filings.toolsItem 15. Exhibits, Financial Statement Schedules.
289K 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
| 76 |
| 77 |
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. |
| 78 |
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 Operating Officer and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| Date: May 27, 2020 |
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 27, 2020 | ||
| Ralph Lauren | ||||
| /S/ PATRICE LOUVET | President, Chief Executive Officer, and Director (Principal Executive Officer) | May 27, 2020 | ||
| Patrice Louvet | ||||
| /S/ JANE HAMILTON NIELSEN | Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) | May 27, 2020 | ||
| Jane Hamilton Nielsen | ||||
| /s/ DAVID LAUREN | Vice Chairman, Chief Innovation Officer, Strategic Advisor to the CEO, and Director | May 27, 2020 | ||
| David Lauren | ||||
| /S/ ANGELA AHRENDTS | Director | May 27, 2020 | ||
| Angela Ahrendts | ||||
| /S/ JOHN R. ALCHIN | Director | May 27, 2020 | ||
| John R. Alchin | ||||
| /S/ FRANK A. BENNACK, JR. | Director | May 27, 2020 | ||
| Frank A. Bennack, Jr. | ||||
| /S/ DR. JOYCE F. BROWN | Director | May 27, 2020 | ||
| Dr. Joyce F. Brown | ||||
| /S/ JOEL L. FLEISHMAN | Director | May 27, 2020 | ||
| Joel L. Fleishman | ||||
| /s/ MICHAEL A. GEORGE | Director | May 27, 2020 | ||
| Michael A. George |
| 79 |
| Signature | Title | Date | ||
| /S/ HUBERT JOLY | Director | May 27, 2020 | ||
| Hubert Joly | ||||
| /S/ LINDA FINDLEY KOZLOWSKI | Director | May 27, 2020 | ||
| Linda Findley Kozlowski | ||||
| /S/ JUDITH MCHALE | Director | May 27, 2020 | ||
| Judith McHale | ||||
| /S/ ROBERT C. WRIGHT | Director | May 27, 2020 | ||
| Robert C. Wright |
| 80 |
RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
| F-1 |
RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,620.4 | $ | 584.1 | ||||
| Short-term investments | 495.9 | 1,403.4 | ||||||
| Accounts receivable, net of allowances of $276.2 million and $192.2 million | 277.1 | 398.1 | ||||||
| Inventories | 736.2 | 817.8 | ||||||
| Income tax receivable | 84.8 | 32.1 | ||||||
| Prepaid expenses and other current assets | 160.8 | 359.3 | ||||||
| Total current assets | 3,375.2 | 3,594.8 | ||||||
| Property and equipment, net | 979.5 | 1,039.2 | ||||||
| Operating lease right-of-use assets | 1,511.6 | — | ||||||
| Deferred tax assets | 245.2 | 67.0 | ||||||
| Goodwill | 915.5 | 919.6 | ||||||
| Intangible assets, net | 141.0 | 163.7 | ||||||
| Other non-current assets | 111.9 | 158.5 | ||||||
| Total assets | $ | 7,279.9 | $ | 5,942.8 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Short-term debt | $ | 475.0 | $ | — | ||||
| Current portion of long-term debt | 299.6 | — | ||||||
| Accounts payable | 246.8 | 202.3 | ||||||
| Income tax payable | 65.1 | 29.4 | ||||||
| Current operating lease liabilities | 288.4 | — | ||||||
| Accrued expenses and other current liabilities | 717.1 | 968.4 | ||||||
| Total current liabilities | 2,092.0 | 1,200.1 | ||||||
| Long-term debt | 396.4 | 689.1 | ||||||
| Long-term operating lease liabilities | 1,568.3 | — | ||||||
| Income tax payable | 132.7 | 146.7 | ||||||
| Non-current liability for unrecognized tax benefits | 88.9 | 78.8 | ||||||
| Other non-current liabilities | 308.5 | 540.9 | ||||||
| Commitments and contingencies (Note 15) | ||||||||
| Total liabilities | 4,586.8 | 2,655.6 | ||||||
| Equity: | ||||||||
| Class A common stock, par value $.01 per share; 104.9 million and 102.9 million shares issued; 47.6 million and 52.2 million shares outstanding | 1.0 | 1.0 | ||||||
| Class B common stock, par value $.01 per share; 24.9 million issued and outstanding; 25.9 million shares issued and outstanding | 0.3 | 0.3 | ||||||
| Additional paid-in-capital | 2,594.4 | 2,493.8 | ||||||
| Retained earnings | 5,994.0 | 5,979.1 | ||||||
| Treasury stock, Class A, at cost; 57.3 million and 50.7 million shares | (5,778.4 | ) | (5,083.6 | ) | ||||
| Accumulated other comprehensive loss | (118.2 | ) | (103.4 | ) | ||||
| Total equity | 2,693.1 | 3,287.2 | ||||||
| Total liabilities and equity | $ | 7,279.9 | $ | 5,942.8 |
See accompanying notes.
| F-2 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions, except per share data) | ||||||||||||
| Net revenues | $ | 6,159.8 | $ | 6,313.0 | $ | 6,182.3 | ||||||
| Cost of goods sold | (2,506.5 | ) | (2,427.0 | ) | (2,430.6 | ) | ||||||
| Gross profit | 3,653.3 | 3,886.0 | 3,751.7 | |||||||||
| Selling, general, and administrative expenses | (3,237.5 | ) | (3,168.3 | ) | (3,095.5 | ) | ||||||
| Impairment of assets | (31.6 | ) | (25.8 | ) | (50.0 | ) | ||||||
| Restructuring and other charges | (67.2 | ) | (130.1 | ) | (108.0 | ) | ||||||
| Total other operating expenses, net | (3,336.3 | ) | (3,324.2 | ) | (3,253.5 | ) | ||||||
| Operating income | 317.0 | 561.8 | 498.2 | |||||||||
| Interest expense | (17.6 | ) | (20.7 | ) | (18.2 | ) | ||||||
| Interest income | 34.4 | 40.8 | 12.3 | |||||||||
| Other income (expense), net | (7.4 | ) | 0.6 | (3.1 | ) | |||||||
| Income before income taxes | 326.4 | 582.5 | 489.2 | |||||||||
| Income tax benefit (provision) | 57.9 | (151.6 | ) | (326.4 | ) | |||||||
| Net income | $ | 384.3 | $ | 430.9 | $ | 162.8 | ||||||
| Net income per common share: | ||||||||||||
| Basic | $ | 5.07 | $ | 5.35 | $ | 1.99 | ||||||
| Diluted | $ | 4.98 | $ | 5.27 | $ | 1.97 | ||||||
| Weighted-average common shares outstanding: | ||||||||||||
| Basic | 75.8 | 80.6 | 81.7 | |||||||||
| Diluted | 77.2 | 81.7 | 82.5 | |||||||||
| Dividends declared per share | $ | 2.75 | $ | 2.50 | $ | 2.00 |
See accompanying notes.
| F-3 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Net income | $ | 384.3 | $ | 430.9 | $ | 162.8 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation gains (losses) | (11.9 | ) | (39.2 | ) | 126.9 | |||||||
| Net gains (losses) on cash flow hedges | (2.2 | ) | 36.2 | (30.6 | ) | |||||||
| Net gains (losses) on defined benefit plans | (0.7 | ) | (1.9 | ) | 3.6 | |||||||
| Other comprehensive income (loss), net of tax | (14.8 | ) | (4.9 | ) | 99.9 | |||||||
| Total comprehensive income | $ | 369.5 | $ | 426.0 | $ | 262.7 |
See accompanying notes.
| F-4 |
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 384.3 | $ | 430.9 | $ | 162.8 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization expense | 269.5 | 281.3 | 295.2 | |||||||||
| Deferred income tax expense (benefit) | (168.8 | ) | 8.5 | 84.1 | ||||||||
| Loss on sale of property | — | 11.6 | — | |||||||||
| Non-cash stock-based compensation expense | 100.6 | 88.6 | 74.5 | |||||||||
| Non-cash impairment of assets, including equity method investment | 38.7 | 25.8 | 50.0 | |||||||||
| Bad debt expense | 58.7 | 0.4 | 10.2 | |||||||||
| Other non-cash charges | (2.3 | ) | 6.5 | 1.7 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 57.6 | 10.1 | 34.5 | |||||||||
| Inventories | 72.3 | (83.6 | ) | 65.4 | ||||||||
| Prepaid expenses and other current assets | 58.2 | (40.5 | ) | (15.1 | ) | |||||||
| Accounts payable and accrued liabilities | (64.3 | ) | (4.7 | ) | 64.6 | |||||||
| Income tax receivables and payables | (42.5 | ) | 29.7 | 165.1 | ||||||||
| Deferred income | — | (16.5 | ) | 1.4 | ||||||||
| Other balance sheet changes | (7.4 | ) | 35.7 | (19.3 | ) | |||||||
| Net cash provided by operating activities | 754.6 | 783.8 | 975.1 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (270.3 | ) | (197.7 | ) | (161.6 | ) | ||||||
| Purchases of investments | (1,289.7 | ) | (3,030.8 | ) | (1,605.6 | ) | ||||||
| Proceeds from sales and maturities of investments | 2,240.4 | 2,357.5 | 1,582.7 | |||||||||
| Acquisitions and ventures | 0.9 | (4.5 | ) | (4.6 | ) | |||||||
| Proceeds from sale of property | 20.8 | 20.0 | — | |||||||||
| Settlement of net investment hedges | — | (23.8 | ) | — | ||||||||
| Net cash provided by (used in) investing activities | 702.1 | (879.3 | ) | (189.1 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from credit facilities | 475.0 | — | 10.1 | |||||||||
| Repayments of borrowings on credit facilities | — | (9.9 | ) | — | ||||||||
| Proceeds from the issuance of long-term debt | — | 398.1 | — | |||||||||
| Repayments of long-term debt | — | (300.0 | ) | — | ||||||||
| Payments of finance lease obligations | (13.6 | ) | (19.6 | ) | (28.2 | ) | ||||||
| Payments of dividends | (203.9 | ) | (190.7 | ) | (162.4 | ) | ||||||
| Repurchases of common stock, including shares surrendered for tax withholdings | (694.8 | ) | (502.6 | ) | (17.1 | ) | ||||||
| Proceeds from exercise of stock options | — | 21.8 | 0.1 | |||||||||
| Other financing activities | (0.9 | ) | (2.8 | ) | — | |||||||
| Net cash used in financing activities | (438.2 | ) | (605.7 | ) | (197.5 | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (15.2 | ) | (27.8 | ) | 55.2 | |||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 1,003.3 | (729.0 | ) | 643.7 | ||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 626.5 | 1,355.5 | 711.8 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,629.8 | $ | 626.5 | $ | 1,355.5 |
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 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 | 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 | ||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 430.9 | |||||||||||||||||||||||||||||
| Other comprehensive loss | (4.9 | ) | ||||||||||||||||||||||||||||
| Total comprehensive income | 426.0 | |||||||||||||||||||||||||||||
| Dividends declared | (198.9 | ) | (198.9 | ) | ||||||||||||||||||||||||||
| Repurchases of common stock | 4.1 | (502.6 | ) | (502.6 | ) | |||||||||||||||||||||||||
| Stock-based compensation | 88.6 | 88.6 | ||||||||||||||||||||||||||||
| Shares issued pursuant to stock-based compensation plans | 0.9 | — | 21.8 | 21.8 | ||||||||||||||||||||||||||
| Cumulative adjustment from adoption of new accounting standards | (5.1 | ) | (5.1 | ) | ||||||||||||||||||||||||||
| Balance at March 30, 2019 | 128.8 | $ | 1.3 | $ | 2,493.8 | $ | 5,979.1 | 50.7 | $ | (5,083.6 | ) | $ | (103.4 | ) | $ | 3,287.2 | ||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 384.3 | |||||||||||||||||||||||||||||
| Other comprehensive loss | (14.8 | ) | ||||||||||||||||||||||||||||
| Total comprehensive income | 369.5 | |||||||||||||||||||||||||||||
| Dividends declared | (204.9 | ) | (204.9 | ) | ||||||||||||||||||||||||||
| Repurchases of common stock | 6.6 | (694.8 | ) | (694.8 | ) | |||||||||||||||||||||||||
| Stock-based compensation | 100.6 | 100.6 | ||||||||||||||||||||||||||||
| Shares issued pursuant to stock-based compensation plans | 1.0 | — | — | — | ||||||||||||||||||||||||||
| Cumulative adjustment from adoption of new accounting standards (see Note 4) | (164.5 | ) | (164.5 | ) | ||||||||||||||||||||||||||
| Balance at March 28, 2020 | 129.8 | $ | 1.3 | $ | 2,594.4 | $ | 5,994.0 | 57.3 | $ | (5,778.4 | ) | $ | (118.2 | ) | $ | 2,693.1 |
| (a) | Includes Class A and Class B common stock. In Fiscal 2020, 1.0 million shares of Class B common stock were converted into an equal number of shares of Class A common stock pursuant to the terms of the Class B common stock (see Note 16). |
| (b) | Accumulated other comprehensive income (loss). |
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, footwear, accessories, home furnishings, fragrances, and hospitality. 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 channel of distribution (retail, wholesale, 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 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. The Company's wholesale sales are made principally to major department stores, specialty stores, and third-party digital partners around the world, as well as to certain third-party-owned stores to which the Company has licensed the right to operate in defined geographic territories using its trademarks. In addition, the Company licenses to third parties for specified periods the right to access its various trademarks in connection with the licensees' 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 20 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, comprehensive income, 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 2020 ended on March 28, 2020 and was a 52-week period ("Fiscal 2020"); fiscal year 2019 ended on March 30, 2019 and was a 52-week period ("Fiscal 2019"); fiscal year 2018 ended on March 31, 2018 and was a 52-week period ("Fiscal 2018"); and fiscal year 2021 will end on March 27, 2021 and will be a 52-week period ("Fiscal 2021").
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 forfeiture rates; reserves for restructuring activity; and accounting for business combinations, among others.
Reclassifications
Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation, including a change to the Company's segment reporting structure as further described in Note 20.
| F-7 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 3. | Summary of Significant Accounting Policies |
Revenue Recognition
The Company recognizes revenue across all channels of the business when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services, and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales and other related taxes collected from customers and remitted to government authorities are excluded from revenue.
Revenue from the Company's retail business is recognized when the customer takes physical possession of the products, which occurs either at the point of sale for merchandise purchased at the Company's retail stores and concession-based shop-within-shops, or upon receipt of shipment for merchandise ordered through direct-to-consumer digital commerce sites. Such revenues are recorded net of estimated returns based on historical trends. Payment is due at the point of sale.
Gift cards issued to customers by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed (referred to as "breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's wholesale business is generally recognized upon shipment of products, at which point title passes and risk of loss is transferred to the customer. In certain arrangements where the Company retains the risk of loss during shipment, revenue is recognized upon receipt of products by the customer. 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 amounts have not differed materially from actual results.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks (i.e., symbolic intellectual property) and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually-guaranteed minimum royalty amount. Payments are generally due quarterly and, depending on time of receipt, may be recorded as a liability until recognized as revenue. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually-guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually-guaranteed minimum royalty amount, the minimum is recognized as revenue ratably over the contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks. As of March 28, 2020, contractually-guaranteed minimum royalty amounts expected to be recognized as revenue during future periods were as follows:
| Contractually-Guaranteed Minimum Royalties**(a)** | ||||
| (millions) | ||||
| Fiscal 2021 | $ | 119.0 | ||
| Fiscal 2022 | 80.7 | |||
| Fiscal 2023 | 45.1 | |||
| Fiscal 2024 | 27.2 | |||
| Fiscal 2025 and thereafter | 1.1 | |||
| Total | $ | 273.1 |
| F-8 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (a) | Amounts presented do not contemplate anticipated contract renewals or royalties earned in excess of the contractually guaranteed minimums. |
Disaggregated Net Revenues
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors for the fiscal periods presented:
| Fiscal Year Ended | ||||||||||||||||||||
| March 28, 2020 | ||||||||||||||||||||
| North America | Europe | Asia | Other | Total | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Sales Channel**(a)****:** | ||||||||||||||||||||
| Retail | $ | 1,727.3 | $ | 874.6 | $ | 948.0 | $ | 191.0 | $ | 3,740.9 | ||||||||||
| Wholesale | 1,413.2 | 757.6 | 69.2 | 10.8 | 2,250.8 | |||||||||||||||
| Licensing | — | — | — | 168.1 | 168.1 | |||||||||||||||
| Total | $ | 3,140.5 | $ | 1,632.2 | $ | 1,017.2 | $ | 369.9 | $ | 6,159.8 |
| Fiscal Year Ended | ||||||||||||||||||||
| March 30, 2019 | ||||||||||||||||||||
| North America | Europe | Asia | Other | Total | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Sales Channel**(a)****:** | ||||||||||||||||||||
| Retail | $ | 1,688.5 | $ | 881.1 | $ | 969.9 | $ | 208.3 | $ | 3,747.8 | ||||||||||
| Wholesale | 1,514.4 | 801.9 | 71.1 | 5.1 | 2,392.5 | |||||||||||||||
| Licensing | — | — | — | 172.7 | 172.7 | |||||||||||||||
| Total | $ | 3,202.9 | $ | 1,683.0 | $ | 1,041.0 | $ | 386.1 | $ | 6,313.0 |
| Fiscal Year Ended | ||||||||||||||||||||
| March 31, 2018 | ||||||||||||||||||||
| North America | Europe | Asia | Other | Total | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Sales Channel**(a)****:** | ||||||||||||||||||||
| Retail | $ | 1,659.6 | $ | 857.9 | $ | 874.1 | $ | 224.8 | $ | 3,616.4 | ||||||||||
| Wholesale | 1,571.4 | 750.4 | 59.6 | 7.8 | 2,389.2 | |||||||||||||||
| Licensing | — | — | — | 176.7 | 176.7 | |||||||||||||||
| Total | $ | 3,231.0 | $ | 1,608.3 | $ | 933.7 | $ | 409.3 | $ | 6,182.3 |
| (a) | Net revenues from the Company's retail and wholesale businesses are recognized at a point in time. Net revenues from the Company's licensing business are recognized over time. |
| F-9 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Income
Deferred income represents cash payments received in advance of the Company's transfer of control of products or services to its customers and is generally comprised of unredeemed gift cards, net of breakage, and advance royalty payments from licensees. The Company's deferred income balances were $14.6 million and $14.8 million as of March 28, 2020 and March 30, 2019, respectively, and were primarily recorded within accrued expenses and other current liabilities within the consolidated balance sheets. During Fiscal 2020, the Company recognized $9.3 million of net revenues from amounts recorded as deferred income as of March 30, 2019. The majority of the deferred income balance as of March 28, 2020 is expected to be recognized as revenue within the next twelve months.
