uncertainties associated with general economic conditions and distinct conditions affecting specific issuers. Factors considered by the Company include (i) the length of time and the extent to which the fair value has been below cost, (ii) the financial condition, credit worthiness and near-term prospects of the issuer, (iii) the length of time to maturity, (iv) future economic conditions and market forecasts, and (v) the Company’s intent and ability to retain its investment for a period of time sufficient to allow for recovery of market value. Thevalue, and (vi) an assessment of whether it is more-likely-than-not that the Company limitswill be required to sell its exposure by primarily investing in highly rated investments issued by municipalities.investment before recovery of market value.
the related losses are estimable. In addition, if it is reasonably possible that an unfavorable settlement of a contingency could exceed the established liability, the Company discloses the estimated impact on its liquidity, financial condition and results of operations. Management considers many factors in making these assessments. As the ultimate resolution of contingencies is inherently unpredictable, these assessments can involve a series of complex judgments about future events including, but not limited to, court rulings, negotiations between affected parties and governmental actions. As a result, the accounting for loss contingencies relies heavily on estimates and assumptions.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with FAS No. 123R, “Share-Based Payment” (“FAS 123R”), which requiresexpenses all share-based payments to employees and non-employee directors to be expensed based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures.
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Stock Options
Stock options are granted to employees and non-employee directors with exercise prices equal to fair market value at the date of grant. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of subjective assumptions. Certain key assumptions involve estimating future uncertain events. The key factors influencing the estimation process include the expected term of the option, the expected stock price volatility factor, the expected dividend yield and risk-free interest rate, among others. Generally, once stock option values are determined, current accounting practices do not permit them to be changed, even if the estimates used are different from the actuals.
Determining the fair value of stock-based compensation at the date of grant requires significant judgment by management, including estimates of the above Black-Scholes assumptions. In addition, judgment is required in estimating the number of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, if management changes its assumptions for future stock-based award grants, or if there are changes in market conditions, stock-based compensation expense and the Company’s results of operations could be materially impacted.
Restricted Stock and Restricted Stock Units (“RSUs”)
The Company grants restricted shares of Class A common stock and service-based RSUs to certain of its senior executives and non-employee directors. In addition, the Company grants performance-based RSUs to such senior executives and other key executives, and certain other employees of the Company. The fair values of restricted stock shares and RSUs are based on the fair value of unrestricted Class A common stock, as adjusted to reflect the absence of dividends for those restricted securities that are not entitled to dividend equivalents. Compensation expense for performance-based RSUs is recognized over the related service period when attainment of the performance goals is deemed probable, which involves judgment on the part of management.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer toSee Note 4 to the accompanying audited consolidated financial statements for a discussion of a description of certain recently issued accounting standards the Company is not yet required to adopt which may impact itsthe Company’s results of operationsand/or financial condition in future reporting periods.
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Item 7A. | Quantitative and Qualitative Disclosures about Market RiskRisk. |
For a discussion of the Company’s exposure to market risk, see “Market Risk Management” in Item 7 included elsewhere in this Annual Report onForm 10-K.
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Item 8. | Financial Statements and Supplementary DataData. |
See the “Index to Consolidated Financial Statements” appearing at the end of this Annual Report onForm 10-K.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial DisclosureDisclosure. |
Not applicable.
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Item 9A. | Controls and ProceduresProcedures. |
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures of an issuer that are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that material information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934
64
is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined inRules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as of the end of the fiscal year covered by this annual report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level, as of the fiscal year end covered by this Annual Report onForm 10-K.
(b) Management’s Report of Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange ActRule 13a-15(f). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of the Company’s assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the fiscal year covered by this report based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework.Based on this evaluation, management concluded that the Company’s internal controls over financial reporting were effective at the reasonable assurance level as of the fiscal year end covered by this Annual Report onForm 10-K.
During the fourth quarter of Fiscal 2010, the Company acquired control of the Polo-branded apparel business in Asia-Pacific (excluding Japan) from Dickson that was formerly conducted under a licensed arrangement (the “Asia-Pacific Licensed Operations Acquisition,” as discussed in Note 5 to the accompanying audited consolidated financial statements). The Company is in the process of evaluating Dickson’s internal controls. However, as permitted by related SEC Staff interpretive guidance for newly acquired businesses, the Company excluded Dickson from management’s annual assessment of the effectiveness of the Company’s internal control over
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financial reporting as of April 3, 2010. In the aggregate, Dickson represented 2.8% of the total consolidated assets and 0.6% of total consolidated revenues of the Company as of and for the fiscal year ended April 3, 2010.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting as included elsewhere herein.
(c) Changes in Internal Controls Overover Financial Reporting
ThereExcept as discussed below, there has been no change in the Company’s internal control over financial reporting during the fourth quarter of Fiscal 20092010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Asia-Pacific Licensed Operations Acquisition
In connection with the Asia-Pacific Licensed Operations Acquisition, the Company has developed a supporting infrastructure covering all critical operations, including but not limited to, merchandising, sales, inventory management, customer service, distribution, store operations, real estate management, finance and other administrative areas. As part of the development of this infrastructure, the Company has implemented various processes, systems, and internal controls to support the business.
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Item 9B. | Other InformationInformation. |
On May 21, 2009, the Company’s board of directors adopted an amendment to the 1997 Long-Term Stock Incentive Plan that allows the Company to seek repayment in certain circumstances of stock-based and other compensation awards that are granted under the plan on or after May 21, 2009 to the Company’s named executive officers. The complete text of the amendment is included as Exhibit 10.26 to this Annual Report onForm 10-K.Not applicable.
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PART III
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Item 10. | Directors, Executive Officers and Corporate GovernanceGovernance. |
Information relating to our directors and corporate governance will be set forth in the Company’s proxy statement for its 20092010 annual meeting of stockholders to be filed within 120 days after March 28, 2009April 3, 2010 (the “Proxy Statement”) and is incorporated by reference herein. Information relating to our executive officers is set forth in Item I of this Annual Report onForm 10-K under the caption“Executive Officers.”
The Company has a Code of Ethics for Principal Executive Officers and Senior Financial Officers that applies to our principal executive officer, our principal operating officer, our principal financial officer, our principal accounting officer and our controller. You can find our Code of Ethics for Principal Executive Officers and Senior Financial Officers on our internet site,http://investor.ralphlauren.com. We will post any amendments to the Code of Ethics for Principal Executive Officers and Senior Financial Officers and any waivers that are required to be disclosed by the rules of either the SEC or the NYSE on our internet site.
