connection with the payments of dividends on the Company's Class A common stock.
Service-based RSUs granted to certain of the Company's senior executives and other employees generally vest over a three-year period, subject to the employee's continuing employment (except for awards granted to retirement-eligible employees, or employees who become retirement-eligible prior to the end of the awards' respective stated vesting periods, as previously discussed). The fair values of service-based RSUs are 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 any awards not entitled to accrue dividend equivalents while outstanding.
| F-43 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of restricted stock and service-based RSU activity during Fiscal 2018 is as follows:
| Restricted Stock | Service- based RSUs | |||||||||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | Number of Shares | Weighted-Average Grant Date Fair Value | |||||||||||
| (thousands) | (thousands) | |||||||||||||
| Nonvested at April 1, 2017 | 19 | $ | 92.11 | 922 | $ | 94.31 | ||||||||
| Granted | — | N/A | 701 | 73.59 | ||||||||||
| Vested | — | N/A | (366 | ) | 98.65 | |||||||||
| Forfeited | — | N/A | (185 | ) | 83.64 | |||||||||
| Nonvested at March 31, 2018 | 19 | $ | 92.11 | 1,072 | $ | 81.27 |
| Restricted Stock | Service- based RSUs | |||||||
| Total unrecognized compensation expense at March 31, 2018 (millions) | $ | 0.4 | $ | 26.8 | ||||
| Weighted-average period expected to be recognized over (years) | 1.5 | 1.6 |
Additional information pertaining to restricted stock and service-based RSU activity is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| Restricted Stock: | ||||||||||||
| Weighted-average grant date fair value of awards granted | N/A | $ | 81.78 | $ | 111.94 | |||||||
| Total fair value of awards vested (millions) | N/A | $ | 0.5 | $ | 0.7 | |||||||
| Service-based RSUs: | ||||||||||||
| Weighted-average grant date fair value of awards granted | $ | 73.59 | $ | 82.89 | $ | 125.19 | ||||||
| Total fair value of awards vested (millions) | $ | 30.0 | $ | 13.8 | $ | 2.1 |
Performance-based RSUs
The Company grants performance-based RSUs to its senior executives and other key executives. Performance-based RSUs generally vest (i) upon the completion of a three-year period of time (cliff vesting), subject to the employee's continuing employment (except for awards granted to retirement-eligible employees, or employees who become retirement-eligible prior to the end of the awards' respective stated vesting periods, as previously discussed) and the Company's achievement of certain performance goals established at the beginning of the three-year performance period or (ii) ratably, over a three-year period of time (graded vesting), subject to the employee's continuing employment during the applicable vesting period (except for awards granted to retirement-eligible employees, or employees who become retirement-eligible prior to the end of the awards' respective stated vesting periods, as previously discussed) and the achievement by the Company of certain performance goals in the initial year of the three-year vesting period. For performance-based RSUs subject to cliff vesting, the number of shares that may be earned ranges between 0% (if the specified threshold performance level is not attained) and 150% (if performance meets or exceeds the maximum achievement level) of the awards originally granted. If actual performance exceeds the pre-established threshold, the number of shares earned is calculated based on the relative performance between specified levels of achievement.
Cliff vesting performance-based RSU awards granted by the Company, in addition to being subject to continuing employment requirements and the Company's performance goals noted above, may also be subject to a market condition in the form of a total shareholder return ("TSR") modifier. The actual number of shares that vest at the end of the respective three-year period is determined based on the Company's achievement of the three-year performance goals described above, as well as its TSR relative to the S&P 500 over the related three-year performance period. At the end of the three-year performance period, if the performance condition is achieved at or above the pre-established threshold, the number of shares earned is further adjusted by a TSR modifier payout percentage, which ranges between 75% and 125%, based on the Company's TSR performance relative to that of the S&P 500 index
| F-44 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
over the respective three-year period. Depending on the total level of achievement, the actual number of shares that vest for performance-based RSU awards with a TSR modifier may range from 0% to 187.5% of the awards originally granted.