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 qualifying 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
Costs associated with shipping goods to customers are accounted for as fulfillment activities and 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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Shipping costs | $ | 46.7 | $ | 49.1 | $ | 39.1 | ||||||
| Handling costs | 154.0 | 153.1 | 155.4 |
Advertising and Marketing Costs
Advertising costs, including the costs to produce advertising, are expensed when the advertisement is first exhibited. Advertising costs paid to wholesale customers under cooperative advertising programs are not included in advertising costs, but rather are reflected as a reduction of revenue since generally 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 were $278.0 million, $272.8 million, and $241.1 million in Fiscal 2020, Fiscal 2019, and Fiscal 2018, 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 $10.1 million and $9.6 million at the end of Fiscal 2020 and Fiscal 2019, 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 accounted for in their respective functional currencies, which are primarily consistent with the local currency. For purposes of consolidation, 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 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.
| F-10 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also recognizes gains and losses on both third-party and intercompany balances that are denominated in a currency other than the respective entity's functional currency. Such foreign currency transactional gains and losses are recognized within other income (expense), net in the consolidated statements of operations, inclusive of the effects of any related hedging activities, and reflected net losses of $1.1 million and $2.8 million in Fiscal 2020 and Fiscal 2019, respectively, and net gains of $4.5 million in Fiscal 2018.
Comprehensive Income
Comprehensive income, which is reported in the consolidated statements of comprehensive income and consolidated statements of equity, consists of net income and certain other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income and referred to as OCI. Components of OCI 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 per Common Share
Basic net income per common share is computed by dividing net income 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 per common share adjusts basic net income per common share for the dilutive effects of outstanding restricted stock units ("RSUs"), stock options, and any other potentially dilutive instruments, only in the periods in which such effects are dilutive.
The weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to shares used to calculate diluted net income per common share as follows:
| Fiscal Years Ended | |||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | |||||||
| (millions) | |||||||||
| Basic shares | 75.8 | 80.6 | 81.7 | ||||||
| Dilutive effect of RSUs and stock options | 1.4 | 1.1 | 0.8 | ||||||
| Diluted shares | 77.2 | 81.7 | 82.5 |
All earnings per share amounts have been calculated using unrounded numbers. The Company has outstanding performance-based and market-based RSUs, which are included in the computation of diluted shares only to the extent that the underlying performance or market conditions (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. In addition, 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 per common share. As of the end of Fiscal 2020, Fiscal 2019, and Fiscal 2018, there were 0.8 million, 1.4 million, and 2.0 million, respectively, of additional shares issuable contingent on vesting of performance-based RSUs and upon exercise of anti-dilutive options, 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 grant date fair value of the Company's market-based RSU awards, for which vesting is dependent upon total shareholder return ("TSR") of its Class A common stock over a three-year performance period relative to that of a pre-established peer group, is estimated using a Monte Carlo simulation model. The grant date fair values of restricted stock awards, service-based RSUs, and performance-based RSUs 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 any awards for which dividend equivalent amounts do not accrue while outstanding and unvested. The Company uses the Black-Scholes valuation model to estimate the grant date fair value of any stock option awards. Compensation expense for all performance-based RSUs is recognized over the requisite service period when attainment of the performance goal is deemed
| F-11 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
probable, net of estimated forfeitures. Compensation expense for market-based RSUs, net of estimated forfeitures, is recognized over the requisite service period regardless of whether, and the extent to which, the market condition is ultimately satisfied. The Company recognizes compensation expense on an accelerated basis for all awards with graded vesting terms, including restricted stock, certain RSUs, and stock options. For RSU awards with cliff vesting terms, compensation expense is recognized on a straight-line basis. For certain RSU awards granted to retirement-eligible employees, or employees who will become retirement-eligible prior to the end of the awards' respective stated vesting periods, the related stock-based compensation expense is recognized on an accelerated basis over a term commensurate with the period that the employee is required to provide service in order to vest in the award. See Note 18 for further discussion of the Company's stock-based compensation plans.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less, including investments in time deposits and debt securities. Investments in debt securities are diversified across high-credit quality issuers 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, as well as to secure guarantees related to certain real estate leases. Such cash is classified as restricted cash and reported as a component of either prepaid expenses and other current assets or other non-current assets in the Company's consolidated balance sheets.
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 recorded within income (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
Investment ownership interests that provide the Company with significant influence, but less than a controlling interest, over an investee are accounted for using the equity method of accounting. 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 generally recorded in the Company's consolidated financial statements: the Company's original investment, as subsequently adjusted for its share of the investee's earnings (losses) and reduced by any dividends received and other-than-temporary impairments recorded, is included in the consolidated balance sheets; the Company's share of the investee's periodic earnings (losses) is included in the consolidated statements of operations; and dividends and other cash distributions received from the investee and additional cash investments made in or other cash paid to the investee are included in the consolidated statements of cash flows.
The Company's share of equity-method investee earnings and losses is recognized within other income (expense), net, in the consolidated statements of operations, and reflected net gains of $0.1 million and $2.9 million in Fiscal 2020 and Fiscal 2019, respectively, and net losses of $4.5 million in Fiscal 2018.
| F-12 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment Assessment
The Company evaluates its investments that are in unrealized loss positions, if any, and equity method investments for other-than-temporary impairment on a quarterly basis (see Note 12). 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 or investees. Factors considered by the Company include (i) the length of time and the extent to which an investment's fair value has been below its 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; (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; and (vii) whether events or changes in circumstances indicate that the investment's carrying amount might not be recoverable. See Note 13 for further information relating to the Company's investments.
During Fiscal 2020, the Company recorded a $7.1 million impairment charge within other income (expense), net in the consolidated statements of operations relating to an equity method investment (see Note 8).
Accounts Receivable
In the normal course of business, the Company extends credit to wholesale customers that satisfy defined credit criteria. Payment is generally due within 30 to 120 days and does not include a significant financing component. 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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Beginning reserve balance | $ | 176.5 | $ | 202.5 | $ | 202.8 | ||||||
| Amount charged against revenue to increase reserve | 580.1 | 543.8 | 585.0 | |||||||||
| Amount credited against customer accounts to decrease reserve | (550.3 | ) | (563.0 | ) | (596.6 | ) | ||||||
| Foreign currency translation | (1.6 | ) | (6.8 | ) | 11.3 | |||||||
| Ending reserve balance | $ | 204.7 | $ | 176.5 | $ | 202.5 |
An allowance for doubtful accounts is determined through an analysis of accounts receivable aging, assessments of collectability based on evaluation of historical and anticipated trends, the financial condition of the Company's customers and their ability to withstand prolonged periods of adverse economic conditions, and evaluation of the impact of other economic and market conditions, among other factors. The Company's estimated allowance for doubtful accounts as of March 28, 2020 reflects adverse impacts associated with COVID-19 business disruptions, which include temporary department and specialty store closures worldwide, as well as declines in retail traffic, tourism, and consumer spending on discretionary items.
| F-13 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A rollforward of the activity in the Company's allowance for doubtful accounts is presented below:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Beginning reserve balance | $ | 15.7 | $ | 19.7 | $ | 11.6 | ||||||
| Amount recorded to expense to increase reserve**(a)** | 58.7 | 0.4 | 10.2 | |||||||||
| Amount written-off against customer accounts to decrease reserve | (2.6 | ) | (3.5 | ) | (3.2 | ) | ||||||
| Foreign currency translation | (0.3 | ) | (0.9 | ) | 1.1 | |||||||
| Ending reserve balance | $ | 71.5 | $ | 15.7 | $ | 19.7 |
| (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 stores, specialty stores, and third-party digital partners 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 2020, the Company's sales to its three largest wholesale customers accounted for approximately 18% of total net revenues. Substantially all of the Company's sales to its three largest wholesale customers related to its North America segment. As of March 28, 2020, these three key wholesale customers constituted approximately 32% of total gross accounts receivable.
Inventories
The Company holds inventory that is sold in its retail stores and digital commerce sites directly to consumers. The Company also holds inventory that is sold through wholesale distribution channels to major department stores, specialty stores, and third-party digital partners. Substantially all of the Company's inventories consist 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 actual economic and market conditions. In addition, 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 the realizable value of its inventory and its reserves for inventory shrinkage have not differed materially from actual results. However, unforeseen adverse future economic and market conditions, such as those resulting from disease pandemics and other catastrophic events, could result in the Company's actual results differing materially from its estimates.
The Company's estimated realizable value of its inventory as of March 28, 2020 reflects adverse impacts associated with COVID-19 business disruptions, which include temporary closures of the Company's stores and those of its wholesale customers worldwide, as well as declines in retail traffic, tourism, and consumer spending on discretionary items.
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.
| F-14 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 (see Note 12). 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.
Leases
As discussed in Note 4, the Company adopted a new lease accounting standard as of the beginning of Fiscal 2020.
The Company's lease arrangements primarily relate to real estate, including its retail stores, concession-based shop-within-shops, corporate offices, and warehouse facilities, and to a lesser extent, certain equipment and other assets. The Company's leases generally have initial terms ranging from three to fifteen years and may include renewal or early-termination options, rent escalation clauses, and/or lease incentives in the form of construction allowances and rent abatements. Renewal rent payment terms generally reflect market rates prevailing at the time of renewal. The Company is typically required to make fixed minimum rent payments, variable rent payments based on performance (e.g., percentage-of-sales-based payments), or a combination thereof, directly related to its right to use an underlying leased asset. The Company is also often required to pay for certain other costs that do not relate specifically to its right to use an underlying leased asset, but that are associated with the asset, including real estate taxes, insurance, common area maintenance fees, and/or certain other costs (referred to collectively herein as "non-lease components"), which may be fixed or variable in amount, depending on the terms of the respective lease agreement. The Company's leases do not contain significant residual value guarantees or restrictive covenants.
The Company determines whether an arrangement contains a lease at the arrangement's inception. If a lease is determined to exist, its related term is assessed at lease commencement, once the underlying asset is made available by the lessor for the Company's use. The Company's assessment of the lease term reflects the non-cancellable period of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options for which the Company is not considered reasonably certain of exercising, as well as periods covered by renewal options for which it is considered reasonably certain of exercising. The Company also determines lease classification as either operating or finance (formerly referred to as "capital") at lease commencement, which governs the pattern of expense recognition and the presentation thereof reflected in the consolidated statements of operations over the lease term.
For leases with a lease term exceeding 12 months, a lease liability is recorded on the Company's consolidated balance sheet at lease commencement reflecting the present value of its fixed payment obligations over such term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, increased by any prepaid rent and/or initial direct costs incurred in connection with execution of the lease, and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as it elects to account for lease and non-lease components together as a single lease component. Variable lease payments are not included in the measurement of ROU assets and lease liabilities. ROU assets associated with finance leases are presented separate from those associated with operating leases, and are included within property and equipment, net on the Company's consolidated balance sheet. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis an amount equal to the lease payments and incorporates the term and economic environment of the lease.
For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments as they are made. For leases with a lease term of 12 months or less (referred to as a "short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term and are not recognized on the consolidated balance sheet. Variable lease cost, if any, is recognized as incurred for all leases.
ROU assets, along with any other related long-lived assets, are periodically evaluated for impairment whenever events or circumstances indicate that their carrying values may not be fully recoverable (see Note 12). To the extent that an ROU asset and any related long-lived assets are determined to be impaired, they are written down accordingly on a relative carrying amount basis,
| F-15 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with the ROU asset written down to an amount no lower than its estimated fair value. Subsequent to the recognition of any such impairment, total remaining lease cost is recognized on a front-loaded basis over the remaining lease term.
See Note 14 for further discussion of the Company's leases.
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 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.
| F-16 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Financial Instruments
The Company records derivative financial instruments on its consolidated balance sheets at fair value. Changes in the fair value of derivative instruments that are designated and qualify for hedge accounting are either (i) offset through earnings against the changes in fair value of the related hedged assets, liabilities, or firm commitments or (ii) recognized in equity as a component of AOCI until the hedged item is recognized in earnings, depending on whether the instrument is hedging 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 in offsetting the risk associated with the related exposure. For each instrument that is designated as a hedge, the Company 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 over the instrument's term. To assess hedge effectiveness at the inception of a hedging relationship, the Company generally uses regression analysis, a statistical method, to compare changes in the fair value of the derivative instrument to changes in the 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 by the Company on at least a quarterly basis.
Given 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 such 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 further mitigate credit risk. 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 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 mitigate its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency. To the extent designated as cash flow hedges, related gains or losses on such instruments are initially deferred in equity as a component of AOCI and are subsequently recognized within cost of goods sold in the consolidated statements of operations when the related inventory is sold.
If a derivative instrument is dedesignated or if hedge accounting is discontinued because the instrument is not expected to be highly effective in hedging the designated exposure, any further gains (losses) are recognized in earnings each period within other income (expense), net. Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the hedging strategy, unless the related forecasted transaction is probable of not occurring, in which case the accumulated amount is immediately recognized in earnings within other income (expense), net.
Hedges of Net Investments in Foreign Operations
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. In assessing the effectiveness of such hedges, 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 hedging instrument. Under this method, changes in the fair value of the hedging instrument other than those due to changes in the spot rate are initially recorded in AOCI as a translation adjustment and are amortized into earnings as interest expense using a systematic and rational method over the instrument's term. Changes in fair value associated with the effective portion (i.e., those due to changes in the spot rate) are recorded in AOCI as a translation adjustment and are released and recognized in earnings only upon the sale or liquidation of the hedged net investment.
| F-17 |
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. To the extent that the change in the fair value of the hedged item does not fully offset the change in the fair value of the hedging instrument, the resulting net impact is reflected in earnings within the income statement line item associated with the hedged item.
Undesignated Hedges
The Company uses undesignated hedges primarily to hedge foreign currency exchange rate risk related to third-party and intercompany balances and exposures. Changes in the fair value of undesignated derivative instruments are recognized in earnings each period within other income (expense), net.
See Note 13 for further discussion of the Company's derivative financial instruments.
| 4. | Recently Issued Accounting Standards |
Implementation Costs in Cloud Computing Arrangements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). ASU 2018-15 addresses diversity in practice surrounding the accounting for costs incurred to implement a cloud computing hosting arrangement that is a service contract by establishing a model for capitalizing or expensing such costs, depending on their nature and the stage of the implementation project during which they are incurred. Any capitalized costs are to be amortized over the reasonably certain term of the hosting arrangement and presented in the same line within the statement of operations as the related service arrangement's fees. ASU 2018-15 also requires enhanced qualitative and quantitative disclosures surrounding hosting arrangements that are service contracts. ASU 2018-15 is effective for the Company beginning in its Fiscal 2021, with early adoption permitted, and may be adopted on either a retrospective or prospective basis. Other than the new disclosure requirements, the Company does not currently expect that the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). Existing accounting guidance requires the remeasurement of deferred tax assets and liabilities resulting from a change in tax laws or rates to be included in net income, including the remeasurement of deferred taxes related to items recorded within AOCI. ASU 2018-02 provides an entity with the option to adjust AOCI for the "stranded" tax effect of such remeasurements resulting from the reduction in the U.S. federal statutory income tax rate under the 2017 Tax Cuts and Jobs Act (the "TCJA") through a reclassification to retained earnings.