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Item 11. | Executive CompensationCompensation. |
Information relating to executive and director compensation will be set forth in the Proxy Statement and such information is incorporated by reference herein.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersMatters. |
Equity Compensation Plan Information as of March 28, 2009April 3, 2010
The following table sets forth information as of March 28, 2009April 3, 2010 regarding compensation plans under which the Company’s equity securities are authorized for issuance:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) | |
| | Numbers of
| | | | Number of Securities
| | | Numbers of
| | | | Number of Securities
| |
| | Securities
| | | | Remaining Available for
| | | Securities
| | | | Remaining Available for
| |
| | to be Issued upon
| | | | Future Issuance Under
| | | to be Issued upon
| | | | Future Issuance Under
| |
| | Exercise of
| | | | Equity Compensation
| | | Exercise of
| | | | Equity Compensation
| |
| | Outstanding
| | Weighted-Average
| | Plans (Excluding
| | | Outstanding
| | Weighted-Average
| | Plans (Excluding
| |
| | Options, Warrants
| | Exercise Price of
| | Securities Reflected in
| | | Options, Warrants
| | Exercise Price of
| | Securities Reflected in
| |
Plan Category | | and Rights | | Outstanding Options ($) | | Column (a)) | | | and Rights | | Outstanding Options ($) | | Column (a)) | |
|
Equity compensation plans approved by security holders | | | 7,524,817 | (1) | | $ | 44.22 | (2) | | | 3,975,179 | (3) | | | 7,142,858 | (1) | | $ | 50.55 | (2) | | | 2,526,731 | (3) |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total | | | 7,524,817 | | | $ | 44.22 | | | | 3,975,179 | | | | 7,142,858 | | | $ | 50.55 | | | | 2,526,731 | |
| | |
(1) | | Consists of 5,698,2695,054,838 options to purchase shares of our Class A common stock and 1,826,5482,088,020 restricted stock units (including 266,667 of service-based restricted stock units that have fully vested but have not yet been issued as of April 3, 2010) that are payable solely in shares of Class A common stock. Does not include 23,42411,438 outstanding restricted shares that are subject to forfeiture. |
|
(2) | | Represents the weighted average exercise price of the outstanding stock options. No exercise price is payable with respect to the outstanding restricted stock units. |
|
(3) | | All of the securities remaining available for future issuance set forth in column (c) may be in the form of options, stock appreciation rights, restricted stock, restricted stock units, performance awards or other stock-based awards under the Company’s Amended and Restated 1997 Long-Term Stock Incentive Plan. An additional 23,42411,438 outstanding shares of restricted stock granted under the Company’s Amended and Restated 1997 Long-Term Stock Incentive Plan that remain subject to forfeiture are not reflected in column (c). |
Other information relating to security ownership of certain beneficial owners and management will be set forth in the Proxy Statement and such information is incorporated by reference herein.
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Item 13. | Certain Relationships and Related Transactions, and Director IndependenceIndependence. |
The information required to be included by Item 13 ofForm 10-K will be included in the Proxy Statement and such information is incorporated by reference herein.
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Item 14. | Principal Accounting Fees and ServicesServices. |
The information required to be included by Item 14 ofForm 10-K will be included in the Proxy Statement and such information is incorporated by reference herein.
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PART IV
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Item 15. | Exhibits, and Financial Statement SchedulesSchedules. |
| | |
| (a) 1., | 2. Financial Statements and Financial Statement Schedules. See index onPage F-1. |
3. Exhibits
| | | | |
Exhibit
| | |
Number | | Description |
|
| 3 | .1 | | Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Registration Statement onForm S-1 (FileNo. 333-24733) (the“S-1”))* |
| 3 | .2 | | Second Amended and Restated By-laws of the Company (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended September 29, 2007)* |
| 10 | .1 | | Registration Rights Agreement dated as of June 9, 1997 by and among Ralph Lauren, GS Capital Partners, L.P., GS Capital Partner PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to theS-1)* |
| 10 | .2 | | U.S.A. Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, and Cosmair, Inc., and letter Agreement related thereto dated January 1, 1985** (filed as Exhibit 10.4 to theS-1)* |
| 10 | .3 | | Restated U.S.A. License Agreement, dated January 1, 1985, between Ricky Lauren and Mark N. Kaplan, as Licensor, and Cosmair, Inc., as Licensee, and letter Agreement related thereto dated January 1, 1985** (filed as Exhibit 10.5 to theS-1)* |
| 10 | .4 | | Foreign Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, as Licensor, and L’Oreal S.A., as Licensee, and letter Agreements related thereto dated January 1, 1985, September 16, 1994 and October 25, 1994** (filed as Exhibit 10.6 to theS-1)* |
| 10 | .5 | | Restated Foreign License Agreement, dated January 1, 1985, between The Polo/Lauren Company, as Licensor, and L’Oreal S.A., as Licensee, Letter Agreement related thereto dated January 1, 1985, and Supplementary Agreement thereto, dated October 1, 1991** (filed as Exhibit 10.7 to theS-1)* |
| 10 | .6 | | Amendment, dated November 27, 1992, to Foreign Design and Consulting Agreement and Restated Foreign License Agreement** (filed as Exhibit 10.8 to theS-1)* |
| 10 | .7 | | Agency Agreement dated October 5, 2006, between Polo Ralph Lauren Corporation and Deutsche Bank AG, London Branch and Deutsche Bank Luxemburg S.A., as fiscal and principal paying agent (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended December 30, 2006)* |