The fair value of the Company's performance-based RSUs that are not subject to a TSR modifier is 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 securities that are not entitled to dividend equivalents. The fair value of the Company's performance-based RSUs with a TSR modifier is determined on the date of grant using a Monte Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine its expected TSR performance ranking. No such performance-based RSUs with a TSR modifier were granted during any of the fiscal years presented.
A summary of performance-based RSUs without TSR Modifier and performance-based RSUs with TSR Modifier activity during Fiscal 2018 is as follows:
| Performance-based RSUs — without TSR Modifier | Performance-based RSUs — with TSR Modifier | |||||||||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | Number of Shares | Weighted-Average Grant Date Fair Value | |||||||||||
| (thousands) | (thousands) | |||||||||||||
| Nonvested at April 1, 2017 | 788 | $ | 109.87 | 61 | $ | 170.03 | ||||||||
| Granted | 585 | 69.40 | — | N/A | ||||||||||
| Change due to performance/market condition achievement | (12 | ) | 158.76 | (21 | ) | 170.03 | ||||||||
| Vested | (149 | ) | 142.08 | (40 | ) | 170.03 | ||||||||
| Forfeited | (55 | ) | 90.90 | — | N/A | |||||||||
| Nonvested at March 31, 2018 | 1,157 | $ | 85.73 | — | N/A |
| Performance-based RSUs — without TSR Modifier | Performance-based RSUs — with TSR Modifier | |||||||
| Total unrecognized compensation expense at March 31, 2018 (millions) | $ | 39.6 | $ | — | ||||
| Weighted-average period expected to be recognized over (years) | 1.8 | N/A |
Additional information pertaining to performance-based RSUs without TSR Modifier and performance-based RSUs with TSR Modifier activity is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| Performance-based RSUs — without TSR Modifier: | ||||||||||||
| Weighted-average grant date fair value of awards granted | $ | 69.40 | $ | 86.11 | $ | 126.48 | ||||||
| Total fair value of awards vested (millions) | $ | 10.3 | $ | 19.7 | $ | 38.3 | ||||||
| Performance-based RSUs — with TSR Modifier: | ||||||||||||
| Weighted-average grant date fair value of awards granted | N/A | N/A | N/A | |||||||||
| Total fair value of awards vested (millions) | $ | 2.6 | $ | 4.7 | $ | 6.6 |
| F-45 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 18. | Employee Benefit Plans |
Defined Contribution Plans
The Company sponsors defined contribution benefit plans covering substantially all eligible employees in the U.S. and Puerto Rico who are not covered by a collective bargaining agreement. The plans include a savings plan feature under Section 401(k) of the Internal Revenue Code. The Company makes matching contributions to the plans equal to 50% of the first 6% of salary contributed by an eligible employee. Additionally, the Company makes a supplemental matching contribution for plan years in which the Company achieves a "stretch" or a "maximum" performance target based on certain goals established at the beginning of each fiscal year, increasing the matching contribution to 75% or 100%, respectively, of the first 6% of salary contributed by eligible employees, not to exceed the maximum contribution permitted by the plan.
Under the terms of the plans, a participant becomes 100% vested in the Company's matching contributions after five years of credited service. Contributions made by the Company under these plans were $10.6 million, $10.1 million, and $10.5 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively.
International Defined Benefit Plans
The Company sponsors certain single-employer defined benefit plans and cash balance plans at international locations which are not considered to be material individually or in the aggregate to the Company's financial statements. Pension benefits under these plans are based on formulas that reflect the employees' years of service and compensation levels during their employment period. The aggregate funded status of the single-employer defined benefit plans reflected net liabilities of $1.1 million and $3.0 million as of March 31, 2018 and April 1, 2017, respectively, and were primarily recorded within other non-current liabilities in the Company's consolidated balance sheets. These single-employer defined benefit plans had aggregate projected benefit obligations of $43.4 million and aggregate fair values of plan assets of $42.3 million as of March 31, 2018, compared to aggregate projected benefit obligations of $55.6 million and aggregate fair values of plan assets of $52.6 million as of April 1, 2017. The asset portfolio of the single-employer defined benefit plans primarily consists of fixed income securities, which have been measured at fair value largely using Level 2 inputs, as described in Note 12. Net pension expense for these plans was $6.6 million, $9.2 million, and $5.8 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively. The service cost component of $4.6 million, $6.7 million, and $4.9 million in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively, was recorded within SG&A expenses in the Company's consolidated statements of operations. All other components of net pension expense during the fiscal years presented were recorded within other expense, net, in the Company's consolidated statement of operations.