The Company adopted ASU 2018-02 as of the beginning of the first quarter of Fiscal 2020 and elected to reclassify the income tax effect stranded in AOCI related to the TCJA, inclusive of state income tax-related effects, resulting in a $4.9 million increase to its opening retained earnings. The Company generally releases income tax effects from AOCI when the corresponding pretax AOCI items are reclassified to earnings.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13, which was further updated and clarified by the FASB through issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and investments in certain debt securities, by requiring upfront recognition of an allowance for credit losses expected to be incurred over an asset's lifetime based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectibility. It is expected that application of this "expected loss" model will result in earlier recognition of credit losses than the current "as incurred" model, under which losses are recognized only upon occurrence of an event that gives rise to the incurrence of a probable loss. While the Company's historical bad debt write-off activity has generally been insignificant, similar to current practice, the extent of losses ultimately recognized will depend on prevailing
| F-18 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
conditions and ongoing consideration of information and forecasts that inform assessments of collectability. ASU 2016-13 is effective for the Company beginning in its Fiscal 2021, with early adoption permitted, and is to be adopted on a modified retrospective basis.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases." ASU No. 2016-02, along with certain other ASUs that were subsequently issued to clarify and modify certain of its provisions (collectively "ASU 2016-02"), supersedes historical lease accounting guidance and requires that, among its provisions, a lessee's rights and fixed payment obligations under most leases be recognized as ROU assets and lease liabilities on its balance sheet, initially measured based on the present value of its fixed payment obligations over the lease term. Under historical guidance, only those leases classified as capital were recognized on a lessee's balance sheet; operating leases were not recognized on the balance sheet. ASU 2016-02 retains a dual model for classifying leases as either finance (formerly referred to as "capital") or operating, consistent with historical guidance, which governs the pattern of expense recognition reflected in the statement of operations over the lease term. Accordingly, recognition of lease expense in the statement of operations will not significantly change. Additionally, variable lease payments based on performance, such as percentage-of-sales-based payments, are not included in the measurement of ROU assets and lease liabilities and, consistent with historical practice, are recognized as an expense in the period incurred. The standard also requires enhanced quantitative and qualitative lease-related disclosures.
The Company adopted ASU 2016-02 as of the beginning of the first quarter of Fiscal 2020 using a modified retrospective approach under which the cumulative effect of initially applying the standard was recognized as an adjustment to its opening retained earnings (discussed further below), with no restatement of prior year amounts. In connection therewith, the Company applied an optional package of practical expedients intended to ease transition to the standard for existing leases by, among its provisions, carrying forward its original lease classification conclusions without reassessment. Upon adoption of ASU 2016-02, the Company recognized initial ROU asset and lease liability balances of approximately $1.60 billion and $1.75 billion, respectively, on its consolidated balance sheet.
Additionally, in connection with its adoption of ASU 2016-02, the Company recorded an adjustment to reduce its opening retained earnings balance by $131.6 million, net of related income tax benefits, reflecting the impairment of an ROU asset for a certain real estate lease of which, under historical accounting guidance, the Company was previously deemed the owner for accounting purposes (commonly referred to as a "build-to-suit" lease arrangement). Specifically, although the Company no longer generates revenue or other cash flows from its rights underlying the leased asset given it no longer actively uses the space for commercial purposes, the asset was previously not considered impaired under historical accounting guidance as its fair value, assessed from an ownership perspective (and not from that of a lessee), exceeded its carrying value. However, in accordance with and upon transitioning to ASU 2016-02, the Company derecognized the remaining asset and liability balances previously recognized solely as a result of the arrangement's build-to-suit designation, as the related construction activities that originally gave rise to such designation have since ended, and established initial ROU asset and lease liability balances measured based on the Company's remaining fixed payment obligations under the lease. The initial ROU asset was then assessed for impairment based on the aggregate estimated cash flows that could be generated by transferring the lease to a market participant sublessee for the remainder of its term, which were lower than the aggregate remaining lease payments underlying the measurement of the initial ROU asset. Accordingly, the Company impaired the initial ROU asset by $175.4 million to its estimated fair value which was recorded as a reduction to its opening retained earnings balance, net of related income tax benefits of $43.8 million, upon adoption of ASU 2016-02, as previously noted.
The Company also recorded other initial ROU asset impairments to reduce its opening retained earnings balance upon adoption of the standard related to leases of certain underperforming retail locations for which the carrying value of the respective store's initial operating lease ROU asset exceeded its fair value. These impairments totaled $49.7 million and were recorded as adjustments to reduce the Company's opening retained earnings balance by $37.8 million, net of related income tax effects. Leasehold improvements related to these underperforming retail locations were previously fully-impaired prior to the adoption of ASU 2016-02.
See Notes 3 and 14 for further discussion of the Company's lease accounting policy and other related disclosures.
| F-19 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 5. | Property and Equipment |
Property and equipment, net consists of the following:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Land and improvements | $ | 15.3 | $ | 15.3 | ||||
| Buildings and improvements | 309.0 | 387.8 | ||||||
| Furniture and fixtures | 629.5 | 626.4 | ||||||
| Machinery and equipment | 378.8 | 350.4 | ||||||
| Capitalized software | 543.3 | 534.0 | ||||||
| Leasehold improvements | 1,194.5 | 1,169.4 | ||||||
| Construction in progress | 37.5 | 58.7 | ||||||
| 3,107.9 | 3,142.0 | |||||||
| Less: accumulated depreciation | (2,128.4 | ) | (2,102.8 | ) | ||||
| Property and equipment, net | $ | 979.5 | $ | 1,039.2 |
Depreciation expense was $246.6 million, $257.8 million, and $271.2 million during Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively, and is recorded primarily within SG&A expenses in the consolidated statements of operations.
| 6. | Goodwill and Other Intangible Assets |
Goodwill
The following table details the changes in goodwill for each of the Company's segments during Fiscal 2020 and Fiscal 2019:
| North America | Europe | Asia | Other Non-reportable Segments**(a)** | Total**(a)** | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Balance at March 31, 2018 | $ | 421.8 | $ | 317.9 | $ | 78.8 | $ | 132.0 | $ | 950.5 | ||||||||||
| Foreign currency translation | — | (27.9 | ) | (3.0 | ) | — | (30.9 | ) | ||||||||||||
| Balance at March 30, 2019 | 421.8 | 290.0 | 75.8 | 132.0 | 919.6 | |||||||||||||||
| Foreign currency translation | — | (4.9 | ) | 0.8 | — | (4.1 | ) | |||||||||||||
| Balance at March 28, 2020 | $ | 421.8 | $ | 285.1 | $ | 76.6 | $ | 132.0 | $ | 915.5 |
| (a) | The goodwill balance for each period presented is net of accumulated impairment charges of $5.2 million related to the Company's other non-reportable segments. |
Based on the results of the Company's goodwill impairment testing in Fiscal 2020, Fiscal 2019, and Fiscal 2018, no goodwill impairment charges were recorded. See Note 12 for further discussion of the Company's goodwill impairment testing.
| F-20 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Intangible Assets
Other intangible assets consist of the following:
| March 28, 2020 | March 30, 2019 | |||||||||||||||||||||||
| Gross Carrying Amount | Accum. Amort. | Net | Gross Carrying Amount | Accum. Amort. | Net | |||||||||||||||||||
| (millions) | ||||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||
| Re-acquired licensed trademarks | $ | 231.6 | $ | (155.4 | ) | $ | 76.2 | $ | 231.3 | $ | (146.8 | ) | $ | 84.5 | ||||||||||
| Customer relationships | 253.9 | (199.0 | ) | 54.9 | 253.2 | (184.0 | ) | 69.2 | ||||||||||||||||
| Other | 10.1 | (7.5 | ) | 2.6 | 10.1 | (7.4 | ) | 2.7 | ||||||||||||||||
| Total intangible assets subject to amortization | 495.6 | (361.9 | ) | 133.7 | 494.6 | (338.2 | ) | 156.4 | ||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||
| Trademarks and brands | 7.3 | N/A | 7.3 | 7.3 | N/A | 7.3 | ||||||||||||||||||
| Total intangible assets | $ | 502.9 | $ | (361.9 | ) | $ | 141.0 | $ | 501.9 | $ | (338.2 | ) | $ | 163.7 |
Amortization Expense
Amortization expense was $22.9 million, $23.5 million, and $24.0 million during Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively, and is recorded within SG&A expenses in the consolidated statements of operations.
Based on the balance of the Company's finite-lived intangible assets subject to amortization as of March 28, 2020, the expected amortization expense for each of the next five fiscal years and thereafter is as follows:
| Amortization Expense | ||||
| (millions) | ||||
| Fiscal 2021 | $ | 19.8 | ||
| Fiscal 2022 | 17.9 | |||
| Fiscal 2023 | 14.4 | |||
| Fiscal 2024 | 13.2 | |||
| Fiscal 2025 | 12.9 | |||
| Fiscal 2026 and thereafter | 55.5 | |||
| Total | $ | 133.7 |
The expected future amortization expense above reflects weighted-average estimated remaining useful lives of 9.9 years for re-acquired licensed trademarks, 7.9 years for customer relationships, and 9.2 years for the Company's finite-lived intangible assets in total.
| F-21 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 7. | Other Assets and Liabilities |
Prepaid expenses and other current assets consist of the following:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Non-trade receivables | $ | 27.0 | $ | 30.8 | ||||
| Other taxes receivable | 24.7 | 137.9 | ||||||
| Prepaid software maintenance | 23.2 | 19.8 | ||||||
| Derivative financial instruments | 13.7 | 19.8 | ||||||
| Prepaid advertising and marketing | 10.1 | 9.6 | ||||||
| Inventory return asset | 8.9 | 18.4 | ||||||
| Prepaid occupancy expense | 6.7 | 38.0 | ||||||
| Tenant allowances receivable | 1.8 | 8.2 | ||||||
| Restricted cash | 1.4 | 11.9 | ||||||
| Assets held-for-sale**(a)** | — | 20.8 | ||||||
| Other prepaid expenses and current assets | 43.3 | 44.1 | ||||||
| Total prepaid expenses and other current assets | $ | 160.8 | $ | 359.3 |
| (a) | Balance as of March 30, 2019 related to the estimated fair value, less costs to sell, of the Company's corporate jet. The jet was sold during Fiscal 2020 with no gain or loss recognized on sale. The Company donated the $20.8 million net cash proceeds received from the sale to the Ralph Lauren Corporate Foundation (formerly known as the Polo Ralph Lauren Foundation), a non-profit, charitable foundation that supports various philanthropic programs. |
Other non-current assets consist of the following:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Derivative financial instruments | $ | 48.6 | $ | 12.2 | ||||
| Security deposits | 29.4 | 24.5 | ||||||
| Restricted cash | 8.0 | 30.5 | ||||||
| Non-current investments | — | 44.9 | ||||||
| Other non-current assets | 25.9 | 46.4 | ||||||
| Total other non-current assets | $ | 111.9 | $ | 158.5 |
| F-22 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued expenses and other current liabilities consist of the following:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Accrued payroll and benefits | $ | 186.2 | $ | 232.5 | ||||
| Accrued operating expenses | 176.4 | 235.2 | ||||||
| Accrued inventory | 167.1 | 141.0 | ||||||
| Dividends payable | 49.8 | 48.8 | ||||||
| Other taxes payable | 47.9 | 158.3 | ||||||
| Accrued capital expenditures | 29.1 | 47.6 | ||||||
| Restructuring reserve | 25.5 | 60.4 | ||||||
| Deferred income | 14.6 | 14.1 | ||||||
| Finance lease obligations | 9.8 | 22.3 | ||||||
| Derivative financial instruments | 6.9 | 3.6 | ||||||
| Other accrued expenses and current liabilities | 3.8 | 4.6 | ||||||
| Total accrued expenses and other current liabilities | $ | 717.1 | $ | 968.4 |
Other non-current liabilities consist of the following:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Finance lease obligations | $ | 189.4 | $ | 212.6 | ||||
| Deferred lease incentives and obligations | 57.8 | 202.7 | ||||||
| Accrued benefits and deferred compensation | 19.5 | 26.2 | ||||||
| Deferred tax liabilities | 10.0 | 50.2 | ||||||
| Restructuring reserve | 2.0 | 11.4 | ||||||
| Derivative financial instruments | — | 11.9 | ||||||
| Other non-current liabilities | 29.8 | 25.9 | ||||||
| Total other non-current liabilities | $ | 308.5 | $ | 540.9 |
| 8. | Impairment of Assets |
During Fiscal 2020, the Company recorded non-cash impairment charges of $31.6 million to write-down certain long-lived assets, of which $8.7 million was recorded in connection with its restructuring plans (see Note 9) and $22.9 million of which related to underperforming stores identified through its on-going store portfolio evaluation and adverse impacts associated with COVID-19 business disruptions. These charges were recorded within impairment of assets in the consolidated statements of operations. In addition, the Company recorded a $7.1 million impairment charge within other income (expense), net in the consolidated statements of operations during Fiscal 2020 relating to an equity method investment.
During Fiscal 2019, the Company recorded non-cash impairment charges of $21.2 million to write-down certain long-lived assets, of which $10.7 million was recorded in connection with its restructuring plans (see Note 9) and $10.5 million of which related to underperforming stores identified as a result of its on-going store portfolio evaluation. Additionally, as a result of its decision to sell its corporate jet in connection with its cost savings initiative, the Company recorded a non-cash impairment charge of $4.6 million during Fiscal 2019 to reduce the carrying value of the asset held-for-sale to its estimated fair value, less costs to sell.
During Fiscal 2018, the Company recorded non-cash impairment charges of $41.2 million, to write-down certain long-lived assets, of which $16.0 million was recorded in connection with its restructuring plans (see Note 9) and $25.2 million of which related to underperforming stores identified as a result of its on-going store portfolio evaluation. Additionally, as a result of a
| F-23 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
change in the planned usage of a certain intangible asset, the Company recorded a non-cash impairment charge of $8.8 million during Fiscal 2018 to reduce the carrying value of the intangible asset to its estimated fair value.
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 their related costs is included below.
Fiscal 2019 Restructuring Plan
On June 4, 2018, the Company's Board of Directors approved a restructuring plan associated with the Company's strategic objective of operating with discipline to drive sustainable growth (the "Fiscal 2019 Restructuring Plan"). The Fiscal 2019 Restructuring Plan includes the following restructuring-related activities: (i) rightsizing and consolidation of the Company's global distribution network and corporate offices; (ii) targeted severance-related actions; and (iii) closure of certain of its stores and shop-within-shops.