| 10 | .8 | | Form of Indemnification Agreement between Polo Ralph Lauren Corporation and its Directors and Executive Officers (filed as Exhibit 10.26 to theS-1)* |
| 10 | .9 | | Amended and Restated Employment Agreement, effective as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended June 29, 2002)*† |
| 10 | .10 | | Amended and Restated Employment Agreement, dated as of June 17, 2003, between Polo Ralph Lauren Corporation and Ralph Lauren (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended June 28, 2003)*† |
| 10 | .11 | | Non-Qualified Stock Option Agreement, dated as of June 8, 2004, between Polo Ralph Lauren Corporation and Ralph Lauren (filed as Exhibit 10.14 to the Company’s Annual Report onForm 10-K for the fiscal year ended April 2, 2005 (the “Fiscal 200610-K”))*† |
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| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 10 | .12 | | Restricted Stock Unit Award Agreement, dated as of June 8, 2004, between Polo Ralph Lauren Corporation and Ralph Lauren (filed as Exhibit 10.15 to the Fiscal 200610-K)*† | 3 | .1 | | Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Registration Statement onForm S-1 (FileNo. 333-24733) (the“S-1”))* |
| 10 | .13 | | Polo Ralph Lauren Corporation Executive Officer Annual Incentive Plan, as amended as of August 9, 2007 (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended December 29, 2007)*† | 3 | .2 | | Second Amended and Restated By-laws of the Company (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended September 29, 2007)* |
| 10 | .14 | | Amendment No. 1, dated July 1, 2004, to the Amended and Restated Employment Agreement between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended October 2, 2004)*† | 10 | .1 | | Registration Rights Agreement dated as of June 9, 1997 by and among Ralph Lauren, GS Capital Partners, L.P., GS Capital Partner PRL Holding I, L.P., GS Capital Partners PRL Holding II, L.P., Stone Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp., Bridge Street Fund 1994, L.P., and Polo Ralph Lauren Corporation (filed as Exhibit 10.3 to theS-1)* |
| 10 | .15 | | Amendment No. 2, dated September 5, 2007, to the Amended and Restated Employment Agreement between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended September 29, 2007)*† | 10 | .2 | | U.S.A. Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, and Cosmair, Inc., and letter Agreement related thereto dated January 1, 1985** (filed as Exhibit 10.4 to theS-1)* |
| 10 | .16 | | Amendment No. 3, dated as of December 23, 2008, to the Amended and Restated Employment Agreement between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended December 27, 2008)*† | 10 | .3 | | Restated U.S.A. License Agreement, dated January 1, 1985, between Ricky Lauren and Mark N. Kaplan, as Licensor, and Cosmair, Inc., as Licensee, and letter Agreement related thereto dated January 1, 1985** (filed as Exhibit 10.5 to theS-1)* |
| 10 | .17 | | Restricted Stock Unit Award Agreement, dated as of July 1, 2004, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.18 to the Fiscal 200610-K)*† | 10 | .4 | | Foreign Design and Consulting Agreement, dated January 1, 1985, between Ralph Lauren, individually and d/b/a Ralph Lauren Design Studio, as Licensor, and L’Oreal S.A., as Licensee, and letter Agreements related thereto dated January 1, 1985, September 16, 1994 and October 25, 1994** (filed as Exhibit 10.6 to theS-1)* |
| 10 | .18 | | Amendment No. 1, dated as of December 23, 2008, to the Restricted Stock Unit Award Agreement between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended December 27, 2008)*† | 10 | .5 | | Restated Foreign License Agreement, dated January 1, 1985, between The Polo/Lauren Company, as Licensor, and L’Oreal S.A., as Licensee, Letter Agreement related thereto dated January 1, 1985, and Supplementary Agreement thereto, dated October 1, 1991** (filed as Exhibit 10.7 to theS-1)* |
| 10 | .19 | | Restricted Stock Award Agreement, dated as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.19 to the Fiscal 200610-K)*† | 10 | .6 | | Amendment, dated November 27, 1992, to Foreign Design and Consulting Agreement and Restated Foreign License Agreement** (filed as Exhibit 10.8 to theS-1)* |
| 10 | .20 | | Non-Qualified Stock Option Agreement, dated as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.20 to the Fiscal 200610-K)*† | 10 | .7 | | Agency Agreement dated October 5, 2006, between Polo Ralph Lauren Corporation and Deutsche Bank AG, London Branch and Deutsche Bank Luxemburg S.A., as fiscal and principal paying agent (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended December 30, 2006)* |
| 10 | .21 | | Deferred Compensation Agreement, dated as of September 19, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.21 to the Fiscal 200610-K)*† | 10 | .8 | | Form of Indemnification Agreement between Polo Ralph Lauren Corporation and its Directors and Executive Officers (filed as Exhibit 10.26 to theS-1)* |
| 10 | .22 | | Asset Purchase Agreement by and among Polo Ralph Lauren Corporation, RL Childrenswear Company, LLC and The Seller Affiliate Group (as defined therein) dated March 25, 2004 (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended July 3, 2004)* | 10 | .9 | | Amended and Restated Employment Agreement, effective as of October 14, 2009, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.1 to theForm 8-K dated October 14, 2009)*† |
| 10 | .23 | | Amendment No. 1, dated as of July 2, 2004, to Asset Purchase Agreement by and among Polo Ralph Lauren Corporation, RL Childrenswear Company, LLC and The Seller Affiliate Group (as defined therein) (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended July 3, 2004)* | 10 | .10 | | Amended and Restated Employment Agreement, dated as of June 17, 2003, between Polo Ralph Lauren Corporation and Ralph Lauren (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended June 28, 2003)*† |