Union Pension Plan
The Company participates in a multi-employer pension plan and is required to make contributions to the Workers United union (which was previously known as UNITE HERE) (the "Union") for dues based on wages paid to union employees. A portion of these dues is allocated by the Union to a retirement fund which provides defined benefits to substantially all unionized workers. The Company does not participate in the management of the plan and has not been furnished with information with respect to the type of benefits provided, vested and non-vested benefits, or assets.
Under the Employee Retirement Income Security Act of 1974, as amended, an employer, upon withdrawal from or termination of a multi-employer plan, is required to continue funding its proportionate share of the plan's unfunded vested benefits. Such liability was assumed in conjunction with the acquisition of certain assets from a non-affiliated licensee. The Company has no current intention of withdrawing from the plan.
Other Compensation Plans
The Company had a non-qualified supplemental retirement plan for certain highly compensated employees whose benefits under the 401(k) profit sharing retirement savings plans were expected to be constrained by the operation of Internal Revenue Code limitations. These supplemental benefits vested over time and the related compensation expense was recognized over the vesting period. Effective August 2008, the Company amended this plan, resulting in a suspension of the annual contributions for substantially all plan participants. Further, affected participants were provided with a one-time election to either withdraw all benefits vested in the plan in a lump sum amount or remain in the plan and receive future distributions of benefits. As of March 31, 2018 and April 1, 2017, amounts accrued under this plan totaled $7.0 million and $7.8 million, respectively, and were classified within other non-current liabilities in the consolidated balance sheets. Total compensation expense recognized related to these benefits was not material in any of the three fiscal years presented.
| F-46 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 19. | Segment Information |
The Company has three reportable segments based on its business activities and organization:
| • | North America — The North America segment primarily consists of sales of Ralph Lauren branded apparel, accessories, home furnishings, and related products made through the Company's wholesale and retail businesses in the U.S. and Canada, excluding Club Monaco. In North America, the Company's wholesale business is comprised primarily of sales to department stores, and to a lesser extent, specialty stores. The Company's retail business in North America is comprised of its Ralph Lauren stores, its factory stores, and its digital commerce site, www.RalphLauren.com. |
| • | Europe — The Europe segment primarily consists of sales of Ralph Lauren branded apparel, accessories, home furnishings, and related products made through the Company's wholesale and retail businesses in Europe and the Middle East, excluding Club Monaco. In Europe, the Company's wholesale business is comprised of a varying mix of sales to both department stores and specialty stores, depending on the country. The Company's retail business in Europe is comprised of its Ralph Lauren stores, its factory stores, its concession-based shop-within-shops, and its various digital commerce sites. |
| • | Asia — The Asia segment primarily consists of sales of Ralph Lauren branded apparel, accessories, home furnishings, and related products made through the Company's wholesale and retail businesses in Asia, Australia, and New Zealand. The Company's retail business in Asia is comprised of its Ralph Lauren stores, its factory stores, and its concession-based shop-within-shops. In addition, the Company sells its products online through various third-party digital partner commerce sites. In Asia, the Company's wholesale business is comprised primarily of sales to department stores, with related products distributed through shop-within-shops. |
No operating segments were aggregated to form the Company's reportable segments. In addition to these reportable segments, the Company also has other non-reportable segments, which primarily consist of (i) sales of Club Monaco branded products made through its retail businesses in the U.S., Canada, and Europe, and its licensing alliances in Europe and Asia, (ii) sales of Ralph Lauren branded products made through its wholesale business in Latin America, and (iii) royalty revenues earned through its global licensing alliances, excluding Club Monaco.