Actions associated with the Fiscal 2019 Restructuring Plan are complete and no additional charges are expected to be incurred in connection with this plan. A summary of the charges recorded in connection with the Fiscal 2019 Restructuring Plan during the fiscal periods presented, as well as the cumulative charges recorded since its inception, is as follows:
| Fiscal Year Ended | Cumulative Charges | |||||||||||
| March 28, 2020 | March 30, 2019 | |||||||||||
| (millions) | ||||||||||||
| Cash-related restructuring charges: | ||||||||||||
| Severance and benefit costs | $ | 30.1 | $ | 60.2 | $ | 90.3 | ||||||
| Lease termination and store closure costs | 0.5 | 1.8 | 2.3 | |||||||||
| Other cash charges | 3.4 | 7.4 | 10.8 | |||||||||
| Total cash-related restructuring charges | 34.0 | 69.4 | 103.4 | |||||||||
| Non-cash charges: | ||||||||||||
| Impairment of assets (see Note 8) | 8.7 | 10.3 | 19.0 | |||||||||
| Inventory-related charges**(a)** | 2.2 | 6.0 | 8.2 | |||||||||
| Accelerated stock-based compensation expense**(b)** | 3.6 | — | 3.6 | |||||||||
| Loss on sale of property**(c)** | — | 11.6 | 11.6 | |||||||||
| Total non-cash charges | 14.5 | 27.9 | 42.4 | |||||||||
| Total charges | $ | 48.5 | $ | 97.3 | $ | 145.8 |
| (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. |
| (c) | Loss on sale of property, which was recorded within restructuring and other charges in the consolidated statements of operations during Fiscal 2019, was incurred in connection with the sale of one of the Company's distribution centers in North America. Total cash proceeds from the sale were $20.0 million. |
| F-24 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the activity in the restructuring reserve related to the Fiscal 2019 Restructuring Plan is as follows:
| Severance and Benefit Costs | Lease Termination and Store Closure Costs | Other Cash Charges | Total | |||||||||||||
| (millions) | ||||||||||||||||
| Balance at March 31, 2018 | $ | — | $ | — | $ | — | $ | — | ||||||||
| Additions charged to expense | 60.2 | 1.8 | 7.4 | 69.4 | ||||||||||||
| Cash payments charged against reserve | (19.0 | ) | (2.1 | ) | (7.3 | ) | (28.4 | ) | ||||||||
| Non-cash adjustments | (0.2 | ) | 0.8 | — | 0.6 | |||||||||||
| Balance at March 30, 2019 | 41.0 | 0.5 | 0.1 | 41.6 | ||||||||||||
| Additions charged to expense | 30.1 | 0.5 | 3.4 | 34.0 | ||||||||||||
| Cash payments charged against reserve | (47.6 | ) | (0.6 | ) | (2.9 | ) | (51.1 | ) | ||||||||
| Non-cash adjustments**(a)** | — | (0.4 | ) | — | (0.4 | ) | ||||||||||
| Balance at March 28, 2020 | $ | 23.5 | $ | — | $ | 0.6 | $ | 24.1 |
| (a) | Certain lease-related liabilities previously recognized in connection with the Company's closure and cessation of use of real estate locations were reclassified and reflected as reductions of the respective operating lease ROU assets initially recognized upon adoption of ASU 2016-02 (see Note 4). |
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"). In connection with the Way Forward Plan, the Company refocused on its core brands and its product, marketing, and shopping experience to increase desirability and relevance. It also evolved its operating model by significantly improving quality of sales, reducing supply chain lead times, improving its sourcing, and executing a disciplined multi-channel distribution and expansion strategy. The Company reduced its cost structure and implemented a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Company also strengthened its leadership team and created a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan also included 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 the Company's fiscal year ended April 1, 2017 ("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 the 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. 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.
| F-25 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actions associated with the Way Forward Plan are complete and no additional charges are expected to be incurred in connection with this plan. A summary of the charges recorded in connection with the Way Forward Plan during the fiscal periods presented, as well as the cumulative charges recorded since its inception, is as follows:
| Fiscal Years Ended | Cumulative Charges | |||||||||||
| March 30, 2019 | March 31, 2018 | |||||||||||
| (millions) | ||||||||||||
| Cash-related restructuring charges: | ||||||||||||
| Severance and benefits costs | $ | 7.0 | $ | 39.0 | $ | 228.7 | ||||||
| Lease termination and store closure costs | 1.4 | 33.2 | 121.9 | |||||||||
| Other cash charges | 0.8 | 6.3 | 26.2 | |||||||||
| Total cash-related restructuring charges | 9.2 | 78.5 | 376.8 | |||||||||
| Non-cash charges: | ||||||||||||
| Impairment of assets (see Note 8) | 0.4 | 16.0 | 251.0 | |||||||||
| Inventory-related charges**(a)** | 1.2 | 7.6 | 206.7 | |||||||||
| Accelerated stock-based compensation expense**(b)** | — | 0.7 | 0.7 | |||||||||
| Other non-cash charges | 3.4 | — | 3.4 | |||||||||
| Total non-cash charges | 5.0 | 24.3 | 461.8 | |||||||||
| Total charges | $ | 14.2 | $ | 102.8 | $ | 838.6 |
| (a) | Cumulative inventory-related charges include $155.2 million associated with the destruction of inventory out of current liquidation channels. 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 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 | ||||||||||||
| Additions charged to expense | 7.0 | 1.4 | 0.8 | 9.2 | ||||||||||||
| Cash payments charged against reserve | (37.7 | ) | (33.6 | ) | (2.2 | ) | (73.5 | ) | ||||||||
| Non-cash adjustments | (0.4 | ) | 0.6 | — | 0.2 | |||||||||||
| Balance at March 30, 2019 | 6.5 | 21.9 | 0.4 | 28.8 | ||||||||||||
| Additions charged to expense | — | — | — | — | ||||||||||||
| Cash payments charged against reserve | (4.9 | ) | (2.1 | ) | (0.1 | ) | (7.1 | ) | ||||||||
| Non-cash adjustments**(a)** | — | (18.3 | ) | — | (18.3 | ) | ||||||||||
| Balance at March 28, 2020 | $ | 1.6 | $ | 1.5 | $ | 0.3 | $ | 3.4 |
| F-26 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (a) | Includes $17.7 million of certain lease-related liabilities previously recognized in connection with the Company's closure and cessation of use of real estate locations that were reclassified and reflected as reductions of the respective operating lease ROU assets initially recognized upon adoption of ASU 2016-02 (see Note 4). |
Other Restructuring Plans
The Company made cash payments of $0.2 million, $3.2 million, and $7.6 million during Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively, which were applied against the reserve associated with its restructuring plan initiated prior to Fiscal 2017. Additionally, during Fiscal 2020, $1.2 million of lease-related liabilities previously recognized in connection with the Company's closure and cessation of use of real estate locations were reclassified and reflected as reductions of the respective operating lease ROU assets initially recognized upon adoption of ASU 2016-02 (see Note 4). As of March 28, 2020, there was no remaining restructuring reserve associated with this plan, and no charges were recorded for this plan in any of the fiscal years presented.
Other Charges
During Fiscal 2020, the Company recorded other charges of $20.8 million related to the donation of net cash proceeds received from the sale of its corporate jet. This donation was made to the Ralph Lauren Corporate Foundation (formerly known as the Polo Ralph Lauren Foundation), a non-profit, charitable foundation that supports various philanthropic programs. Additionally, during Fiscal 2020, the Company recorded other charges of $8.8 million primarily related to rent and occupancy costs associated with certain previously exited real estate locations for which the related lease agreements have not yet expired.
During Fiscal 2019, 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. Additionally, during Fiscal 2019, the Company recorded other charges of $4.2 million primarily related to a customs audit, as well as $18.2 million primarily related to the launch of its new sabbatical leave program, which entitles eligible employees to periodic paid leave based on the attainment of certain employment tenure milestones. Other than this initial charge to establish its estimated liability for services rendered to-date, the Company does not expect there will be a significant, ongoing impact to the consolidated financial statements in future periods related to its sabbatical leave program.
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, $10.2 million related to a customs audit, 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.
| 10. | Income Taxes |
Swiss Tax Reform
In May 2019, a public referendum was held in Switzerland that approved the Federal Act on Tax Reform and AHV Financing (the "Swiss Tax Act"), which became effective January 1, 2020. The Swiss Tax Act eliminates certain preferential tax items at both the federal and cantonal levels for multinational companies and provides the cantons with parameters for establishing local tax rates and regulations. The Swiss Tax Act also provides transitional provisions, one of which allows eligible companies to increase the tax basis of certain assets based on the value generated by their business in previous years, and to amortize such adjustment as a tax deduction over a transitional period.
During the second quarter of Fiscal 2020, the Swiss Tax Act was enacted into law, resulting in an immaterial adjustment associated with the revaluation of the Company's Swiss deferred tax assets and liabilities and estimated annual effective tax rate. Subsequently, as a result of additional information received from the tax authorities and analyses performed related to the transitional provision noted above, the Company recorded a one-time income tax benefit and corresponding deferred tax asset of $122.9 million during Fiscal 2020. This one-time benefit decreased the Company's effective tax rate by 3,760 basis points during Fiscal 2020.
| F-27 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 allowed 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 additional information became available and further analyses were completed. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, not to 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, 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 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, increased the Company's effective tax rate by 4,520 basis points during Fiscal 2018.
During the second quarter of Fiscal 2019, the Company recorded an additional measurement period adjustment as a result of the issuance of new interpretive guidance related to stock-based compensation for certain executives, whereby it recorded an income tax benefit and corresponding deferred tax asset of $4.7 million. Subsequently, during the third quarter of Fiscal 2019, the Company completed its analyses and recorded its final measurement period adjustments, whereby it recorded incremental charges of $32.3 million within its income tax provision, substantially all of which related to the mandatory transition tax. These measurement period adjustments increased the Company's effective tax rate by 470 basis points during Fiscal 2019. Approximately $241 million of the cumulative TCJA enactment-related charges recorded related to the mandatory transition tax (see Note 15).
Additionally, during the fourth quarter of Fiscal 2018 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. 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 also decided to account for the minimum tax on global intangible low-taxed income ("GILTI") 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 2019.
Taxes on Income
Domestic and foreign pretax income are as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Domestic | $ | (82.9 | ) | $ | 66.6 | $ | 16.4 | |||||
| Foreign | 409.3 | 515.9 | 472.8 | |||||||||
| Total income before income taxes | $ | 326.4 | $ | 582.5 | $ | 489.2 |
| F-28 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Benefits (provisions) for current and deferred income taxes are as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 1.5 | $ | (37.3 | ) | $ | (154.6 | ) | ||||
| State and local | (19.8 | ) | (11.9 | ) | (5.0 | ) | ||||||
| Foreign | (92.6 | ) | (93.9 | ) | (82.7 | ) | ||||||
| (110.9 | ) | (143.1 | ) | (242.3 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | 18.0 | (5.0 | ) | (64.1 | ) | |||||||
| State and local | 5.6 | (6.9 | ) | (12.6 | ) | |||||||
| Foreign | 145.2 | 3.4 | (7.4 | ) | ||||||||
| 168.8 | (8.5 | ) | (84.1 | ) | ||||||||
| Total income tax benefit (provision) | $ | 57.9 | $ | (151.6 | ) | $ | (326.4 | ) |
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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Provision for income taxes at the U.S. federal statutory rate**(a)** | $ | (68.5 | ) | $ | (122.3 | ) | $ | (154.3 | ) | |||
| Change due to: | ||||||||||||
| State and local income taxes, net of federal benefit | (1.5 | ) | (12.4 | ) | (1.6 | ) | ||||||
| Foreign income taxed at different rates, net of U.S. foreign tax credits | 24.7 | 27.6 | 74.7 | |||||||||
| Unrecognized tax benefits and settlements of tax examinations | (9.2 | ) | (3.4 | ) | (14.4 | ) | ||||||
| Changes in valuation allowance on deferred tax assets | (1.7 | ) | (1.4 | ) | 2.5 | |||||||
| TCJA enactment-related charges | — | (27.6 | ) | (221.4 | ) | |||||||
| Swiss Tax Act benefit | 125.3 | — | — | |||||||||
| Compensation-related adjustments | (10.7 | ) | (11.6 | ) | (15.4 | ) | ||||||
| Other | (0.5 | ) | (0.5 | ) | 3.5 | |||||||
| Total income tax benefit (provision) | $ | 57.9 | $ | (151.6 | ) | $ | (326.4 | ) | ||||
| Effective tax rate**(b)** | (17.7 | %) | 26.0 | % | 66.7 | % |
| (a) | The U.S. federal statutory income tax rate was 21.0% during Fiscal 2020 and Fiscal 2019. The previous statutory rate of 35.0% was reduced to 21.0% by the TCJA effective January 1, 2018, resulting 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 2020 effective tax rate was lower than the U.S. federal statutory income tax rate of 21% primarily due to the one-time income tax benefit recorded in connection with the Swiss Tax Act, as previously discussed, the favorable impact of the change in geographic mix of its worldwide earnings and the favorable impact of tax benefits associated with provision to tax return adjustments, partially offset by the unfavorable impact of additional income tax reserves associated with certain income tax audits. The Company's Fiscal 2019 effective tax rate was higher than the U.S. federal statutory income tax rate of 21%
| F-29 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
primarily due to the SAB 118 measurement period adjustments recorded, as previously discussed, state and local income taxes, and compensation-related adjustments, partially offset by the favorable impact of the proportion of earnings generated in lower taxed jurisdictions. The Company's Fiscal 2018 effective tax rate was higher than the blended statutory rate of 31.5% primarily due to the enactment-related charges recorded in connection with the TCJA, as previously discussed, the negative impact of the adoption of ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), 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.
Deferred Taxes
Significant components of the Company's deferred tax assets and liabilities are as follows:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Lease liabilities | $ | 428.9 | $ | 44.6 | ||||
| Inventory basis difference | 54.0 | 19.0 | ||||||
| Deferred compensation | 50.2 | 53.4 | ||||||
| Receivable allowances and reserves | 45.6 | 25.6 | ||||||
| Net operating loss carryforwards | 42.6 | 48.9 | ||||||
| Unrecognized tax benefits | 17.1 | 8.1 | ||||||
| Accrued expenses | 10.5 | 11.8 | ||||||
| Transfer pricing | 9.0 | 9.0 | ||||||
| Property and equipment | 3.0 | (24.6 | ) | |||||
| Deferred income | 0.2 | 1.2 | ||||||
| Deferred rent | — | 7.3 | ||||||
| Lease right-of-use assets | (353.0 | ) | — | |||||
| Goodwill and other intangible assets | (30.0 | ) | (149.8 | ) | ||||
| Cumulative translation adjustment and hedges | (17.6 | ) | (7.8 | ) | ||||
| Undistributed foreign earnings | (3.3 | ) | (4.7 | ) | ||||
| Other | 15.3 | 13.2 | ||||||
| Valuation allowance | (37.3 | ) | (38.4 | ) | ||||
| Net deferred tax assets**(a)** | $ | 235.2 | $ | 16.8 |
| (a) | Net deferred tax balances as of March 28, 2020 and March 30, 2019 were comprised of non-current deferred tax assets of $245.2 million and $67.0 million, respectively, recorded within deferred tax assets, and non-current deferred tax liabilities of $10.0 million and $50.2 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 $0.7 million and $5.9 million (both net of tax), respectively, for tax purposes to offset future taxable income. The net operating loss carryforwards expire beginning in Fiscal 2021.
The Company also has available state and foreign net operating loss carryforwards of $7.8 million and $28.1 million (both net of tax), respectively, for which no net deferred tax asset has been recognized. A full valuation allowance has been recorded against these carryforwards since the Company does not believe that it will more likely than not be able to utilize these carryforwards to offset future taxable income. Subsequent recognition of these deferred tax assets would result in an income tax benefit in the year of such recognition. The valuation allowance relating to state net operating loss carryforwards increased by $0.6 million (net of tax) as a result of net operating losses in certain jurisdictions where the Company does not believe that it will more likely than not be able to utilize these carryforwards in the future. The valuation allowance relating to foreign net operating loss carryforwards decreased by $1.1 million as a result of reductions in net operating losses in certain jurisdictions.
| F-30 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of the taxation of undistributed foreign earnings in connection with the TCJA, the Company reevaluated its permanent reinvestment assertion and determined that undistributed foreign earnings that were subject to the TCJA's one-time mandatory transition tax were no longer considered to be permanently reinvested, effective December 31, 2017. 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 $924 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.
Uncertain Income Tax Benefits
Fiscal 2020*,* Fiscal 2019*, and* Fiscal 2018 Activity
Reconciliations of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for Fiscal 2020, Fiscal 2019, and Fiscal 2018 are presented below:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Unrecognized tax benefits beginning balance | $ | 65.2 | $ | 64.2 | $ | 49.9 | ||||||
| Additions related to current period tax positions | 6.0 | 4.9 | 6.8 | |||||||||
| Additions related to prior period tax positions | 30.5 | 11.7 | 9.5 | |||||||||
| Reductions related to prior period tax positions | (18.7 | ) | (5.5 | ) | (1.3 | ) | ||||||
| Reductions related to expiration of statutes of limitations | (1.2 | ) | (4.1 | ) | (3.3 | ) | ||||||
| Reductions related to settlements with taxing authorities | (8.8 | ) | (3.1 | ) | (0.7 | ) | ||||||
| Additions (reductions) related to foreign currency translation | (0.3 | ) | (2.9 | ) | 3.3 | |||||||
| Unrecognized tax benefits ending balance | $ | 72.7 | $ | 65.2 | $ | 64.2 |
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 2020, Fiscal 2019, and Fiscal 2018 are presented below:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Accrued interest and penalties beginning balance | $ | 13.6 | $ | 15.0 | $ | 12.8 | ||||||
| Net additions charged to expense | 7.0 | 3.0 | 3.8 | |||||||||
| Reductions related to prior period tax positions | (1.9 | ) | (3.4 | ) | (1.6 | ) | ||||||
| Reductions related to settlements with taxing authorities | (2.5 | ) | (0.8 | ) | (0.3 | ) | ||||||
| Additions (reductions) related to foreign currency translation | — | (0.2 | ) | 0.3 | ||||||||
| Accrued interest and penalties ending balance | $ | 16.2 | $ | 13.6 | $ | 15.0 |
The total amount of unrecognized tax benefits, including interest and penalties, was $88.9 million and $78.8 million as of March 28, 2020 and March 30, 2019, respectively, and was 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 $71.7 million and $70.7 million as of March 28, 2020 and March 30, 2019, respectively.
| F-31 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended March 30, 2013.
| 11. | Debt |
Debt consists of the following:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| $300 million 2.625% Senior Notes**(a)** | $ | 299.6 | $ | 293.4 | ||||
| $400 million 3.750% Senior Notes**(b)** | 396.4 | 395.7 | ||||||
| Borrowings outstanding under credit facilities | 475.0 | — | ||||||
| Total debt | 1,171.0 | 689.1 | ||||||
| Less: short-term debt and current portion of long-term debt | 774.6 | — | ||||||
| Total long-term debt | $ | 396.4 | $ | 689.1 |
| (a) | The carrying value of the 2.625% Senior Notes as of March 28, 2020 and March 30, 2019 reflects adjustments of $0.2 million and $5.9 million, respectively, associated with the Company's related interest rate swap contract (see Note 13). The carrying value of the 2.625% Senior Notes is also presented net of unamortized debt issuance costs and discount of $0.2 million and $0.7 million as of March 28, 2020 and March 30, 2019, respectively. |
| (b) | The carrying value of the 3.750% Senior Notes is presented net of unamortized debt issuance costs and discount of $3.6 million and $4.3 million as of March 28, 2020 and March 30, 2019, respectively. |
Senior Notes
In August 2015, the Company completed a registered public debt offering and issued $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.