| 10 | .24 | | Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004 (filed as Exhibit 99.1 to theForm 8-K dated August 12, 2004)*† | 10 | .11 | | Non-Qualified Stock Option Agreement, dated as of June 8, 2004, between Polo Ralph Lauren Corporation and Ralph Lauren (filed as Exhibit 10.14 to the Company’s Annual Report onForm 10-K for the fiscal year ended April 2, 2005 (the “Fiscal 200610-K”))*† |
| 10 | .25 | | Amendment, dated as of June 30, 2006, to the Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004 (filed as Exhibit 10.4 to theForm 10-Q for the quarterly period ended July 1, 2006)*† | 10 | .12 | | Restricted Stock Unit Award Agreement, dated as of June 8, 2004, between Polo Ralph Lauren Corporation and Ralph Lauren (filed as Exhibit 10.15 to the Fiscal 200610-K)*† |
| 10 | .26 | | Amendment No. 2, dated as of May 21, 2009, to the Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004. | 10 | .13 | | Polo Ralph Lauren Corporation Executive Officer Annual Incentive Plan, as amended as of August 9, 2007 (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended December 29, 2007)*† |
| 10 | .27 | | Cliff Restricted Performance Share Unit Award Overview containing the standard terms of restricted performance share awards under the Stock Incentive Plan (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended July 1, 2006)*† | 10 | .14 | | Amendment No. 1, dated March 29, 2010, to the Amended and Restated Employment Agreement between Polo Ralph Lauren Corporation and Roger N. Farah |
| 10 | .28 | | Pro-Rata Restricted Performance Share Unit Award Overview containing the standard terms of restriction performance share awards under the Stock Incentive Plan (filed as Exhibit 10.3 to theForm 10-Q for the quarterly period ended July 1, 2006)*† | 10 | .15 | | Restricted Stock Unit Award Agreement, dated as of July 1, 2004, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.18 to the Fiscal 200610-K)*† |
| 10 | .29 | | Stock Option Award Overview — U.S. containing the standard terms of stock option award under the Stock Incentive Plan (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended July 1, 2006)*† | 10 | .16 | | Amendment No. 1, dated as of December 23, 2008, to the Restricted Stock Unit Award Agreement between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended December 27, 2008)*† |
| 10 | .30 | | Definitive Agreement, dated April 13, 2007, among Polo Ralph Lauren Corporation, PRL Japan Kabushiki Kaisha, Onward Kashiyama Co., Ltd and Impact 21 Co., Ltd.(filed as Exhibit 10.27 to the Fiscal 200810-K)* | |
| 10 | .31 | | Amended and Restated Credit Agreement as of May 22, 2007 to the Credit Agreement, dated as of November 28, 2006, among Polo Ralph Lauren Corporation, Polo JP Acqui B.V., the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company’sForm 10-Q for the quarterly period ended June 30, 2007)* | |
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| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 10 | .32 | | Amendment and Restatement Agreement, dated as of May 22, 2007, among Polo Ralph Lauren Corporation, Polo JP Acqui B.V., the lenders party thereto, The Bank of New York, Citibank, N.A., Bank of America, N.A. and Wachovia Bank National Association, as syndication agents, Sumitomo Mitsui Banking Corporation and Deutsche Bank Securities, s co-agents and JPMorgan Chase Bank, N.A., as administrative agent under the Credit Agreement dated as of November 28, 2006 among Polo Ralph Lauren Corporation, the lenders from time to time party thereto and the agents party thereto (filed as Exhibit 10.2 to the Company’sForm 10-Q for the quarterly period ended June 30, 2007)* | 10 | .17 | | Restricted Stock Award Agreement, dated as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.19 to the Fiscal 200610-K)*† |
| 10 | .33 | | Employment Agreement, dated as of September 4, 2004, between Polo Ralph Lauren Corporation and Jackwyn Nemerov (filed as Exhibit 10.3 to theForm 10-Q for the quarterly period ended October 2, 2004)*† | 10 | .18 | | Non-Qualified Stock Option Agreement, dated as of July 23, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.20 to the Fiscal 200610-K)*† |
| 10 | .34 | | Amendment No. 1, effective as of January 1, 2009, to the Employment Agreement between Polo Ralph Lauren Corporation and Jackwyn Nemerov (filed as Exhibit 10.5 to theForm 10-Q for the quarterly period ended December 27, 2008)*† | 10 | .19 | | Deferred Compensation Agreement, dated as of September 19, 2002, between Polo Ralph Lauren Corporation and Roger N. Farah (filed as Exhibit 10.21 to the Fiscal 200610-K)*† |
| 10 | .35 | | Employment Agreement, dated as of March 26, 2007, between Polo Ralph Lauren Corporation and Tracey T. Travis (filed as Exhibit 10.28 to the Fiscal 200710-K)*† | 10 | .20 | | Asset Purchase Agreement by and among Polo Ralph Lauren Corporation, RL Childrenswear Company, LLC and The Seller Affiliate Group (as defined therein) dated March 25, 2004 (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended July 3, 2004)* |
| 10 | .36 | | Amendment No. 1, effective as of January 1, 2009, to the Employment Agreement between Polo Ralph Lauren Corporation and Tracey Travis (filed as Exhibit 10.3 to theForm 10-Q for the quarterly period ended December 27, 2008)*† | 10 | .21 | | Amendment No. 1, dated as of July 2, 2004, to Asset Purchase Agreement by and among Polo Ralph Lauren Corporation, RL Childrenswear Company, LLC and The Seller Affiliate Group (as defined therein) (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended July 3, 2004)* |
| 10 | .37 | | Employment Agreement, dated as of April 30, 2007, between Polo Ralph Lauren Corporation and Mitchell A. Kosh (filed as Exhibit 10.3 to the Company’sForm 10-Q for the quarterly period ended June 30, 2007)*† | 10 | .22 | | Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004 (filed as Exhibit 99.1 to theForm 8-K dated August 12, 2004)*† |