The Company's segment reporting structure is consistent with how it establishes its overall business strategy, allocates resources, and assesses performance of its business. The accounting policies of the Company's segments are consistent with those described in Notes 2 and 3. Sales and transfers between segments are generally recorded at cost and treated as transfers of inventory. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment's performance is evaluated based upon net revenues and operating income before restructuring-related charges, impairment of assets, and certain other one-time items, if any. Certain corporate overhead expenses related to global functions, most notably the Company's executive office, information technology, finance and accounting, human resources, and legal departments, largely remain at corporate. Additionally, other costs that cannot be allocated to the segments based on specific usage are also maintained at corporate, including corporate advertising and marketing expenses, depreciation and amortization of corporate assets, and other general and administrative expenses resulting from corporate-level activities and projects. Asset information by segment is not utilized for purposes of assessing performance or allocating resources, and therefore such information has not been presented.
Net revenues for each of the Company's segments are as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Net revenues: | ||||||||||||
| North America | $ | 3,231.0 | $ | 3,783.0 | $ | 4,479.6 | ||||||
| Europe | 1,585.0 | 1,543.4 | 1,561.7 | |||||||||
| Asia | 933.7 | 882.5 | 892.4 | |||||||||
| Other non-reportable segments | 432.6 | 443.9 | 471.5 | |||||||||
| Total net revenues(a) | $ | 6,182.3 | $ | 6,652.8 | $ | 7,405.2 |
| F-47 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (a) | The Company's sales to its largest wholesale customer, Macy's, accounted for approximately 8%, 10%, and 11%, of its total net revenues in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively. Substantially all of the Company's sales to Macy's related to its North America segment. |
Operating income (loss) for each of the Company's segments is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Operating income (loss)(a): | ||||||||||||
| North America | $ | 677.6 | $ | 666.8 | $ | 941.3 | ||||||
| Europe | 356.7 | 305.2 | 281.0 | |||||||||
| Asia | 137.2 | (86.3 | ) | (1.2 | ) | |||||||
| Other non-reportable segments | 107.5 | 81.0 | 119.3 | |||||||||
| 1,279.0 | 966.7 | 1,340.4 | ||||||||||
| Unallocated corporate expenses | (672.8 | ) | (740.4 | ) | (615.0 | ) | ||||||
| Unallocated restructuring and other charges(b) | (108.0 | ) | (318.6 | ) | (142.6 | ) | ||||||
| Total operating income (loss) | $ | 498.2 | $ | (92.3 | ) | $ | 582.8 |
| (a) | Segment operating income (loss) and unallocated corporate expenses during the fiscal years presented included certain restructuring-related inventory charges (see Note 9) and asset impairment charges (see Note 8), which are detailed below: |
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Restructuring-related inventory charges: | ||||||||||||
| North America | $ | (2.8 | ) | $ | (33.9 | ) | $ | (7.2 | ) | |||
| Europe | (1.5 | ) | (20.1 | ) | (2.4 | ) | ||||||
| Asia | (2.9 | ) | (137.6 | ) | (10.8 | ) | ||||||
| Other non-reportable segments | (0.4 | ) | (6.3 | ) | — | |||||||
| Total restructuring-related inventory charges | $ | (7.6 | ) | $ | (197.9 | ) | $ | (20.4 | ) |
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Asset impairment charges: | ||||||||||||
| North America | $ | (4.7 | ) | $ | (62.5 | ) | $ | (20.5 | ) | |||
| Europe | (1.2 | ) | (3.1 | ) | (8.2 | ) | ||||||
| Asia | (1.0 | ) | (42.0 | ) | (18.2 | ) | ||||||
| Other non-reportable segments | (22.4 | ) | (29.2 | ) | (1.9 | ) | ||||||
| Unallocated corporate expenses | (20.7 | ) | (117.0 | ) | — | |||||||
| Total asset impairment charges | $ | (50.0 | ) | $ | (253.8 | ) | $ | (48.8 | ) |
| F-48 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (b) | The fiscal years presented included certain unallocated restructuring and other charges (see Note 9), which are detailed below: |