In August 2018, the Company completed another registered public debt offering and issued an additional $400 million aggregate principal amount of unsecured senior notes due September 15, 2025, which bear interest at a fixed rate of 3.750%, payable semi-annually (the "3.750% Senior Notes"). The 3.750% Senior Notes were issued at a price equal to 99.521% of their principal amount. The proceeds from this offering were used for general corporate purposes, including repayment of the Company's previously outstanding $300 million principal amount of unsecured 2.125% senior notes that matured September 26, 2018 (the "2.125% Senior Notes").
The Company has the option to redeem the 2.625% Senior Notes and 3.750% 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,
| F-32 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
or convey all or substantially all of the Company's property or assets to another party. However, the Indenture does not contain any financial covenants.
Commercial Paper
The Company has a commercial paper borrowing program that allows it to issue up to $500 million of unsecured commercial paper notes through private placement using third-party broker-dealers (the "Commercial Paper Program").
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 28, 2020, there were no borrowings outstanding under the Commercial Paper Program.
Revolving Credit Facilities
Global Credit Facility
In August 2019, the Company replaced its existing credit facility and entered into a new credit facility that provides for a $500 million senior unsecured revolving line of credit through August 12, 2024 (the "Global Credit Facility") under terms and conditions substantially similar to those of the previous facility. The Global Credit Facility is also used to support the issuance of letters of credit and maintenance of the Commercial Paper Program. Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and certain other currencies, including Euros, Hong Kong Dollars, and Japanese Yen, and are guaranteed by all of the Company's domestic significant subsidiaries. In accordance with the terms of the agreement governing the Global Credit Facility, the Company has the ability to expand its borrowing availability under the Global Credit Facility to $1 billion, 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.
In March 2020, the Company borrowed $475.0 million under the Global Credit Facility as a preemptive action to preserve cash and strengthen its liquidity in response to the COVID-19 pandemic. This borrowing has been classified as short-term debt in the Company's consolidated balance sheet as of March 28, 2020. The Company was also contingently liable for $9.0 million of outstanding letters of credit, resulting in remaining availability under the Global Credit Facility of $16.0 million as of March 28, 2020.
Under the Global Credit Facility as originally implemented, 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 75 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 relating to the unutilized commitments. The commitment fee rate of 6.5 basis points is subject to adjustment based on the Company's credit ratings. These provisions were amended in May 2020, as discussed below.
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. As originally implemented, the Global Credit Facility also required the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the "leverage ratio") of no greater than 4.25 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding, including finance lease obligations, plus all operating lease obligations. Consolidated EBITDAR is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense, (iv) operating lease cost, (v) restructuring and other non-recurring expenses, and (vi) acquisition-related
| F-33 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
costs. This requirement was amended in May 2020, as discussed below. As of March 28, 2020, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company's Global Credit Facility.
Upon the occurrence of an Event of Default under the Global Credit Facility, the lenders may cease making loans, terminate the Global Credit Facility, and declare all amounts outstanding to be immediately due and payable. The Global Credit Facility specifies a number of events of default (many of which are subject to applicable grace periods), including, among others, the failure to make timely principal, interest, and fee payments or to satisfy the covenants, including the financial covenant described above. Additionally, the Global Credit Facility provides that an Event of Default will occur if Mr. Ralph Lauren, the Company's Executive Chairman and Chief Creative Officer, and entities controlled by the Lauren family fail to maintain a specified minimum percentage of the voting power of the Company's common stock.
In May 2020, the Company entered into an amendment of its Global Credit Facility (the "Amendment"). Under the Amendment, until the earlier of (a) the date on which the Company provides the periodic reporting information required under the Global Credit Facility for the quarter ending September 30, 2021 and (b) the date on which the Company certifies that its leverage ratio as of the last day of the two most recent fiscal quarters was no greater than 4.25 (the "Ratings-Based Toggle Date"), for loans based on Adjusted LIBOR, the spread over Adjusted LIBOR will be increased to 187.5 basis points, the spread on loans based on the base rate will be 87.5 basis points and the commitment fee will be increased to 25 basis points, in each case with no adjustments based on the Company's credit rating. The pricing will return to the original levels set forth in the Global Credit Facility on the Ratings-Based Toggle Date. Additionally, the leverage ratio requirements have been waived until the quarter ending September 30, 2021. For that Fiscal Quarter the maximum permitted leverage ratio would be 5.25 to 1.00. For the fiscal quarter ending December 31, 2021 and the fiscal quarter ending March 31, 2022 the maximum would be 4.75 to 1.00. For each fiscal quarter ending on or after June 30, 2022, the leverage ratio test would return to 4.25 to 1.00. The Amendment also (a) imposes a new requirement that would remain in effect until the Ratings-Based Toggle Date that the aggregate amount of unrestricted cash of the Company and its subsidiaries plus the undrawn amounts available under the Global Credit Facility may not be less than $750 million, (b) restricts the amount of dividends and distributions on, or purchases, redemptions, retirements or acquisitions of, the Company's stock until the Specified Period Termination Date (as defined below), (c) until March 31, 2021, amends the material adverse change representation to disregard pandemic-related impacts to the business and (d) until the Specified Period Termination Date, adds certain other restrictions on indebtedness incurred by the Company and its subsidiaries and investments and acquisitions by the Company and its subsidiaries. The "Specified Period Termination Date" is the earlier of (i) the date on which the Company provides the periodic reporting information required under the Global Credit Facility for the quarter ending June 30, 2022 and (ii) the date on which the Company certifies that its leverage ratio as of the last day of the two most recent fiscal quarters was no greater than 4.25.
364 Day Facility
In May 2020, the Company entered into a new credit facility with the same lenders that are parties to the Global Credit Facility (the "364 Day Facility"). The 364 Day Facility provides for a $500 million senior unsecured revolving line of credit and matures on May 25, 2021; provided that the maturity date may be earlier if the Company issues senior notes other than to refinance the currently outstanding senior notes due in August 2020. The terms of the 364 Day Facility are otherwise substantially similar to the terms of the Global Credit Facility as in effect until the Specified Period Termination Date, including with respect to having the same borrowers and guarantors, including with respect to having the same borrowers and guarantors, except that (a) no letters of credit may be issued under the 364 Day Facility, (b) the interest rate under the 364 Day Facility is 187.5 basis points above Adjusted LIBOR or 87.5 basis points above the alternate base rate, and the commitment fee is 25 basis points per annum, in each case subject to adjustment based on the Company's credit rating, (c) the 364 Day Facility contains provisions that limit borrowings if consolidated unrestricted cash and liquid investments of the Company exceed $1 billion and (d) there is no leverage ratio requirement under the 364 Day Facility. Under the terms of the 364 Day Facility, if the Company does not satisfy certain customary closing conditions by June 15, 2020 (which date will be extended to June 17, 2020 under certain circumstances), the lenders' commitment to make loans will expire.
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:
| F-34 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| • | China Credit Facility — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to 50 million Chinese Renminbi (approximately $7 million) through April 3, 2021, 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 30 billion South Korean Won (approximately $25 million) through October 30, 2020. |
As of March 28, 2020, there were no borrowings outstanding under the Pan-Asia Credit Facilities.
| 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 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Investments in commercial paper**(a)(b)** | $ | 243.6 | $ | 290.7 | ||||
| Derivative assets**(a)** | 62.3 | 32.0 | ||||||
| Derivative liabilities**(a)** | 6.9 | 15.5 |
| (a) | Based on Level 2 measurements. |
| (b) | Amount as of March 28, 2020 was included within short-term investments in the consolidated balance sheet. As of March 30, 2019, $54.7 million was included within cash and cash equivalents and $236.0 million was included within short-term investments in the consolidated balance sheet. |
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 generally approximates fair value based on Level 1 measurements.
| F-35 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 28, 2020 | March 30, 2019 | |||||||||||||||
| Carrying Value**(a)** | Fair Value**(b)** | Carrying Value**(a)** | Fair Value**(b)** | |||||||||||||
| (millions) | ||||||||||||||||
| $300 million 2.625% Senior Notes | $ | 299.6 | $ | 299.8 | $ | 293.4 | $ | 299.1 | ||||||||
| $400 million 3.750% Senior Notes | 396.4 | 415.1 | 395.7 | 410.0 | ||||||||||||
| Borrowings outstanding under credit facilities | 475.0 | 473.0 | — | — |
| (a) | See Note 11 for discussion of the carrying values of the Company's senior notes. |
| (b) | Based on Level 2 measurements. |
Unrealized gains or losses resulting from changes in the fair value of the Company's debt instruments 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, property and equipment, and lease-related ROU assets, are not required to be measured at fair value on a recurring basis, and instead are reported at carrying value in its consolidated balance sheet. However, on a periodic basis or whenever events or changes in circumstances indicate that they may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), the respective carrying value of non-financial assets are assessed for impairment and, if ultimately considered impaired, are adjusted and written down to their fair value, as estimated based on consideration of external market participant assumptions.
During Fiscal 2020, Fiscal 2019, and Fiscal 2018, the Company recorded non-cash impairment charges to reduce the carrying values of certain long-lived assets to their estimated fair values. The fair values of these assets were determined based on Level 3 measurements, the related inputs of which included estimates of the amount and timing of the assets' net future discounted cash flows (including any potential sublease income for lease-related ROU assets), based on historical experience and consideration of current trends, market conditions, and comparable sales, as applicable.
The following tables summarize non-cash impairment charges recorded by the Company during the fiscal years presented in order to reduce the carrying values of certain long-lived assets to their estimated fair values as of the assessment date:
| Fiscal Years Ended | ||||||||||||||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||||||||||||||
| Long-Lived Asset Category | Fair Value As of Impairment Date | Total Impairments**(a)** | Fair Value As of Impairment Date | Total Impairments**(a)** | Fair Value As of Impairment Date | Total Impairments**(a)** | ||||||||||||||||||
| (millions) | ||||||||||||||||||||||||
| Property and equipment, net**(b)** | $ | 2.4 | $ | 16.8 | $ | 20.8 | $ | 25.8 | $ | — | $ | 41.2 | ||||||||||||
| Operating lease right-of-use assets**(c)** | 120.8 | 239.9 | N/A | N/A | N/A | N/A | ||||||||||||||||||
| Intangible assets, net**(d)** | N/A | — | N/A | — | 2.9 | 8.8 | ||||||||||||||||||
| Equity method investment | 1.3 | 7.1 | N/A | — | N/A | — |
| F-36 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (a) | Impairment of equity method investment is recorded within other income (expense), net in the consolidated statements of operations. All other impairment charges are recorded within impairments of assets in the consolidated statements of operations, unless otherwise noted. |
| (b) | Total impairment charges for Fiscal 2019 includes $4.6 million recorded to reduce the carrying value of the Company's held-for-sale corporate jet to its estimated fair value less costs to sell of $20.8 million as of March 30, 2019. Balance was reclassified from property and equipment, net to prepaid expenses and other current assets in the consolidated balance sheet upon being classified as an asset held-for-sale. The asset was subsequently sold during Fiscal 2020 (see Note 7). |
| (c) | Total impairment charges for Fiscal 2020 includes $225.1 million recorded in connection with the Company's adoption of ASC 2016-02 as of the beginning of Fiscal 2020 which, net of related income tax benefits, reduced its opening retained earnings balance by $169.4 million (see Note 4). |
| (d) | Non-cash impairment charge recorded during Fiscal 2018 relates a change in the planned usage of a certain intangible asset. |
See Note 8 for additional discussion regarding non-cash impairment charges recorded by the Company within the consolidated statements of operations during the fiscal years presented.
No goodwill impairment charges were recorded during any of the fiscal years presented. In Fiscal 2020, the Company performed its annual goodwill impairment assessment using a qualitative approach as of the beginning of the second quarter of the fiscal year. 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 then-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.
Subsequent to performing its Fiscal 2020 annual goodwill impairment assessment, the Company determined that indicators of impairment were present during the fourth quarter of Fiscal 2020 as a result of adverse business disruptions related to the COVID-19 pandemic, including the temporary closure of its stores in North America, Europe, and Asia. As a result, the Company performed an interim assessment of the recoverability of goodwill assigned to its reporting units using a quantitative approach as of March 28, 2020. The estimated fair values of the Company's reporting units were determined with the assistance of an independent third-party valuation firm using discounted cash flows and market comparisons. Based on the results of the quantitative impairment assessment, the Company concluded that the fair values of its reporting units significantly exceeded their respective carrying values and were not at risk of impairment. Accordingly, no goodwill impairment charges were recorded.
| F-37 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 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 obligations attributed to changes in a benchmark interest rate. Accordingly, the Company uses derivative financial instruments to manage and mitigate such risks. The Company does not use derivatives for speculative or trading purposes.
The following table summarizes the Company's outstanding derivative instruments recorded on its consolidated balance sheets as of March 28, 2020 and March 30, 2019:
| Notional Amounts | Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||
| Derivative Instrument**(a)** | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | ||||||||||||||||||||||||||
| 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 | $ | 229.0 | $ | 636.3 | PP | $ | 7.4 | PP | $ | 19.5 | AE | $ | 0.4 | AE | $ | 2.3 | ||||||||||||||||
| IRS — Fixed-rate debt | 300.0 | 300.0 | — | — | AE | 0.2 | ONCL | 5.9 | ||||||||||||||||||||||||
| Net investment hedges**(c)** | 683.6 | 695.3 | ONCA | 48.6 | ONCA | 12.2 | AE | 4.0 | ONCL | 6.0 | ||||||||||||||||||||||
| Total Designated Hedges | 1,212.6 | 1,631.6 | 56.0 | 31.7 | 4.6 | 14.2 | ||||||||||||||||||||||||||
| Undesignated Hedges: | ||||||||||||||||||||||||||||||||
| FC — Undesignated hedges**(d)** | 473.5 | 146.6 | PP | 6.3 | PP | 0.3 | AE | 2.3 | AE | 1.3 | ||||||||||||||||||||||
| Total Hedges | $ | 1,686.1 | $ | 1,778.2 | $ | 62.3 | $ | 32.0 | $ | 6.9 | $ | 15.5 |
| (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. |
| (c) | Includes cross-currency swaps designated as hedges of the Company's net investment in certain foreign operations. |
| (d) | Relates to third-party and intercompany foreign currency-denominated exposures and balances. |
The Company presents the fair values of its derivative assets and liabilities recorded on 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 28, 2020 and March 30, 2019 would be adjusted from the current gross presentation as detailed in the following table:
| March 28, 2020 | March 30, 2019 | |||||||||||||||||||||||
| 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 | $ | 62.3 | $ | (6.1 | ) | $ | 56.2 | $ | 32.0 | $ | (4.8 | ) | $ | 27.2 | ||||||||||
| Derivative liabilities | 6.9 | (6.1 | ) | 0.8 | 15.5 | (4.8 | ) | 10.7 |
| F-38 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. See Note 3 for further discussion of the Company's master netting arrangements.