| 10 | .38 | | Amendment No. 1, effective as of January 1, 2009, to the Employment Agreement between Polo Ralph Lauren Corporation and Mitchell Kosh (filed as Exhibit 10.4 to theForm 10-Q for the quarterly period ended December 27, 2008)*† | 10 | .23 | | Amendment, dated as of June 30, 2006, to the Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004 (filed as Exhibit 10.4 to theForm 10-Q for the quarterly period ended July 1, 2006)*† |
| 10 | .39 | | Cross Default and Term Extension Agreement, dated May 11, 1998, among PRL USA, Inc., The Polo/Lauren Company, L.P., Polo Ralph Lauren Corporation, Jones Apparel Group, Inc. and Jones Investment Co., Inc. (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended December 28, 2002)* | 10 | .24 | | Amendment No. 2, dated as of May 21, 2009, to the Polo Ralph Lauren Corporation 1997 Long-Term Stock Incentive Plan, as Amended and Restated as of August 12, 2004 (filed as Exhibit 10.26 to the Fiscal2009 10-K)*† |
| 10 | .40 | | Amended and Restated Polo Ralph Lauren Supplemental Executive Retirement Plan (filed as Exhibit 10.1 to the Company’sForm 10-Q for the quarterly period ended December 31, 2005)*† | 10 | .25 | | Cliff Restricted Performance Share Unit Award Overview containing the standard terms of restricted performance share awards under the Stock Incentive Plan (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended July 1, 2006)*† |
| 14 | .1 | | Code of Ethics for Principal Executive Officers and Senior Financial Officers (filed as Exhibit 14.1 to the Fiscal 2003Form 10-K)* | 10 | .26 | | Pro-Rata Restricted Performance Share Unit Award Overview containing the standard terms of restriction performance share awards under the Stock Incentive Plan (filed as Exhibit 10.3 to theForm 10-Q for the quarterly period ended July 1, 2006)*† |
| 21 | .1 | | List of Significant Subsidiaries of the Company | 10 | .27 | | Stock Option Award Overview — U.S. containing the standard terms of stock option award under the Stock Incentive Plan (filed as Exhibit 10.2 to theForm 10-Q for the quarterly period ended July 1, 2006)*† |
| 23 | .1 | | Consent of Ernst & Young LLP | 10 | .28 | | Definitive Agreement, dated April 13, 2007, among Polo Ralph Lauren Corporation, PRL Japan Kabushiki Kaisha, Onward Kashiyama Co., Ltd and Impact 21 Co., Ltd.(filed as Exhibit 10.27 to the Fiscal 200810-K)* |
| 23 | .2 | | Consent of Deloitte & Touche LLP | 10 | .29 | | Amended and Restated Credit Agreement as of May 22, 2007 to the Credit Agreement, dated as of November 28, 2006, among Polo Ralph Lauren Corporation, Polo JP Acqui B.V., the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company’sForm 10-Q for the quarterly period ended June 30, 2007)* |
| 31 | .1 | | Certification of Ralph Lauren required by 17 CFR 240.13a-14(a) | 10 | .30 | | Amendment and Restatement Agreement, dated as of May 22, 2007, among Polo Ralph Lauren Corporation, Polo JP Acqui B.V., the lenders party thereto, The Bank of New York, Citibank, N.A., Bank of America, N.A. and Wachovia Bank National Association, as syndication agents, Sumitomo Mitsui Banking Corporation and Deutsche Bank Securities, s co-agents and JPMorgan Chase Bank, N.A., as administrative agent under the Credit Agreement dated as of November 28, 2006 among Polo Ralph Lauren Corporation, the lenders from time to time party thereto and the agents party thereto (filed as Exhibit 10.2 to the Company’sForm 10-Q for the quarterly period ended June 30, 2007)* |
| 31 | .2 | | Certification of Tracey T. Travis required by 17 CFR 240.13a-14(a) | 10 | .31 | | Employment Agreement, effective as of October 14, 2009, between Polo Ralph Lauren Corporation and Jackwyn Nemerov (filed as Exhibit 10.2 to theForm 8-K dated October 14, 2009)*† |
| 32 | .1 | | Certification of Ralph Lauren Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 10 | .32 | | Employment Agreement, effective as of September 28, 2009, between Polo Ralph Lauren Corporation and Tracey T. Travis (filed as Exhibit 10.1 to theForm 8-K dated September 28, 2009)*† |
| 32 | .2 | | Certification of Tracey T. Travis Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 10 | .33 | | Employment Agreement, effective as of October 14, 2009, between Polo Ralph Lauren Corporation and Mitchell A. Kosh (filed as Exhibit 10.3 to theForm 8-K dated October 14, 2009)*† |
| | 10 | .34 | | Cross Default and Term Extension Agreement, dated May 11, 1998, among PRL USA, Inc., The Polo/Lauren Company, L.P., Polo Ralph Lauren Corporation, Jones Apparel Group, Inc. and Jones Investment Co., Inc. (filed as Exhibit 10.1 to theForm 10-Q for the quarterly period ended December 28, 2002)* |
| | 10 | .35 | | Amended and Restated Polo Ralph Lauren Supplemental Executive Retirement Plan (filed as Exhibit 10.1 to the Company’sForm 10-Q for the quarterly period ended December 31, 2005)*† |
| | 14 | .1 | | Code of Ethics for Principal Executive Officers and Senior Financial Officers (filed as Exhibit 14.1 to the Fiscal 2003Form 10-K)* |
69
| | | | |
Exhibit
| | |
Number | | Description |
|
| 21 | .1 | | List of Significant Subsidiaries of the Company |
| 23 | .1 | | Consent of Ernst & Young LLP |
| 23 | .2 | | Consent of Deloitte & Touche LLP |
| 31 | .1 | | Certification of Ralph Lauren required by 17 CFR 240.13a-14(a) |
| 31 | .2 | | Certification of Tracey T. Travis required by 17 CFR 240.13a-14(a) |
| 32 | .1 | | Certification of Ralph Lauren Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .2 | | Certification of Tracey T. Travis Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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.
| | |
* | | Incorporated herein by reference. |
|
† | | Management contract or compensatory plan or arrangement. |
|
** | | Portions ofExhibits 10.2-10.6 have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission. |
6970
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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, on May 26, 2009.June 2, 2010.
POLO RALPH LAUREN CORPORATION
Tracey T. Travis
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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 Ralph Lauren | | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) | | May 26, 2009June 2, 2010 |