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Unallocated restructuring and other charges: | ||||||||||||
| North America-related | $ | (15.5 | ) | $ | (34.7 | ) | $ | (26.1 | ) | |||
| Europe-related | (4.5 | ) | (27.7 | ) | (5.6 | ) | ||||||
| Asia-related | 2.5 | (68.3 | ) | (3.2 | ) | |||||||
| Other non-reportable segment-related | (8.5 | ) | (7.7 | ) | (5.6 | ) | ||||||
| Corporate operations-related | (53.2 | ) | (155.6 | ) | (54.4 | ) | ||||||
| Unallocated restructuring charges | (79.2 | ) | (294.0 | ) | (94.9 | ) | ||||||
| Other charges (see Note 9) | (28.8 | ) | (24.6 | ) | (47.7 | ) | ||||||
| Total unallocated restructuring and other charges | $ | (108.0 | ) | $ | (318.6 | ) | $ | (142.6 | ) |
The following tables summarize depreciation and amortization expense and capital expenditures for each of the Company's segments:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Depreciation and amortization: | ||||||||||||
| North America | $ | 82.5 | $ | 110.0 | $ | 112.4 | ||||||
| Europe | 34.8 | 31.8 | 35.2 | |||||||||
| Asia | 50.3 | 47.8 | 58.2 | |||||||||
| Other non-reportable segments | 10.7 | 14.5 | 13.7 | |||||||||
| Unallocated corporate | 102.8 | 103.4 | 89.9 | |||||||||
| Unallocated restructuring and other charges (see Note 9) | 14.1 | — | — | |||||||||
| Total depreciation and amortization | $ | 295.2 | $ | 307.5 | $ | 309.4 |
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Capital expenditures: | ||||||||||||
| North America | $ | 41.9 | $ | 62.8 | $ | 84.9 | ||||||
| Europe | 28.5 | 43.6 | 48.2 | |||||||||
| Asia | 40.7 | 30.2 | 49.1 | |||||||||
| Other non-reportable segments | 5.3 | 20.1 | 38.0 | |||||||||
| Unallocated corporate | 45.2 | 127.3 | 197.5 | |||||||||
| Total capital expenditures | $ | 161.6 | $ | 284.0 | $ | 417.7 |
| F-49 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net revenues and long-lived assets by geographic location of the reporting subsidiary are as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Net revenues(a): | ||||||||||||
| The Americas(b) | $ | 3,652.1 | $ | 4,214.7 | $ | 4,938.2 | ||||||
| Europe(c) | 1,595.2 | 1,554.1 | 1,572.7 | |||||||||
| Asia(d) | 935.0 | 884.0 | 894.3 | |||||||||
| Total net revenues | $ | 6,182.3 | $ | 6,652.8 | $ | 7,405.2 |
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Long-lived assets(a): | ||||||||
| The Americas(b) | $ | 915.4 | $ | 1,061.7 | ||||
| Europe(c) | 154.8 | 141.8 | ||||||
| Asia(d) | 116.1 | 112.5 | ||||||
| Total long-lived assets | $ | 1,186.3 | $ | 1,316.0 |
| (a) | Net revenues and long-lived assets for certain of the Company's licensed operations are included within the geographic location of the reporting subsidiary which holds the respective license. |
| (b) | Includes the U.S., Canada, and Latin America. Net revenues earned in the U.S. were $3.427 billion, $3.990 billion, and $4.688 billion in Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively. Long-lived assets located in the U.S. were $889.7 million and $1.033 billion as of March 31, 2018 and April 1, 2017, respectively. |
| (c) | Includes the Middle East. |
| (d) | Includes Australia and New Zealand. |
| 20. | Additional Financial Information |
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
A reconciliation of cash, cash equivalents, and restricted cash as of March 31, 2018 and April 1, 2017 from the consolidated balance sheets to the consolidated statements of cash flows is as follows:
| March 31, 2018 | April 1, 2017 | |||||||
| (millions) | ||||||||
| Cash and cash equivalents | $ | 1,304.6 | $ | 668.3 | ||||
| Restricted cash included within prepaid expenses and other current assets | 15.5 | 9.8 | ||||||
| Restricted cash included within other non-current assets | 35.4 | 33.7 | ||||||
| Total cash, cash equivalents, and restricted cash | $ | 1,355.5 | $ | 711.8 |
Amounts included in restricted cash relate to cash placed in escrow with certain banks as collateral, primarily to secure guarantees in connection with certain international tax matters.