The following tables summarize the pretax impact of 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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Designated Hedges: | ||||||||||||
| FC — Cash flow hedges | $ | 24.0 | $ | 47.5 | $ | (45.5 | ) | |||||
| Net investment hedges — effective portion | 7.7 | 64.5 | (90.9 | ) | ||||||||
| Net investment hedges — portion excluded from assessment of hedge effectiveness | 30.7 | 1.6 | — | |||||||||
| Total Designated Hedges | $ | 62.4 | $ | 113.6 | $ | (136.4 | ) |
| Location and Amount of Gains (Losses) from Cash Flow Hedges Reclassified from AOCI to Earnings | ||||||||||||||||||||||||
| Fiscal Years Ended | ||||||||||||||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||||||||||||||
| Cost of goods sold | Other income (expense), net | Cost of goods sold | Other income (expense), net | Cost of goods sold | Other income (expense), net | |||||||||||||||||||
| (millions) | ||||||||||||||||||||||||
| Total amounts presented in the consolidated statements of operations in which the effects of related cash flow hedges are recorded | $ | (2,506.5 | ) | $ | (7.4 | ) | $ | (2,427.0 | ) | $ | 0.6 | $ | (2,430.6 | ) | $ | (3.1 | ) | |||||||
| Effects of cash flow hedging: | ||||||||||||||||||||||||
| FC — Cash flow hedges | 24.9 | 1.1 | 5.0 | 1.7 | (8.2 | ) | (2.9 | ) |
| Gains (Losses) from Net Investment Hedges Recognized in Earnings | Location of Gains (Losses) Recognized in Earnings | |||||||||||||
| Fiscal Years Ended | ||||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||||
| (millions) | ||||||||||||||
| Net Investment Hedges: | ||||||||||||||
| Net investment hedges — portion excluded from assessment of hedge effectiveness**(a)** | $ | 19.0 | $ | 19.0 | $ | 10.5 | Interest expense | |||||||
| Total Net Investment Hedges | $ | 19.0 | $ | 19.0 | $ | 10.5 |
| (a) | Amounts recognized in OCI relating to the effective portion of the Company's net investment hedges would be recognized in earnings only upon the sale or liquidation of the hedged net investment. |
As of March 28, 2020, it is estimated that $20.7 million of pretax net gains on both outstanding and matured derivative instruments designated and qualifying as cash flow hedges deferred in AOCI will be recognized in earnings over the next twelve months. Amounts ultimately recognized in earnings will depend on exchange rates in effect when outstanding derivative instruments are settled.
| F-39 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||||
| (millions) | ||||||||||||||
| Undesignated Hedges: | ||||||||||||||
| FC — Undesignated hedges | $ | 16.0 | $ | 3.1 | $ | 2.4 | Other income (expense), net | |||||||
| Total Undesignated Hedges | $ | 16.0 | $ | 3.1 | $ | 2.4 |
Risk Management Strategies
Forward Foreign Currency Exchange Contracts
The Company uses forward foreign currency exchange contracts to mitigate its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, 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 for managing the level of exposure to such exchange rate risk, relating primarily to the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, the Swiss Franc, and the Chinese Renminbi, the Company generally hedges a portion of its related exposures anticipated over the next twelve months using forward foreign currency exchange contracts with maturities of two months to one year to provide continuing coverage over the 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 a benchmark interest rate (the "Interest Rate Swaps"). The interest rate swap related to the 2.125% Senior Notes (the "2.125% Interest Rate Swap"), which matured on September 26, 2018 concurrent with the maturity of the related debt, had a notional amount of $300 million and swapped the fixed interest rate on the 2.125% Senior Notes for a variable interest rate based on the 3-month LIBOR plus a fixed spread. The interest rate swap related to the 2.625% Senior Notes (the "2.625% Interest Rate Swap"), which matures on August 18, 2020 and also has a notional amount of $300 million, swaps the fixed interest rate on the 2.625% Senior Notes for a variable interest rate based on 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 net impact reflected in earnings during any of the fiscal years presented.
The following table summarizes the carrying values of the 2.625% Senior Notes and the impacts of the related fair value hedging adjustments as of March 28, 2020 and March 30, 2019:
| Carrying Value of the Hedged Item | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Value of the Hedged Item | |||||||||||||||||
| Hedged Item | Balance Sheet Line in which the Hedged Item is Included | March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||||
| (millions) | ||||||||||||||||||
| $300 million 2.625% Senior Notes | Current portion of long-term debt | $ | 299.6 | N/A | $ | (0.2 | ) | N/A | ||||||||||
| $300 million 2.625% Senior Notes | Long-term debt | N/A | $ | 293.4 | N/A | $ | (5.9 | ) |
| F-40 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 that were designated as hedges of its net investment in certain of its European subsidiaries. The €280 million notional cross-currency swap, which was settled during the second quarter of Fiscal 2019, swapped the U.S. Dollar-denominated variable interest rate payments based on 3-month LIBOR plus a fixed spread (as paid under the 2.125% Interest Rate Swap discussed above) for Euro-denominated variable interest rate payments based on the 3-month Euro Interbank Offered Rate ("EURIBOR") plus a fixed spread, which, in combination with the 2.125% Interest Rate Swap, economically converted the Company's previously-outstanding $300 million fixed-rate 2.125% Senior Notes obligation to a €280 million floating-rate Euro-denominated obligation. Similarly, the €274 million notional cross-currency swap, which matures on August 18, 2020, swaps the U.S. Dollar-denominated variable interest rate payments based on 3-month LIBOR plus a fixed spread (as paid under the 2.625% Interest Rate Swap discussed above) for Euro-denominated variable interest rate payments based on 3-month EURIBOR plus a fixed spread, which in combination with the 2.625% Interest Rate Swap, economically converts the Company's $300 million fixed-rate 2.625% Senior Notes obligation to a €274 million floating-rate Euro-denominated obligation.
Additionally, in August 2018, the Company entered into pay-fixed rate, receive-fixed rate cross-currency swap contracts with an aggregate notional amount of €346 million that were designated as hedges of its net investment in certain of its European subsidiaries. These contracts, which mature on September 15, 2025, swap the U.S. Dollar-denominated fixed interest rate payments on the Company's 3.750% Senior Notes for Euro-denominated 1.29% fixed interest rate payments, thereby economically converting the Company's $400 million fixed-rate 3.750% Senior Notes obligation to a €346 million fixed-rate 1.29% Euro-denominated obligation.
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.
Investments
As of March 28, 2020, the Company's investments were all classified as short-term and consisted of $252.3 million of time deposits and $243.6 million of commercial paper. As of March 30, 2019, the Company's short-term investments consisted of $1.167 billion of time deposits and $236.0 million of commercial paper, and its non-current investments consisted of $44.9 million of time deposits.
No significant realized or unrealized gains or losses on available-for-sale investments or 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.
| F-41 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 14. | Leases |
The following table summarizes ROU assets and lease liabilities recorded on the Company's consolidated balance sheet as of March 28, 2020:
| March 28, 2020 | Location Recorded on Balance Sheet | |||||
| (millions) | ||||||
| Assets: | ||||||
| Operating leases | $ | 1,511.6 | Operating lease right-of-use assets | |||
| Finance leases | 166.4 | Property and equipment, net | ||||
| Total lease assets | $ | 1,678.0 | ||||
| Liabilities: | ||||||
| Operating leases: | ||||||
| Current portion | $ | 288.4 | Current operating lease liabilities | |||
| Non-current portion | 1,568.3 | Long-term operating lease liabilities | ||||
| Total operating lease liabilities | 1,856.7 | |||||
| Finance leases: | ||||||
| Current portion | 9.8 | Accrued expenses and other current liabilities | ||||
| Non-current portion | 189.4 | Other non-current liabilities | ||||
| Total finance lease liabilities | 199.2 | |||||
| Total lease liabilities | $ | 2,055.9 |
The following table summarizes the composition of net lease cost during Fiscal 2020:
| Fiscal Year Ended | ||||||
| March 28, 2020 | Location Recorded in Earnings | |||||
| Operating lease cost | $ | 322.0 | (a) | |||
| Finance lease costs: | ||||||
| Depreciation of leased assets | 18.1 | SG&A expenses | ||||
| Accretion of lease liabilities | 8.1 | Interest expense | ||||
| Variable lease cost | 298.0 | (b) | ||||
| Short-term lease cost | 5.5 | SG&A expenses | ||||
| Sublease income | (2.9 | ) | Restructuring and other charges | |||
| Total lease cost | $ | 648.8 |
| (a) | $4.4 million included within cost of goods sold, $307.3 million included within SG&A expenses, and $10.3 million included within restructuring and other charges. |
| (b) | $4.7 million included within cost of goods sold, $290.3 million included within SG&A expenses, and $3.0 million included within restructuring and other charges. |
In accordance with lease accounting guidance in effect prior to its adoption of ASU 2016-02, during Fiscal 2019 and Fiscal 2018, the Company recognized rent expense of approximately $449.3 million and $443.1 million, respectively, net of insignificant sublease income, related to its operating leases, which included contingent rental charges of approximately $192.0 million and $175.9 million, respectively. Such amounts do not include expense recognized related to non-lease components.
| F-42 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes certain cash flow information related to the Company's leases during Fiscal 2020:
| Fiscal Year Ended | ||||
| March 28, 2020 | ||||
| (millions) | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 383.9 | ||
| Operating cash flows from finance leases | 8.0 | |||
| Financing cash flows from finance leases | 13.6 |
See Note 21 for supplemental non-cash information related to ROU assets obtained in exchange for new lease liabilities.
The following table presents a maturity analysis summary of the Company's lease liabilities recorded on the consolidated balance sheet as of March 28, 2020:
| March 28, 2020 | ||||||||
| Operating Leases | Finance Leases | |||||||
| (millions) | ||||||||
| Fiscal 2021 | $ | 323.6 | $ | 16.0 | ||||
| Fiscal 2022 | 325.4 | 22.6 | ||||||
| Fiscal 2023 | 292.6 | 22.3 | ||||||
| Fiscal 2024 | 259.2 | 22.3 | ||||||
| Fiscal 2025 | 206.8 | 22.3 | ||||||
| Fiscal 2026 and thereafter | 615.7 | 153.8 | ||||||
| Total lease payments | 2,023.3 | 259.3 | ||||||
| Less: interest | (166.6 | ) | (60.1 | ) | ||||
| Total lease liabilities | $ | 1,856.7 | $ | 199.2 |
Additionally, the Company has approximately $119 million of future payment obligations related to executed lease agreements for which the related lease terms had not yet commenced as of March 28, 2020.
The following table summarizes the weighted-average remaining lease terms and weighted-average discount rates related to the Company's operating and finance leases recorded on the consolidated balance sheet as of March 28, 2020:
| March 28, 2020 | ||||||
| Operating Leases | Finance Leases | |||||
| Weighted-average remaining lease term (years) | 7.6 | 12.7 | ||||
| Weighted-average discount rate | 2.1 | % | 4.1 | % |
See Note 3 for discussion of the Company's accounting policies related to its leasing activities.
| F-43 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 15. | Commitments and Contingencies |
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 cumulative charges of approximately $241 million within its income tax provision in prior fiscal years (as described in Note 10). The remaining related income tax payable obligation of $146.7 million as of March 28, 2020, which was reduced by foreign tax credits and other federal income tax activity, is expected to be paid as follows:
| Mandatory Transition Tax Payments**(a)** | ||||
| (millions) | ||||
| Fiscal 2021 | $ | 14.0 | ||
| Fiscal 2022 | 14.0 | |||
| Fiscal 2023 | 14.0 | |||
| Fiscal 2024 | 26.2 | |||
| Fiscal 2025 | 34.9 | |||
| Fiscal 2026 and thereafter | 43.6 | |||
| Total mandatory transition tax payments | $ | 146.7 |
| (a) | Included within current and non-current income tax payable in the consolidated balance sheets based upon the estimated timing of payments. |
See Note 10 for further discussion of the TCJA and its enactment-related impacts on the Company's consolidated financial statements.
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 $665.6 million as of March 28, 2020, including inventory purchase commitments of $534.9 million, outstanding letters of credit of $9.0 million, interest payments related to the Company's debt of $90.6 million, and other commitments of $31.1 million, comprised of the Company's legally-binding obligations under sponsorship, licensing, and other marketing and advertising agreements, information technology-related service agreements, and pension-related obligations.
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 any current litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims.
In the normal course of business, the Company enters into agreements that provide general indemnifications. The Company has not made any significant indemnification payments under such agreements in the past and does not currently anticipate incurring any material indemnification payments.
| F-44 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 16. | 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.
Class B Common Stock Conversions
During Fiscal 2020, the Lauren Family, L.L.C., a limited liability company managed by the children of Mr. Ralph Lauren, converted 1.0 million shares of Class B common stock into an equal number of shares of Class A common stock pursuant to the terms of the security. These conversions occurred in advance of a sales plan providing for the sale of such shares of Class A common stock pursuant to Rule 10b5-1 subject to the conditions set forth therein. These transactions resulted in a reclassification within equity and had no effect on the Company's consolidated balance sheet.
Common Stock Repurchase Program
A summary of the Company's repurchases of Class A common stock under its common stock repurchase program is as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (in millions) | ||||||||||||
| Cost of shares repurchased | $ | 650.3 | $ | 470.0 | $ | — | ||||||
| Number of shares repurchased | 6.2 | 3.8 | 0.0 |
On May 13, 2019, the Company's Board of Directors approved an expansion of the Company's existing common stock repurchase program that allowed it to repurchase up to an additional $600 million of Class A common stock. As of March 28, 2020, the remaining availability under the Company's Class A common stock repurchase program was approximately $580 million. Repurchases of shares of Class A common stock are subject to overall business and market conditions. Accordingly, as a result of current business disruptions related to the COVID-19 pandemic, the Company has temporarily suspended its common stock repurchase program as a preemptive action to preserve cash and strengthen its liquidity.
In addition, during Fiscal 2020, Fiscal 2019, and Fiscal 2018, 0.4 million, 0.3 million, and 0.2 million shares of Class A common stock, respectively, at a cost of $44.5 million, $32.6 million, and $17.1 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 long-term stock incentive plans.
Repurchased and surrendered shares are accounted for as treasury stock at cost and held in treasury for future use.
Dividends
Since 2003, the Company has maintained a regular quarterly cash dividend program on its common stock. On May 13, 2019, the Company's Board of Directors approved an increase to the Company's quarterly cash dividend on its common stock from $0.625 to $0.6875 per share. Dividends paid amounted to $203.9 million, $190.7 million, and $162.4 million in Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively.
As a result of current business disruptions related to the COVID-19 pandemic, the Company has temporarily suspended its quarterly cash dividend program as a preemptive action to preserve cash and strengthen its liquidity. Any decision to declare and pay dividends in the future will be made at the discretion of the Company's Board of Directors and will depend on the Company's
| F-45 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
results of operations, cash requirements, financial condition, and other factors that the Board of Directors may deem relevant, including economic and market conditions.
| 17. | Accumulated Other Comprehensive Income (Loss) |
The following table presents OCI activity, net of tax, 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 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 | ) | ||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| OCI before reclassifications | (39.2 | ) | 42.2 | (2.0 | ) | 1.0 | ||||||||||
| Amounts reclassified from AOCI to earnings | — | (6.0 | ) | 0.1 | (5.9 | ) | ||||||||||
| Other comprehensive income (loss), net of tax | (39.2 | ) | 36.2 | (1.9 | ) | (4.9 | ) | |||||||||
| Balance at March 30, 2019 | (118.5 | ) | 20.2 | (5.1 | ) | (103.4 | ) | |||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| OCI before reclassifications | (7.0 | ) | 21.2 | (1.6 | ) | 12.6 | ||||||||||
| Amounts reclassified from AOCI to earnings | (4.9 | ) | (23.4 | ) | 0.9 | (27.4 | ) | |||||||||
| Other comprehensive loss, net of tax | (11.9 | ) | (2.2 | ) | (0.7 | ) | (14.8 | ) | ||||||||
| Balance at March 28, 2020 | $ | (130.4 | ) | $ | 18.0 | $ | (5.8 | ) | $ | (118.2 | ) |
| (a) | OCI before reclassifications to earnings related to foreign currency translation gains (losses) includes income tax provisions of $9.2 million and $10.8 million for Fiscal 2020 and Fiscal 2019, respectively, and includes an income tax benefit of $23.3 million for Fiscal 2018. OCI before reclassifications to earnings includes gains of $29.0 million (net of a $9.4 million income tax provision) and $50.2 million (net of a $15.9 million income tax provision) for Fiscal 2020 and Fiscal 2019, respectively, and includes a loss of $59.6 million (net of a $31.3 million income tax benefit) for Fiscal 2018, 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). Amounts reclassified from AOCI to earnings related to foreign currency translation gains (losses) during Fiscal 2020 relate to the reclassification to retained earnings of income tax effects stranded in AOCI (see Note 4) |
| (b) | OCI before reclassifications to earnings related to net unrealized gains (losses) on cash flow hedges are presented net of income tax provisions of $2.8 million and $5.3 million for Fiscal 2020 and Fiscal 2019, respectively, and are presented net of an income tax benefit of $5.0 million for Fiscal 2018. 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:
| F-46 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Fiscal Years Ended | ||||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | Location of Gains (Losses) Reclassified from AOCI to Earnings | |||||||||||
| (millions) | ||||||||||||||
| Gains (losses) on cash flow hedges**(a)****:** | ||||||||||||||
| FC — Cash flow hedges | $ | 24.9 | $ | 5.0 | $ | (8.2 | ) | Cost of goods sold | ||||||
| FC — Cash flow hedges | 1.1 | 1.7 | (2.9 | ) | Other income (expense), net | |||||||||
| Tax effect | (2.6 | ) | (0.7 | ) | 1.2 | Income tax benefit (provision) | ||||||||
| Net of tax | $ | 23.4 | $ | 6.0 | $ | (9.9 | ) |
| (a) | FC = Forward foreign currency exchange contracts. |
| 18. | Stock-based Compensation |
Long-term Stock Incentive Plans
On August 1, 2019, the Company's shareholders approved the 2019 Long-Term Stock Incentive Plan (the "2019 Incentive Plan"), which replaced the Company's Amended and Restated 2010 Long-Term Stock Incentive Plan (the "2010 Incentive Plan"). The 2019 Incentive Plan provides for 1.2 million of new shares authorized for issuance to the participants, in addition to the approximately 3.0 million shares that remained available for issuance under the 2010 Incentive Plan as of August 1, 2019. In addition, any outstanding awards under the 2010 Incentive Plan or the Company's 1997 Long-Term Stock Incentive Plan (the "1997 Incentive Plan") that expire, are forfeited, or are surrendered to the Company in satisfaction of taxes, will become available for issuance under the 2019 Incentive Plan. The 2019 Incentive Plan became effective August 1, 2019 and no further grants will be made under the 2010 Incentive Plan. Outstanding awards issued prior to August 1, 2019 will continue to remain subject to the terms of the 2010 Incentive Plan or 1997 Incentive Plan, as applicable. As of March 28, 2020, 3.8 million shares remained available for future issuance under the Company's incentive plans.