| | | | |
/s/ ROGER N. FARAH Roger N. Farah | | President, Chief Operating Officer and Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ JACKWYN L. NEMEROV Jackwyn L. Nemerov | | Executive Vice President and Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ TRACEY T. TRAVIS Tracey T. Travis | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | May 26, 2009June 2, 2010 |
| | | | |
/s/ JOHN R. ALCHIN John R. Alchin | | Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ ARNOLD H. ARONSON Arnold H. Aronson | | Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ FRANK A. BENNACK, JR. Frank A. Bennack, Jr. | | Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ DR. JOYCE F. BROWN Dr. Joyce F. Brown | | Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ JOEL L. FLEISHMAN Joel L. Fleishman | | Director | | May 26, 2009June 2, 2010 |
7071
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
Signature/s/ HUBERT JOLY Hubert Joly | | Title Director | | Date
|
June 2, 2010 |
| | | | |
/s/ STEVEN P. MURPHY Steven P. Murphy | | Director | | May 26, 2009June 2, 2010 |
| | | | |
/s/ ROBERT C. WRIGHT Robert C. Wright | | Director | | May 26, 2009June 2, 2010 |
7172
POLO RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
F-1
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 481.2 | | | $ | 551.5 | | | $ | 563.1 | | | $ | 481.2 | |
Short-term investments | | | 338.7 | | | | 74.3 | | | | 584.1 | | | | 338.7 | |
Accounts receivable, net of allowances of $190.9 million and $172.0 million | | | 474.9 | | | | 508.4 | | |
Accounts receivable, net of allowances of $206.1 million and $190.9 million | | | | 381.9 | | | | 474.9 | |
Inventories | | | 525.1 | | | | 514.9 | | | | 504.0 | | | | 525.1 | |
Deferred tax assets | | | 101.8 | | | | 76.6 | | | | 103.0 | | | | 101.8 | |
Prepaid expenses and other | | | 135.0 | | | | 167.8 | | | | 139.7 | | | | 135.0 | |
| | | | | | | | | | |
Total current assets | | | 2,056.7 | | | | 1,893.5 | | | | 2,275.8 | | | | 2,056.7 | |
Non-current investments | | | | 75.5 | | | | 29.7 | |
Property and equipment, net | | | 651.6 | | | | 709.9 | | | | 697.2 | | | | 651.6 | |
Deferred tax assets | | | 102.8 | | | | 116.9 | | | | 101.9 | | | | 102.8 | |
Goodwill | | | 966.4 | | | | 975.1 | | | | 986.6 | | | | 966.4 | |
Intangible assets, net | | | 348.9 | | | | 349.3 | | | | 363.2 | | | | 348.9 | |
Other assets | | | 230.1 | | | | 320.8 | | | | 148.7 | | | | 200.4 | |
| | | | | | | | | | |
Total assets | | $ | 4,356.5 | | | $ | 4,365.5 | | | $ | 4,648.9 | | | $ | 4,356.5 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 165.9 | | | $ | 205.7 | | | $ | 149.8 | | | $ | 165.9 | |
Income tax payable | | | 35.9 | | | | 28.8 | | | | 37.8 | | | | 35.9 | |
Accrued expenses and other | | | 472.3 | | | | 467.7 | | | | 559.7 | | | | 472.3 | |
Current maturities of debt | | | — | | | | 206.4 | | |
| | | | | | | | | | |
Total current liabilities | | | 674.1 | | | | 908.6 | | | | 747.3 | | | | 674.1 | |
Long-term debt | | | 406.4 | | | | 472.8 | | | | 282.1 | | | | 406.4 | |
Non-current liability for unrecognized tax benefits | | | 154.8 | | | | 155.2 | | | | 126.0 | | | | 154.8 | |
Other non-current liabilities | | | 386.1 | | | | 439.2 | | | | 376.9 | | | | 386.1 | |
| | | | | | | | | | |
Commitments and contingencies (Note 16) | | | | | | | | | |
Commitments and contingencies (Note 17) | | | | | | | | | |
Total liabilities | | | 1,621.4 | | | | 1,975.8 | | | | 1,532.3 | | | | 1,621.4 | |
| | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | |
Class A common stock, par value $.01 per share; 72.3 million and 70.5 million shares issued; 55.9 million and 56.2 million shares outstanding | | | 0.7 | | | | 0.7 | | |
Class B common stock, par value $.01 per share; 43.3 million shares issued and outstanding | | | 0.4 | | | | 0.4 | | |
Equity: | | | | | | | | | |
Class A common stock, par value $.01 per share; 75.7 million and 72.3 million shares issued; 56.1 million and 55.9 million shares outstanding | | | | 0.8 | | | | 0.7 | |
Class B common stock, par value $.01 per share; 42.1 million and 43.3 million shares issued and outstanding | | | | 0.4 | | | | 0.4 | |
Additionalpaid-in-capital | | | 1,108.4 | | | | 1,017.6 | | | | 1,243.8 | | | | 1,108.4 | |
Retained earnings | | | 2,465.5 | | | | 2,079.3 | | | | 2,915.3 | | | | 2,465.5 | |
Treasury stock, Class A, at cost (16.4 million and 14.3 million shares) | | | (966.7 | ) | | | (820.9 | ) | |
Accumulated other comprehensive income (loss) | | | 126.8 | | | | 112.6 | | |
Treasury stock, Class A, at cost (19.6 million and 16.4 million shares) | | | | (1,197.7 | ) | | | (966.7 | ) |
Accumulated other comprehensive income | | | | 154.0 | | | | 126.8 | |
| | | | | | | | | | |
Total stockholders’ equity | | | 2,735.1 | | | | 2,389.7 | | |
Total equity | | | | 3,116.6 | | | | 2,735.1 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 4,356.5 | | | $ | 4,365.5 | | |
Total liabilities and equity | | | $ | 4,648.9 | | | $ | 4,356.5 | |
| | | | | | | | | | |
See accompanying notes.
F-2
POLO RALPH LAUREN CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (millions, except per share data) | | | (millions, except per share data) | |
|
Net sales | | $ | 4,823.7 | | | $ | 4,670.7 | | | $ | 4,059.1 | | | $ | 4,795.5 | | | $ | 4,823.7 | | | $ | 4,670.7 | |
Licensing revenue | | | 195.2 | | | | 209.4 | | | | 236.3 | | | | 183.4 | | | | 195.2 | | | | 209.4 | |
| | | | | | | | | | | | | | |
Net revenues | | | 5,018.9 | | | | 4,880.1 | | | | 4,295.4 | | | | 4,978.9 | | | | 5,018.9 | | | | 4,880.1 | |
Cost of goods sold(a) | | | (2,288.2 | ) | | | (2,242.0 | ) | | | (1,959.2 | ) | | | (2,079.8 | ) | | | (2,288.2 | ) | | | (2,242.0 | ) |
| | | | | | | | | | | | | | |
Gross profit | | | 2,730.7 | | | | 2,638.1 | | | | 2,336.2 | | | | 2,899.1 | | | | 2,730.7 | | | | 2,638.1 | |
| | | | | | | | | | | | | | |
Other costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses(a) | | | (2,036.0 | ) | | | (1,932.5 | ) | | | (1,663.4 | ) | | | (2,157.0 | ) | | | (2,036.0 | ) | | | (1,932.5 | ) |