| F-50 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Interest and Taxes
Cash paid for interest and income taxes is as follows:
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||
| (millions) | ||||||||||||
| Cash paid for interest | $ | 11.7 | $ | 13.0 | $ | 15.0 | ||||||
| Cash paid for income taxes | 54.0 | 81.7 | 171.7 |
Non-cash Transactions
Non-cash investing activities included capital expenditures incurred but not yet paid of $37.0 million, $45.7 million, and $65.2 million as of the end of Fiscal 2018, Fiscal 2017, and Fiscal 2016, respectively.
Additionally, during Fiscal 2018, Fiscal 2017, and Fiscal 2016, the Company recorded capital lease assets and corresponding capital lease obligations of $3.3 million, $10.9 million, and $48.7 million, respectively, within its consolidated balance sheet.
There were no other significant non-cash investing or financing activities for any of the fiscal years presented.
| F-51 |
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Ralph Lauren Corporation is responsible for the preparation, objectivity, and integrity of the consolidated financial statements and other information contained in this Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include some amounts that are based on management's informed judgments and best estimates.
These consolidated financial statements have been audited by Ernst & Young LLP in Fiscal 2018, Fiscal 2017, and Fiscal 2016, which is an independent registered public accounting firm. They conducted their audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and have expressed herein their unqualified opinions on those financial statements.
The Audit Committee of the Board of Directors, which oversees all of the Company's financial reporting process on behalf of the Board of Directors, consists solely of independent directors, meets with the independent registered accountants, internal auditors, and management periodically to review their respective activities and the discharge of their respective responsibilities. Both the independent registered public accountants and the internal auditors have unrestricted access to the Audit Committee, with or without management, to discuss the scope and results of their audits and any recommendations regarding the system of internal controls.
May 23, 2018
| /s/ PATRICE LOUVET | /s/ JANE HAMILTON NIELSEN | ||
| Patrice Louvet | Jane Hamilton Nielsen | ||
| President and Chief Executive Officer | Chief Financial Officer | ||
| (Principal Executive Officer) | (Principal Financial and Accounting Officer) |
| F-52 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Ralph Lauren Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ralph Lauren Corporation and subsidiaries (the "Company") as of March 31, 2018 and April 1, 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended March 31, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2018 and April 1, 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2018, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2009.
New York, New York
May 23, 2018
| F-53 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Ralph Lauren Corporation
Opinion on Internal Control over Financial Reporting
We have audited Ralph Lauren Corporation and subsidiaries internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Ralph Lauren Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2018 and April 1, 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended March 31, 2018, and the related notes and our report dated May 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
May 23, 2018
| F-54 |
RALPH LAUREN CORPORATION
SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial information as of the dates and for the periods indicated.
The consolidated statement of operations data for each of the three fiscal years in the period ended March 31, 2018, as well as the consolidated balance sheet data as of March 31, 2018 and April 1, 2017 have been derived from, and should be read in conjunction with, the audited financial statements, notes, and other financial information presented elsewhere herein. The consolidated statements of operations data for the fiscal years ended March 28, 2015 and March 29, 2014 and the consolidated balance sheet data at April 2, 2016, March 28, 2015, and March 29, 2014 have been derived from audited financial statements not included herein. Capitalized terms are as defined and described in the consolidated financial statements or elsewhere herein. The historical results are not necessarily indicative of the results to be expected in any future period.