Stock-based compensation awards that may be made under the 2019 Incentive Plan include, but are not limited to, (i) restricted stock, (ii) RSUs, and (iii) stock options. During the fiscal periods presented, annual grants consisted entirely of restricted stock and RSUs. Additionally, for 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 total stock-based compensation expense and the related income tax benefits recognized is as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Compensation expense**(a)** | $ | 100.6 | $ | 88.6 | $ | 74.5 | ||||||
| Income tax benefit | (15.3 | ) | (13.1 | ) | (25.3 | ) |
| (a) | Fiscal 2020 and Fiscal 2018 includes $3.6 million and $2.8 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
| F-47 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recognized during any given fiscal period is not indicative of the level of compensation expense expected to be incurred in future periods.
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. Effective beginning Fiscal 2019, non-employee directors are now granted service-based RSUs in lieu of restricted shares.
Service-based RSUs granted to certain of the Company's senior executives and other employees, as well as non-employee directors, 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 for which dividend equivalent amounts do not accrue while outstanding and unvested.
A summary of restricted stock and service-based RSU activity during Fiscal 2020 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 March 30, 2019 | 10 | $ | 86.01 | 1,112 | $ | 94.99 | ||||||||
| Granted | — | N/A | 543 | 102.27 | ||||||||||
| Vested | (6 | ) | 88.30 | (480 | ) | 90.64 | ||||||||
| Forfeited | — | N/A | (81 | ) | 100.28 | |||||||||
| Nonvested at March 28, 2020 | 4 | $ | 81.78 | 1,094 | $ | 100.92 |
| Restricted Stock | Service- based RSUs | |||||||
| Total unrecognized compensation expense at March 28, 2020 (millions) | $ | — | $ | 36.6 | ||||
| Weighted-average period expected to be recognized over (years) | 0.0 | 1.6 |
Additional information pertaining to restricted stock and service-based RSU activity is as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| Restricted Stock: | ||||||||||||
| Weighted-average grant date fair value of awards granted | N/A | N/A | N/A | |||||||||
| Total fair value of awards vested (millions) | $ | 0.9 | $ | 1.0 | N/A | |||||||
| Service-based RSUs: | ||||||||||||
| Weighted-average grant date fair value of awards granted | $ | 102.27 | $ | 113.38 | $ | 73.59 | ||||||
| Total fair value of awards vested (millions) | $ | 52.5 | $ | 50.0 | $ | 30.0 |
| F-48 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance-based RSUs
The Company grants performance-based RSUs to its senior executives and other key employees. The fair values of performance-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 for which dividend equivalent amounts do not accrue while outstanding and unvested. 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, beginning with grants in Fiscal 2019, the number of shares that may be earned ranges between 0% (if the specified threshold performance level is not attained) and 200% (if performance meets or exceeds the maximum achievement level) of the awards originally granted. For such awards granted in recent years prior to Fiscal 2019, 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.
A summary of performance-based RSU activity during Fiscal 2020 is as follows:
| Performance-based RSUs | |||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | ||||||
| (thousands) | |||||||
| Nonvested at March 30, 2019 | 1,011 | $ | 84.16 | ||||
| Granted | 289 | 83.16 | |||||
| Change due to performance condition achievement | 123 | 86.65 | |||||
| Vested | (482 | ) | 86.91 | ||||
| Forfeited | (7 | ) | 76.40 | ||||
| Nonvested at March 28, 2020 | 934 | $ | 82.83 |
| Performance-based RSUs | ||||
| Total unrecognized compensation expense at March 28, 2020 (millions) | $ | 28.2 | ||
| Weighted-average period expected to be recognized over (years) | 1.5 |
Additional information pertaining to performance-based RSU activity is as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| Performance-based RSUs: | ||||||||||||
| Weighted-average grant date fair value of awards granted | $ | 83.16 | $ | 129.78 | $ | 69.40 | ||||||
| Total fair value of awards vested (millions) | $ | 52.8 | $ | 31.8 | $ | 12.9 |
| F-49 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Market-based RSUs
During Fiscal 2019, the Company began granting cliff vesting RSU awards to its senior executives and other key employees, which, in addition to being subject to continuing employment requirements (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), are also subject to a market condition based on TSR performance. The number of shares that vest upon the completion of a three-year period of time is determined by comparing the Company's TSR relative to that of a pre-established peer group over the related three-year performance period. Depending on the Company's level of achievement, the number of shares that ultimately vest may range from 0% to 200% of the awards originally granted.
The Company estimates the fair value of its TSR awards on the date of grant using a Monte Carlo simulation, which models multiple stock price paths of the Company's Class A common stock and that of its peer group to evaluate and determine its ultimate expected relative TSR performance ranking. Compensation expense, net of estimated forfeitures, is recorded regardless of whether, and the extent to which, the market condition is ultimately satisfied.
The assumptions used to estimate the fair value of TSR awards granted during Fiscal 2020 and Fiscal 2019 were as follows:
| Fiscal Year Ended | ||||||||
| March 28, 2020 | March 30, 2019 | |||||||
| Expected term (years) | 2.6 | 2.6 | ||||||
| Expected volatility | 31.4 | % | 33.5 | % | ||||
| Expected dividend yield | 3.2 | % | 1.9 | % | ||||
| Risk-free interest rate | 1.4 | % | 2.6 | % | ||||
| Weighted-average grant date fair value | $ | 90.59 | $ | 177.13 |
A summary of market-based RSU activity during Fiscal 2020 is as follows:
| Market-based RSUs | |||||||
| Number of Shares | Weighted-Average Grant Date Fair Value | ||||||
| (thousands) | |||||||
| Nonvested at March 30, 2019 | 76 | $ | 177.31 | ||||
| Granted | 159 | 90.59 | |||||
| Change due to market condition achievement | — | N/A | |||||
| Vested | — | N/A | |||||
| Forfeited | (1 | ) | 137.35 | ||||
| Nonvested at March 28, 2020 | 234 | $ | 118.46 |
| Market-based RSUs | ||||
| Total unrecognized compensation expense at March 28, 2020 (millions) | $ | 14.1 | ||
| Weighted-average period expected to be recognized over (years) | 1.8 |
| F-50 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additional information pertaining to market-based RSU activity is as follows:
| Fiscal Years Ended | ||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||
| Market-based RSUs: | ||||||||||
| Weighted-average grant date fair value of awards granted | $ | 90.59 | $ | 177.13 | N/A | |||||
| Total fair value of awards vested (millions) | N/A | N/A | N/A |
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.
A summary of stock option activity during Fiscal 2020 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 March 30, 2019 | 834 | $ | 162.53 | 1.5 | $ | — | |||||||
| Granted | — | N/A | |||||||||||
| Exercised | — | N/A | |||||||||||
| Cancelled/Forfeited | (316 | ) | 151.48 | ||||||||||
| Options outstanding at March 28, 2020 | 518 | $ | 169.37 | 0.9 | $ | — | |||||||
| Options vested at March 28, 2020**(b)** | 518 | $ | 169.37 | 0.9 | $ | — | |||||||
| Options exercisable at March 28, 2020 | 518 | $ | 169.37 | 0.9 | $ | — |
| (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 28, 2020. Accordingly, there was no related unrecognized compensation expense as of March 28, 2020. |
Additional information pertaining to the Company's stock option plans is as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Aggregate intrinsic value of stock options exercised**(a)** | $ | — | $ | 1.2 | $ | — | ||||||
| Cash received from the exercise of stock options | — | 21.8 | 0.1 | |||||||||
| Tax benefits realized on exercise of stock options | — | 3.7 | — |
| (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. |
| F-51 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 19. | 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 an "above target" performance level based on certain goals established at the beginning of each fiscal year, increasing the matching contribution to between 67% and 100% depending on the performance level achieved, 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 $8.7 million, $11.2 million, and $10.6 million in Fiscal 2020, Fiscal 2019, and Fiscal 2018, 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 $4.0 million and $2.8 million as of March 28, 2020 and March 30, 2019, 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 $52.4 million and aggregate fair values of plan assets of $48.4 million as of March 28, 2020, compared to aggregate projected benefit obligations of $48.1 million and aggregate fair values of plan assets of $45.3 million as of March 30, 2019. 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 $5.0 million, $4.2 million, and $6.6 million in Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively. The service cost component of $4.7 million, $4.4 million, and $4.6 million in Fiscal 2020, Fiscal 2019, and Fiscal 2018, 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 income (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 28, 2020 and March 30, 2019, amounts accrued under this plan totaled $3.4 million and $5.1 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 fiscal years presented.
| F-52 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 20. | 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, footwear, accessories, home furnishings, and related products made through the Company's retail and wholesale businesses in the U.S. and Canada, excluding Club Monaco. In North America, the Company's retail business is primarily comprised of its Ralph Lauren stores, its factory stores, and its digital commerce site, www.RalphLauren.com. The Company's wholesale business in North America is comprised primarily of sales to department stores, and to a lesser extent, specialty stores. |
| • | Europe — The Europe segment primarily consists of sales of Ralph Lauren branded apparel, footwear, accessories, home furnishings, and related products made through the Company's retail and wholesale businesses in Europe, the Middle East, and Latin America, excluding Club Monaco. In Europe, the Company's retail business is primarily comprised of its Ralph Lauren stores, its factory stores, its concession-based shop-within-shops, and its various digital commerce sites. The Company's wholesale business in Europe is comprised of a varying mix of sales to both department stores and specialty stores, depending on the country, as well as to various third-party digital partners. |
| • | Asia — The Asia segment primarily consists of sales of Ralph Lauren branded apparel, footwear, accessories, home furnishings, and related products made through the Company's retail and wholesale businesses in Asia, Australia, and New Zealand. The Company's retail business in Asia is primarily comprised of its Ralph Lauren stores, its factory stores, its concession-based shop-within-shops, and its digital commerce site, www.RalphLauren.cn, which launched in September 2018. 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 and wholesale businesses in the U.S., Canada, and Europe, and its licensing alliances in Europe and Asia, and (ii) 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.
Effective beginning in the first quarter of Fiscal 2020, operating results related to the Company's business in Latin America are included within its Europe segment due to a change in how the Company manages this business. Previously, such results were included within the Company's other non-reportable segments. All prior period segment information has been recast to reflect this change on a comparative basis.
| F-53 |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net revenues for each of the Company's segments are as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Net revenues: | ||||||||||||
| North America | $ | 3,140.5 | $ | 3,202.9 | $ | 3,231.0 | ||||||
| Europe | 1,632.2 | 1,683.0 | 1,608.3 | |||||||||
| Asia | 1,017.2 | 1,041.0 | 933.7 | |||||||||
| Other non-reportable segments | 369.9 | 386.1 | 409.3 | |||||||||
| Total net revenues | $ | 6,159.8 | $ | 6,313.0 | $ | 6,182.3 |
Operating income for each of the Company's segments is as follows:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Operating income**(a)****:** | ||||||||||||
| North America | $ | 486.6 | $ | 682.8 | $ | 677.6 | ||||||
| Europe | 336.3 | 392.8 | 361.0 | |||||||||
| Asia | 124.8 | 161.0 | 137.2 | |||||||||
| Other non-reportable segments | 85.2 | 118.7 | 103.2 | |||||||||
| 1,032.9 | 1,355.3 | 1,279.0 | ||||||||||
| Unallocated corporate expenses | (648.7 | ) | (663.4 | ) | (672.8 | ) | ||||||
| Unallocated restructuring and other charges**(b)** | (67.2 | ) | (130.1 | ) | (108.0 | ) | ||||||
| Total operating income | $ | 317.0 | $ | 561.8 | $ | 498.2 |
| (a) | Segment operating income during Fiscal 2020 reflects bad debt expense of $38.7 million, $15.2 million, $1.7 million, and $3.1 million related to North America, Europe, Asia, and other non-reportable segments, respectively, primarily related to adverse impacts associated with COVID-19 business disruptions. Segment operating income during Fiscal 2020 also reflects higher inventory charges of approximately $108 million, $42 million, $17 million, and $8 million as compared to the prior fiscal year related to North America, Europe, Asia, and other non-reportable segments, respectively, primarily related to adverse impacts associated with COVID-19 business disruptions. Segment operating income and unallocated corporate expenses during the fiscal years presented also included asset impairment charges (see Note 8), which are detailed below: |
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Asset impairment charges: | ||||||||||||
| North America | $ | (1.9 | ) | $ | (3.1 | ) | $ | (4.7 | ) | |||
| Europe | — | (5.4 | ) | (1.2 | ) | |||||||
| Asia | (3.7 | ) | (4.4 | ) | (1.0 | ) | ||||||
| Other non-reportable segments | (19.3 | ) | (7.0 | ) | (22.4 | ) | ||||||
| Unallocated corporate expenses | (6.7 | ) | (5.9 | ) | (20.7 | ) | ||||||
| Total asset impairment charges | $ | (31.6 | ) | $ | (25.8 | ) | $ | (50.0 | ) |
| F-54 |
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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Unallocated restructuring and other charges: | ||||||||||||
| North America-related | $ | (1.2 | ) | $ | (27.0 | ) | $ | (15.5 | ) | |||
| Europe-related | (3.3 | ) | (14.9 | ) | (4.6 | ) | ||||||
| Asia-related | (0.9 | ) | (0.9 | ) | 2.5 | |||||||
| Other non-reportable segment-related | (0.8 | ) | (4.5 | ) | (8.4 | ) | ||||||
| Corporate operations-related | (31.4 | ) | (46.3 | ) | (53.2 | ) | ||||||
| Unallocated restructuring charges | (37.6 | ) | (93.6 | ) | (79.2 | ) | ||||||
| Other charges (see Note 9) | (29.6 | ) | (36.5 | ) | (28.8 | ) | ||||||
| Total unallocated restructuring and other charges | $ | (67.2 | ) | $ | (130.1 | ) | $ | (108.0 | ) |
The following tables summarize depreciation and amortization expense and capital expenditures for each of the Company's segments:
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Depreciation and amortization expense: | ||||||||||||
| North America | $ | 74.6 | $ | 81.8 | $ | 82.5 | ||||||
| Europe | 32.8 | 33.6 | 34.9 | |||||||||
| Asia | 59.3 | 49.1 | 50.3 | |||||||||
| Other non-reportable segments | 5.4 | 7.2 | 10.6 | |||||||||
| Unallocated corporate | 97.4 | 95.5 | 102.8 | |||||||||
| Unallocated restructuring and other charges (see Note 9) | — | 14.1 | 14.1 | |||||||||
| Total depreciation and amortization expense | $ | 269.5 | $ | 281.3 | $ | 295.2 |
| Fiscal Years Ended | ||||||||||||
| March 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Capital expenditures: | ||||||||||||
| North America | $ | 48.5 | $ | 74.6 | $ | 41.9 | ||||||
| Europe | 34.3 | 26.6 | 28.8 | |||||||||
| Asia | 59.6 | 45.2 | 40.7 | |||||||||
| Other non-reportable segments | 7.3 | 5.0 | 5.0 | |||||||||
| Unallocated corporate | 120.6 | 46.3 | 45.2 | |||||||||
| Total capital expenditures | $ | 270.3 | $ | 197.7 | $ | 161.6 |
| F-55 |
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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Net revenues**(a)****:** | ||||||||||||
| The Americas**(b)** | $ | 3,516.4 | $ | 3,602.2 | $ | 3,652.1 | ||||||
| Europe**(c)** | 1,625.3 | 1,668.6 | 1,595.2 | |||||||||
| Asia**(d)** | 1,018.1 | 1,042.2 | 935.0 | |||||||||
| Total net revenues | $ | 6,159.8 | $ | 6,313.0 | $ | 6,182.3 |
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Long-lived assets**(a)(e)****:** | ||||||||
| The Americas**(b)** | $ | 1,383.6 | $ | 789.6 | ||||
| Europe**(c)** | 772.9 | 140.0 | ||||||
| Asia**(d)** | 334.6 | 109.6 | ||||||
| Total long-lived assets | $ | 2,491.1 | $ | 1,039.2 |
| (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 $3.308 billion, $3.379 billion, and $3.427 billion in Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively. Long-lived assets located in the U.S. were $1.327 billion and $766.1 million as of March 28, 2020 and March 30, 2019, respectively. |
| (c) | Includes the Middle East. |
| (d) | Includes Australia and New Zealand. |
| (e) | Long-lived assets as of March 28, 2020 reflect operating lease ROU assets resulting from the Company’s adoption of ASU 2016-02 (see Note 4). |
| 21. | Additional Financial Information |
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
A reconciliation of cash, cash equivalents, and restricted cash as of March 28, 2020 and March 30, 2019 from the consolidated balance sheets to the consolidated statements of cash flows is as follows:
| March 28, 2020 | March 30, 2019 | |||||||
| (millions) | ||||||||
| Cash and cash equivalents | $ | 1,620.4 | $ | 584.1 | ||||
| Restricted cash included within prepaid expenses and other current assets | 1.4 | 11.9 | ||||||
| Restricted cash included within other non-current assets | 8.0 | 30.5 | ||||||
| Total cash, cash equivalents, and restricted cash | $ | 1,629.8 | $ | 626.5 |
Restricted cash relates to cash held in escrow with certain banks as collateral, primarily to secure guarantees in connection with certain international tax matters and real estate leases.