Amortization of intangible assets | | | (20.2 | ) | | | (47.2 | ) | | | (15.6 | ) | | | (21.7 | ) | | | (20.2 | ) | | | (47.2 | ) |
Impairments of assets | | | (55.4 | ) | | | (5.0 | ) | | | — | | | | (6.6 | ) | | | (55.4 | ) | | | (5.0 | ) |
Restructuring charges | | | (23.6 | ) | | | — | | | | (4.6 | ) | | | (6.9 | ) | | | (23.6 | ) | | | — | |
| | | | | | | | | | | | | | |
Total other costs and expenses | | | (2,135.2 | ) | | | (1,984.7 | ) | | | (1,683.6 | ) | | | (2,192.2 | ) | | | (2,135.2 | ) | | | (1,984.7 | ) |
| | | | | | | | | | | | | | |
Operating income | | | 595.5 | | | | 653.4 | | | | 652.6 | | | | 706.9 | | | | 595.5 | | | | 653.4 | |
Foreign currency gains (losses) | | | 1.6 | | | | (6.4 | ) | | | (1.5 | ) | | | (2.2 | ) | | | 1.6 | | | | (6.4 | ) |
Interest expense | | | (26.6 | ) | | | (25.7 | ) | | | (21.6 | ) | | | (22.2 | ) | | | (26.6 | ) | | | (25.7 | ) |
Interest and other income, net | | | 22.0 | | | | 24.7 | | | | 26.1 | | | | 12.4 | | | | 22.0 | | | | 24.7 | |
Equity in income (loss) of equity-method investees | | | (5.0 | ) | | | (1.8 | ) | | | 3.0 | | | | (5.6 | ) | | | (5.0 | ) | | | (1.8 | ) |
Minority interest expense | | | — | | | | (2.1 | ) | | | (15.3 | ) | |
| | | | | | | | | | | | | | |
Income before provision for income taxes | | | 587.5 | | | | 642.1 | | | | 643.3 | | | | 689.3 | | | | 587.5 | | | | 644.2 | |
Provision for income taxes | | | (181.5 | ) | | | (222.3 | ) | | | (242.4 | ) | | | (209.8 | ) | | | (181.5 | ) | | | (222.3 | ) |
| | | | | | | | | | | | | | |
Net income | | $ | 406.0 | | | $ | 419.8 | | | $ | 400.9 | | | $ | 479.5 | | | $ | 406.0 | | | $ | 421.9 | |
| | | | | | | | | | | | | | |
Net income per common share: | | | | | | | | | | | | | |
Less: Net income attributable to noncontrolling interest | | | | — | | | | — | | | | 2.1 | |
| | | | | | | | |
Net income attributable to PRLC | | | $ | 479.5 | | | $ | 406.0 | | | $ | 419.8 | |
| | | | | | | | |
Net income per common share attributable to PRLC: | | | | | | | | | | | | | |
Basic | | $ | 4.09 | | | $ | 4.10 | | | $ | 3.84 | | | $ | 4.85 | | | $ | 4.09 | | | $ | 4.10 | |
| | | | | | | | | | | | | | |
Diluted | | $ | 4.01 | | | $ | 3.99 | | | $ | 3.73 | | | $ | 4.73 | | | $ | 4.01 | | | $ | 3.99 | |
| | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 99.2 | | | | 102.3 | | | | 104.4 | | | | 98.9 | | | | 99.2 | | | | 102.3 | |
| | | | | | | | | | | | | | |
Diluted | | | 101.3 | | | | 105.2 | | | | 107.6 | | | | 101.3 | | | | 101.3 | | | | 105.2 | |
| | | | | | | | | | | | | | |
Dividends declared per share | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.30 | | | $ | 0.20 | | | $ | 0.20 | |
| | | | | | | | | | | | | | |
(a)Includes total depreciation expense of: | | $ | (164.2 | ) | | $ | (154.1 | ) | | $ | (129.1 | ) | | $ | (159.5 | ) | | $ | (164.2 | ) | | $ | (154.1 | ) |
| | | | | | | | | | | | | | |
See accompanying notes.
F-3
POLO RALPH LAUREN CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | (millions) | | | | | | | (millions) | | | |
|
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 406.0 | | | $ | 419.8 | | | $ | 400.9 | | | | $479.5 | | | | $406.0 | | | | $421.9 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | 184.4 | | | | 201.3 | | | | 144.7 | | | | 181.2 | | | | 184.4 | | | | 201.3 | |
Deferred income tax expense (benefit) | | | (35.1 | ) | | | (7.7 | ) | | | (112.4 | ) | | | (0.2 | ) | | | (35.1 | ) | | | (7.7 | ) |
Minority interest expense | | | — | | | | 2.1 | | | | 15.3 | | |
Equity in loss (income) of equity-method investees, net of dividends received | | | 5.0 | | | | 1.8 | | | | (1.0 | ) | | | 5.6 | | | | 5.0 | | | | 1.8 | |
Non-cash stock-based compensation expense | | | 49.7 | | | | 70.7 | | | | 43.6 | | | | 59.7 | | | | 49.7 | | | | 70.7 | |
Non-cash impairments of assets | | | 55.4 | | | | 5.0 | | | | — | | | | 6.6 | | | | 55.4 | | | | 5.0 | |
Non-cash provision for bad debt expense | | | 13.9 | | | | 2.6 | | | | 1.9 | | | | 4.7 | | | | 13.9 | | | | 2.6 | |
Loss on disposal of property and equipment | | | — | | | | — | | | | 3.3 | | |
Non-cash foreign currency (gains) losses | | | 2.3 | | | | (1.3 | ) | | | 6.2 | | | | 2.5 | | | | 2.3 | | | | (1.3 | ) |
Non-cash restructuring charges | | | 1.6 | | | | — | | | | 1.1 | | | | 1.9 | | | | 1.6 | | | | — | |
Non-cash litigation-related charges (reversals of excess reserves) | | | 5.6 | | | | (4.1 | ) | | | 3.0 | | |
Non-cash litigation-related charges (reversals of excess reserves), net | | | | (1.7 | ) | | | 5.6 | | | | (4.1 | ) |
Gain on extinguishment of debt | | | | 4.1 | | | | — | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | 1.1 | | | | 10.0 | | | | 26.4 | | | | 92.2 | | | | 1.1 | | | | 10.0 | |
Inventories | | | (10.5 | ) | | | 81.8 | | | | (32.2 | ) | | | 29.1 | | | | (10.5 | ) | | | 81.8 | |
Accounts payable and accrued liabilities | | | 55.2 | | | | (10.8 | ) | | | 38.7 | | | | 41.3 | | | | 55.2 | | | | (10.8 | ) |
Deferred income liabilities | | | (25.7 | ) | | | (2.7 | ) | | | 202.6 | | | | (19.3 | ) | | | (25.7 | ) | | | (2.7 | ) |
Other balance sheet changes | | | 65.3 | | | | (73.1 | ) | | | 54.0 | | | | 19.3 | | | | 65.3 | | | | (73.1 | ) |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 774.2 | | | | 695.4 | | | | 796.1 | | | | 906.5 | | | | 774.2 | | | | 695.4 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisitions and ventures, net of cash acquired and purchase price settlements | | | (46.3 | ) | | | (188.7 | ) | | | (176.1 | ) | | | (30.8 | ) | | | (46.3 | ) | | | (188.7 | ) |
Purchases of investments | | | (623.1 | ) | | | (96.8 | ) | | | — | | | | (1,350.9 | ) | | | (623.1 | ) | | | (96.8 | ) |
Proceeds from sales and maturities of investments | | | 369.5 | | | | 12.7 | | | | — | | | | 1,072.4 | | | | 369.5 | | | | 12.7 | |
Capital expenditures | | | (185.0 | ) | | | (217.1 | ) | | | (184.0 | ) | | | (201.3 | ) | | | (185.0 | ) | | | (217.1 | ) |