| Fiscal Years Ended(a)(b) | ||||||||||||||||||||
| March 31, 2018(c) | April 1, 2017 | April 2, 2016 | March 28, 2015 | March 29, 2014(d) | ||||||||||||||||
| (millions, except per share data) | ||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Net revenues | $ | 6,182.3 | $ | 6,652.8 | $ | 7,405.2 | $ | 7,620.3 | $ | 7,449.8 | ||||||||||
| Gross profit(e) | 3,751.7 | 3,651.1 | 4,186.7 | 4,377.9 | 4,310.1 | |||||||||||||||
| Impairment of assets | (50.0 | ) | (253.8 | ) | (48.8 | ) | (6.9 | ) | (1.3 | ) | ||||||||||
| Restructuring and other charges | (108.0 | ) | (318.6 | ) | (142.6 | ) | (10.1 | ) | (17.8 | ) | ||||||||||
| Operating income (loss) | 498.2 | (92.3 | ) | 582.8 | 1,035.5 | 1,130.1 | ||||||||||||||
| Interest expense, net | (5.9 | ) | (5.1 | ) | (14.7 | ) | (9.0 | ) | (14.7 | ) | ||||||||||
| Net income (loss) | $ | 162.8 | $ | (99.3 | ) | $ | 396.4 | $ | 702.2 | $ | 775.5 | |||||||||
| Net income (loss) per common share: | ||||||||||||||||||||
| Basic | $ | 1.99 | $ | (1.20 | ) | $ | 4.65 | $ | 7.96 | $ | 8.55 | |||||||||
| Diluted | $ | 1.97 | $ | (1.20 | ) | $ | 4.62 | $ | 7.88 | $ | 8.43 | |||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||
| Basic | 81.7 | 82.7 | 85.2 | 88.2 | 90.7 | |||||||||||||||
| Diluted | 82.5 | 82.7 | 85.9 | 89.1 | 92.0 | |||||||||||||||
| Dividends declared per common share | $ | 2.00 | $ | 2.00 | $ | 2.00 | $ | 1.85 | $ | 1.70 |
| (a) | Fiscal 2016 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks. The inclusion of the 53rd week in Fiscal 2016 resulted in incremental net revenues of $72.2 million and net income of $8.3 million, or $0.10 per diluted share. |
| (b) | Reflects the Company's adoption of ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" during Fiscal 2018 on a retrospective basis, which requires that certain components of net pension expense be presented outside of operating income (see Note 4 to the accompanying consolidated financial statements). |
| (c) | Reflects TCJA enactment-related charges of $221.4 million recorded within the income tax provision (see Note 10 to the accompanying consolidated financial statements). |
| (d) | Reflects the acquisition of the North American Chaps-branded men's sportswear business effective in April 2013, which resulted in the recognition of a $16.4 million gain on acquisition, as well as the acquisition of the Ralph Lauren-branded apparel and accessories business in Australia and New Zealand effective in July 2013. |
| (e) | Fiscal 2018, Fiscal 2017, and Fiscal 2016 reflect non-cash inventory-related charges of $7.6 million, $197.9 million, and $20.4 million, respectively, recorded in connection with the Company's restructuring plans (see Note 9 to the accompanying consolidated financial statements). |
| F-55 |
RALPH LAUREN CORPORATION
SELECTED FINANCIAL INFORMATION (Continued)
| March 31, 2018 | April 1, 2017 | April 2, 2016 | March 28, 2015 | March 29, 2014 | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 1,304.6 | $ | 668.3 | $ | 456.3 | $ | 499.7 | $ | 797.4 | ||||||||||
| Investments | 785.6 | 706.1 | 816.0 | 652.2 | 490.1 | |||||||||||||||
| Working capital(a) | 1,961.2 | 1,794.6 | 1,854.4 | 2,137.4 | 2,359.0 | |||||||||||||||
| Total assets | 6,143.3 | 5,652.0 | 6,213.1 | 6,105.8 | 6,087.7 | |||||||||||||||
| Total debt (including current maturities of debt) | 596.2 | 588.2 | 713.1 | 532.3 | 297.9 | |||||||||||||||
| Other non-current obligations(b) | 361.2 | 250.9 | 265.7 | 237.5 | 255.0 | |||||||||||||||
| Equity | 3,457.4 | 3,299.6 | 3,743.5 | 3,891.6 | 4,034.3 |