| F-56 |
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 28, 2020 | March 30, 2019 | March 31, 2018 | ||||||||||
| (millions) | ||||||||||||
| Cash paid for interest | $ | 15.4 | $ | 17.3 | $ | 11.7 | ||||||
| Cash paid for income taxes | 135.5 | 102.0 | 54.0 |
Non-cash Transactions
Operating and finance lease ROU assets recorded in connection with the recognition of new lease liabilities were $374.0 million and $64.0 million, respectively, during Fiscal 2020. Additionally, during Fiscal 2018, the Company recorded new finance (formerly referred to as "capital") lease assets of $3.3 million within its consolidated balance sheet.
Non-cash investing activities also included capital expenditures incurred but not yet paid of $29.1 million, $47.6 million, and $37.0 million as of the end of Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively.
Non-cash financing activities included the conversion of 1.0 million shares of Class B common stock into an equal number of shares of Class A common stock during Fiscal 2020, as discussed in Note 16.
There were no other significant non-cash investing or financing activities for any of the fiscal years presented.
| F-57 |
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 2020, Fiscal 2019, and Fiscal 2018, 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 27, 2020
| /s/ PATRICE LOUVET | /s/ JANE HAMILTON NIELSEN | ||
| Patrice Louvet | Jane Hamilton Nielsen | ||
| President and Chief Executive Officer | Chief Operating Officer and Chief Financial Officer | ||
| (Principal Executive Officer) | (Principal Financial and Accounting Officer) |
| F-58 |
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 (the "Company") as of March 28, 2020 and March 30, 2019, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended March 28, 2020, 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 28, 2020 and March 30, 2019, and the results of its operations and its cash flows for each of the three years in the period ended March 28, 2020, 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 28, 2020, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 27, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 4 to the consolidated financial statements, the Company changed its method for accounting for leases in the fiscal year ended March 28, 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842). See below for discussion of our related critical audit matter.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| End-of-season Markdown Reserves | |
| Description of the Matter | As disclosed in Note 3 of the consolidated financial statements, 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. Auditing management's estimate of end-of-season markdown reserves was complex and judgmental as reserve amounts are sensitive to changes in market or economic conditions (including the effects of the global pandemic), and have a direct, material impact on the amount of revenue recognized by the Company. There is also significant estimation required to establish markdown reserve rates by brand and customer, which are based on the Company's review of the seasonal negotiations with each customer and the expected performance of the products in the customers' stores. |
| F-59 |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's process to calculate the end-of-season markdown reserves, including the consideration of historical experience, actual and forecasted seasonal results, current economic and market conditions, (including the effects of the global pandemic), retailer performance, and contractual terms as applicable. To test the estimate of end-of-season markdown reserves, we performed audit procedures that included, among others, assessing methodologies and testing the assumptions regarding seasonal negotiations with each customer which include the application of market and economic conditions to individual customers and the expected performance of the products in the customers' stores that were used by the Company to calculate the projected markdown allowances to be issued upon settlement. We compared the significant assumptions used by management to current market and economic trends, historical results and other relevant factors. We assessed the historical accuracy of management's estimates and performed sensitivity analyses of significant assumptions to substantively test the changes in the estimate that would result from reasonable changes in the assumptions. |
| Estimated Realizable Value of Inventory | |
| Description of the Matter | As of March 28, 2020, the Company's net inventory balance was $736.2 million. As described in Note 3 to the consolidated financial statements, the valuation of inventory requires management to make assumptions and judgments about the recoverability of inventory and its estimated realizable value. The estimated realizable value of inventory is determined based on an analysis of historical sales trends, market trends and economic conditions (including the effects of the global pandemic), future sales forecasts, on-hand inventory quantities, and consideration of the value of existing customer orders for future sales of inventory. Given the importance of inventory to the Company's operations and the materiality of the balance, coupled with the judgment involved in estimating future sales, auditing management's estimated realizable value involved a higher extent of testing and the involvement of more senior members of the engagement team in executing, supervising and reviewing the results of the procedures. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the process to determine the estimated realizable value of inventory, including controls over the inputs and assumptions used in management's calculation as described above. Our audit procedures to test the estimated realizable value of inventory included, among others, evaluating the appropriateness of management's inputs to the calculation, including testing the completeness and accuracy of the data used in management's calculation such as historical sales activity and loss rates for each class of inventory, write-off activity, on-hand inventory levels and inventory aging. Our procedures also included testing the completeness of any expected net losses on firm commitments to purchase inventory. To evaluate management's ability to accurately estimate future sales projections, which is also a key factor in the determination of the reserve, we retrospectively reviewed actual sales compared to projections and considered the impact of the global pandemic on market trends and economic conditions. We also tested the mathematical accuracy of the Company's calculation. |
| Adoption of Accounting Standards Update No. 2016-02, Leases | |
| Description of the Matter | As discussed above and as described in Note 4 to the consolidated financial statements, the Company adopted Accounting Standards Update 2016-02, Leases ("ASC 842") on March 31, 2019 and recorded operating lease liabilities and related operating lease right-of-use-assets of $1.75 billion and $1.60 billion, respectively, on its balance sheet. The Company applied its incremental borrowing rate ("IBR") to determine the present value of the remaining lease payments for each of its operating leases when calculating the operating lease liability and the related right-of-use asset. Additionally, in connection with the adoption of ASC 842, the Company recorded a $131.6 million adjustment to reduce its opening retained earnings balance for the impairment of a right-of-use asset for one of its real estate leases ("the real estate lease"). |
| F-60 |
| Auditing the Company's methodology and the assumptions applied in developing the IBR involved complex auditor judgment due to the subjectivity inherent in the calculation. Additionally, auditing the Company's impairment of the right-of-use asset for the real estate lease upon adoption involved significant audit effort due to the estimation involved in determining the recoverability and fair value of the right-of-use asset. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over the adoption of ASC 842, including the determination of the IBR and the calculation of the impairment of the right-of-use asset for the real estate lease. For example, we tested controls over management's review of the assumptions used in the determination of the IBR and the recoverability of the real estate lease right-of-use asset, as well as the calculation of the transition adjustment. To test the Company's IBR, we involved our valuation specialists to assist us in performing audit procedures that included, among others, evaluating the Company's selection of the IBR methodology and evaluating the significant assumptions used in applying the selected methodology. We involved our valuation specialists to assist with testing the IBR by performing corroborative calculations and a regression analysis to estimate the Company's credit rating. To test the Company's right-of-use impairment adjustment upon adoption for the real estate lease, we involved our valuation specialists to assist with testing the assumptions used in the Company's valuation. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2008.
New York, New York
May 27, 2020
| F-61 |
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's internal control over financial reporting as of March 28, 2020, 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 (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 28, 2020, 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 28, 2020 and March 30, 2019, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended March 28, 2020, and the related notes and our report dated May 27, 2020 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 27, 2020
| F-62 |
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 28, 2020, as well as the consolidated balance sheet data as of March 28, 2020 and March 30, 2019 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 April 1, 2017 and April 2, 2016 and the consolidated balance sheet data at March 31, 2018, April 1, 2017, and April 2, 2016 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)** | ||||||||||||||||||||
| March 28, 2020**(b)** | March 30, 2019**(c)** | March 31, 2018**(c)** | April 1, 2017 | April 2, 2016 | ||||||||||||||||
| (millions, except per share data) | ||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Net revenues | $ | 6,159.8 | $ | 6,313.0 | $ | 6,182.3 | $ | 6,652.8 | $ | 7,405.2 | ||||||||||
| Gross profit**(d)** | 3,653.3 | 3,886.0 | 3,751.7 | 3,651.1 | 4,186.7 | |||||||||||||||
| Impairment of assets | (31.6 | ) | (25.8 | ) | (50.0 | ) | (253.8 | ) | (48.8 | ) | ||||||||||
| Restructuring and other charges | (67.2 | ) | (130.1 | ) | (108.0 | ) | (318.6 | ) | (142.6 | ) | ||||||||||
| Operating income (loss) | 317.0 | 561.8 | 498.2 | (92.3 | ) | 582.8 | ||||||||||||||
| Interest income (expense), net | 16.8 | 20.1 | (5.9 | ) | (5.1 | ) | (14.7 | ) | ||||||||||||
| Net income (loss) | $ | 384.3 | $ | 430.9 | $ | 162.8 | $ | (99.3 | ) | $ | 396.4 | |||||||||
| Net income (loss) per common share: | ||||||||||||||||||||
| Basic | $ | 5.07 | $ | 5.35 | $ | 1.99 | $ | (1.20 | ) | $ | 4.65 | |||||||||
| Diluted | $ | 4.98 | $ | 5.27 | $ | 1.97 | $ | (1.20 | ) | $ | 4.62 | |||||||||
| Weighted-average common shares outstanding: | ||||||||||||||||||||
| Basic | 75.8 | 80.6 | 81.7 | 82.7 | 85.2 | |||||||||||||||
| Diluted | 77.2 | 81.7 | 82.5 | 82.7 | 85.9 | |||||||||||||||
| Dividends declared per common share | $ | 2.75 | $ | 2.50 | $ | 2.00 | $ | 2.00 | $ | 2.00 |
| (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) | Fiscal 2020 reflects a one-time benefit in connection with Swiss tax reform of $122.9 million recorded within the income tax provision (see Note 10 to the accompanying consolidated financial statements), as well as adverse impacts resulting from COVID-19 business disruptions. |
| (c) | Fiscal 2019 and Fiscal 2018 reflect TCJA enactment-related charges of $27.6 million and $221.4 million, respectively, recorded within the income tax provision (see Note 10 to the accompanying consolidated financial statements). |
| (d) | Fiscal 2020, Fiscal 2019, Fiscal 2018, Fiscal 2017, and Fiscal 2016 reflect restructuring-related inventory charges of $2.2 million, $7.2 million, $7.6 million, $197.9 million, and $20.4 million, respectively (see Note 9 to the accompanying consolidated financial statements). |
| F-63 |
RALPH LAUREN CORPORATION
SELECTED FINANCIAL INFORMATION (Continued)
| March 28, 2020 | March 30, 2019 | March 31, 2018 | April 1, 2017 | April 2, 2016 | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 1,620.4 | $ | 584.1 | $ | 1,304.6 | $ | 668.3 | $ | 456.3 | ||||||||||
| Investments | 495.9 | 1,448.3 | 785.6 | 706.1 | 816.0 | |||||||||||||||
| Working capital**(a)** | 1,283.2 | 2,394.7 | 1,961.2 | 1,794.6 | 1,854.4 | |||||||||||||||
| Total assets | 7,279.9 | 5,942.8 | 6,143.3 | 5,652.0 | 6,213.1 | |||||||||||||||
| Total debt (including current maturities of debt) | 1,171.0 | 689.1 | 596.2 | 588.2 | 713.1 | |||||||||||||||
| Other non-current obligations**(b)** | 322.1 | 359.3 | 361.2 | 250.9 | 265.7 | |||||||||||||||
| Equity | 2,693.1 | 3,287.2 | 3,457.4 | 3,299.6 | 3,743.5 |
| (a) | Working capital is calculated as total current assets less total current liabilities (including current maturities of debt). |
| (b) | Comprised of the Company's non-current finance lease and income tax payable obligations. |
| F-64 |
RALPH LAUREN CORPORATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the quarterly financial information of the Company:
| Quarterly Periods Ended**(a)(b)** | ||||||||||||||||
| June 29, 2019 | September 28, 2019 | December 28, 2019**(c)** | March 28, 2020**(c)(d)** | |||||||||||||
| (millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 1,428.8 | $ | 1,706.2 | $ | 1,750.7 | $ | 1,274.1 | ||||||||
| Gross profit | 920.8 | 1,049.0 | 1,089.1 | 594.4 | ||||||||||||
| Net income (loss) | 117.1 | 182.1 | 334.1 | (249.0 | ) | |||||||||||
| Net income (loss) per common share**(e)**: | ||||||||||||||||
| Basic | $ | 1.50 | $ | 2.37 | $ | 4.47 | $ | (3.38 | ) | |||||||
| Diluted | $ | 1.47 | $ | 2.34 | $ | 4.41 | $ | (3.38 | ) | |||||||
| Dividends declared per common share | $ | 0.6875 | $ | 0.6875 | $ | 0.6875 | $ | 0.6875 | ||||||||
| Quarterly Periods Ended**(a)(f)** | ||||||||||||||||
| June 30, 2018 | September 29, 2018**(g)** | December 29, 2018**(g)** | March 30, 2019 | |||||||||||||
| (millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 1,390.6 | $ | 1,690.9 | $ | 1,725.8 | $ | 1,505.7 | ||||||||
| Gross profit | 895.7 | 1,029.3 | 1,059.5 | 901.5 | ||||||||||||
| Net income | 109.0 | 170.3 | 120.0 | 31.6 | ||||||||||||
| Net income per common share**(e)**: | ||||||||||||||||
| Basic | $ | 1.33 | $ | 2.09 | $ | 1.50 | $ | 0.40 | ||||||||
| Diluted | $ | 1.31 | $ | 2.07 | $ | 1.48 | $ | 0.39 | ||||||||
| Dividends declared per common share | $ | 0.625 | $ | 0.625 | $ | 0.625 | $ | 0.625 |
| (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 June 29, 2019, September 28, 2019, December 28, 2019, and March 28, 2020 were negatively impacted by pretax restructuring-related charges, impairment of assets (including an equity method investment), and certain other charges of $31.4 million, $21.0 million, $21.4 million, and $34.3 million, respectively (see Notes 8 and 9 to the accompanying consolidated financial statements). |
| (c) | Net income (loss) and net income (loss) per common share for the three-month periods ended December 28, 2019 and March 28, 2020 reflect a Swiss Tax Act benefit and charge of $134.1 million and $11.2 million, respectively (see Note 10 to the accompanying consolidated financial statements). |
| (d) | Operating results during the three months ended March 28, 2020 reflected adverse impacts associated with COVID-19 business disruptions. |
| (e) | 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, as well as the exclusion of potentially dilutive instruments from diluted weighted-average common shares outstanding during quarters with net losses. |
| (f) | Net income and net income per common share for the three-month periods ended June 30, 2018, September 29, 2018, December 29, 2018, and March 30, 2019 were negatively impacted by pretax restructuring-related charges, impairment of assets, and certain other charges of $23.7 million, $25.7 million, $45.4 million, and $68.3 million, respectively (see Notes 8 and 9 to the accompanying consolidated financial statements). |
| (g) | Net income and net income per common share for the three-month periods ended September 29, 2018 and December 29, 2018 reflect a favorable TCJA measurement period adjustment of $4.7 million and a TCJA measurement period charge of $32.3 million, respectively (see Note 10 to the accompanying consolidated financial statements). |
| F-65 |
Previous: Item 14. Principal Accounting Fees and Services.