| (a) | Working capital is calculated as total current assets less total current liabilities (including current maturities of debt). Working capital as of March 31, 2018, April 1, 2017, and April 2, 2016 reflect the Company's adoption of ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires all deferred tax assets and liabilities, together with any related valuation allowances, to be classified as non-current on the consolidated balance sheet (past guidance required deferred tax assets and liabilities to be broken out as current and non-current on the consolidated balance sheet). Prior periods were not retrospectively adjusted. |
| (b) | Comprised of the Company's non-current capital lease and income tax payable obligations. |
| F-56 |
RALPH LAUREN CORPORATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the quarterly financial information of the Company:
| Quarterly Periods Ended(a)(b) | ||||||||||||||||
| July 1, 2017 | September 30, 2017 | December 30, 2017(c) | March 31, 2018(c) | |||||||||||||
| (millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 1,347.1 | $ | 1,664.2 | $ | 1,641.8 | $ | 1,529.2 | ||||||||
| Gross profit | 851.2 | 995.8 | 996.2 | 908.5 | ||||||||||||
| Net income (loss) | 59.5 | 143.8 | (81.8 | ) | 41.3 | |||||||||||
| Net income (loss) per common share(d): | ||||||||||||||||
| Basic | $ | 0.73 | $ | 1.76 | $ | (1.00 | ) | $ | 0.51 | |||||||
| Diluted | $ | 0.72 | $ | 1.75 | $ | (1.00 | ) | $ | 0.50 | |||||||
| Dividends declared per common share | $ | 0.50 | $ | 0.50 | $ | 0.50 | $ | 0.50 | ||||||||
| Quarterly Periods Ended(a)(e) | ||||||||||||||||
| July 2, 2016 | October 1, 2016 | December 31, 2016 | April 1, 2017 | |||||||||||||
| (millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 1,552.2 | $ | 1,820.6 | $ | 1,714.6 | $ | 1,565.4 | ||||||||
| Gross profit | 894.6 | 954.2 | 983.2 | 819.1 | ||||||||||||
| Net income (loss) | (22.3 | ) | 45.7 | 81.3 | (204.0 | ) | ||||||||||
| Net income (loss) per common share(d): | ||||||||||||||||
| Basic | $ | (0.27 | ) | $ | 0.55 | $ | 0.98 | $ | (2.48 | ) | ||||||
| Diluted | $ | (0.27 | ) | $ | 0.55 | $ | 0.98 | $ | (2.48 | ) | ||||||
| Dividends declared per common share | $ | 0.50 | $ | 0.50 | $ | 0.50 | $ | 0.50 |
| (a) | All fiscal quarters presented consisted of 13 weeks. |
| (b) | Net income (loss) and net income (loss) per common share for the three-month periods ended July 1, 2017, September 30, 2017, December 30, 2017, and March 31, 2018 were negatively impacted by pretax restructuring-related charges, impairment of assets, and certain other charges of $47.2 million, $30.4 million, $27.2 million, and $60.8 million, respectively (see Notes 8 and 9 to the accompanying consolidated financial statements). |
| (c) | Net loss and net loss per common share for the three months ended December 30, 2017 reflected the negative impact of TCJA enactment-related charges of $231.3 million. During the three months ended March 31, 2018, net income and net income per common share were favorably impacted by TCJA measurement period adjustments of $9.9 million (see Note 10 to the accompanying consolidated financial statements). |
| (d) | Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts may not add to the annual amount because of differences in the average number of common shares outstanding during each period. |
| (e) | Net income (loss) and net income (loss) per common share for the three-month periods ended July 2, 2016, October 1, 2016, December 31, 2016, and April 1, 2017 were negatively impacted by pretax restructuring-related charges, impairment of assets, and certain other charges of $159.1 million, $149.5 million, $91.4 million, and $370.3 million, respectively (see Notes 8 and 9 to the accompanying consolidated financial statements). |
| F-57 |
Previous: Item 14. Principal Accounting Fees and Services.