Change in restricted cash deposits | | | 26.9 | | | | (15.1 | ) | | | (74.5 | ) | | | 6.2 | | | | 26.9 | | | �� | (15.1 | ) |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (458.0 | ) | | | (505.0 | ) | | | (434.6 | ) | | | (504.4 | ) | | | (458.0 | ) | | | (505.0 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of debt | | | — | | | | 168.9 | | | | 380.0 | | | | — | | | | — | | | | 168.9 | |
Repayment of debt | | | (196.8 | ) | | | — | | | | (291.6 | ) | | | (121.0 | ) | | | (196.8 | ) | | | — | |
Debt issuance costs | | | — | | | | (0.3 | ) | | | (2.6 | ) | | | — | | | | — | | | | (0.3 | ) |
Payments of capital lease obligations | | | (6.7 | ) | | | (7.7 | ) | | | (5.0 | ) | | | (6.7 | ) | | | (6.7 | ) | | | (7.7 | ) |
Payments of dividends | | | (19.9 | ) | | | (20.5 | ) | | | (20.9 | ) | | | (24.7 | ) | | | (19.9 | ) | | | (20.5 | ) |
Distributions to minority interest holders | | | — | | | | — | | | | (4.5 | ) | |
Repurchases of common stock, including shares surrendered for tax withholdings | | | (169.8 | ) | | | (475.4 | ) | | | (231.3 | ) | |
Repurchases of common stock, including shares surrendered for tax | | | | | | | | | | | | | |
withholdings | | | | (231.0 | ) | | | (169.8 | ) | | | (475.4 | ) |
Proceeds from exercise of stock options | | | 29.0 | | | | 40.1 | | | | 51.4 | | | | 50.5 | | | | 29.0 | | | | 40.1 | |
Termination of interest rate swap agreements | | | — | | | | — | | | | (4.4 | ) | |
Excess tax benefits from stock-based compensation arrangements | | | 12.1 | | | | 34.4 | | | | 33.7 | | | | 25.2 | | | | 12.1 | | | | 34.4 | |
Other financing activities | | | | 1.3 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Net cash used in financing activities | | | (352.1 | ) | | | (260.5 | ) | | | (95.2 | ) | | | (306.4 | ) | | | (352.1 | ) | | | (260.5 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (34.4 | ) | | | 57.7 | | | | 11.9 | | | | (13.8 | ) | | | (34.4 | ) | | | 57.7 | |
| | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (70.3 | ) | | | (12.4 | ) | | | 278.2 | | | | 81.9 | | | | (70.3 | ) | | | (12.4 | ) |
Cash and cash equivalents at beginning of period | | | 551.5 | | | | 563.9 | | | | 285.7 | | | | 481.2 | | | | 551.5 | | | | 563.9 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 481.2 | | | $ | 551.5 | | | $ | 563.9 | | | | $563.1 | | | | $481.2 | | | | $551.5 | |
| | | | | | | | | | | | | | |
See accompanying notes.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated
| | | | | | | | | | | Additional
| | | | Treasury Stock
| | | | Total
| | Non-
| | | |
| | | | | | Additional
| | | | Treasury Stock
| | Other
| | | | | | | Common Stock(a) | | Paid-In
| | Retained
| | at Cost | | | | Equity of
| | Controlling
| | Total
| |
| | Common Stock | | Paid-In
| | Retained
| | at Cost | | Comprehensive
| | Unearned
| | | | | Shares | | Amount | | Capital | | Earnings | | Shares | | Amount | | AOCI(b) | | PRLC | | Interest | | Equity | |
| | Shares | | Amount | | Capital | | Earnings | | Shares | | Amount | | Income (Loss) | | Compensation | | Total | | | (millions) | |
| | (millions) | |
| |
Balance at April 1, 2006 | | | 109.7 | | | $ | 1.1 | | | $ | 783.6 | | | $ | 1,379.2 | | | | 4.3 | | | $ | (87.1 | ) | | $ | 15.5 | | | $ | (42.7 | ) | | $ | 2,049.6 | | |
Cumulative effect of adopting SAB 108(a) (Note 4) | | | | | | | | | | | | | | | (16.9 | ) | | | | | | | | | | | | | | | | | | | (16.9 | ) | |
Cumulative effect of adopting FAS 123R (Note 4) | | | | | | | | | | | (42.7 | ) | | | | | | | | | | | | | | | | | | | 42.7 | | | | — | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 400.9 | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | 54.3 | | | | | | | | | | |
Net realized and unrealized losses on derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | (29.3 | ) | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 425.9 | | |
Cash dividends declared | | | | | | | | | | | | | | | (20.9 | ) | | | | | | | | | | | | | | | | | | | (20.9 | ) | |
Repurchases of common stock | | | | | | | | | | | | | | | | | | | 3.5 | | | | (231.3 | ) | | | | | | | | | | | (231.3 | ) | |
Shares issued and equity grants made pursuant to stock compensation plans(b) | | | 2.2 | | | | | | | | 131.6 | | | | | | | | 0.1 | | | | (3.1 | ) | | | | | | | | | | | 128.5 | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2007 | | | 111.9 | | | $ | 1.1 | | | $ | 872.5 | | | $ | 1,742.3 | | | | 7.9 | | | $ | (321.5 | ) | | $ | 40.5 | | | $ | — | | | $ | 2,334.9 | | | | 111.9 | | | $ | 1.1 | | | $ | 872.5 | | | $ | 1,742.3 | | | | 7.9 | | | $ | (321.5 | ) | | $ | 40.5 | | | $ | 2,334.9 | | | $ | 4.0 | | | $ | 2,338.9 | |
Cumulative effect of adopting FIN 48 (Note 13) | | | | | | | | | | | | | | | (62.5 | ) | | | | | | | | | | | | | | | | | | | (62.5 | ) | | | | | | | | | | | | | | | (62.5 | ) | | | | | | | | | | | | | | | (62.5 | ) | | | | | | | (62.5 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 419.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 419.8 | | | | | | | | | | | | | | | | | | | | 2.1 | | | | | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | 135.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 135.8 | | | | | | | | | | | | | |
Net realized and unrealized losses on derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | (63.3 | ) | | | | | | | | | |
Net unrealized losses onavailable-for-sale investments | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.2 | ) | | | | | | | | | |
Net unrealized losses on defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.2 | ) | | | | | | | | | |
Net realized and unrealized gains (losses) on derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | (63.3 | ) | | | | | | | | | | | | |
Net unrealized gains (losses) on available- for-sale investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.2 | ) | | | | | | | | | | | | |
Net unrealized gains (losses) on defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.2 | ) | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 491.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 491.9 | | | | 2.1 | | | | 494.0 | |
Noncontrolling interest transactions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.6 | ) | | | (0.6 | ) |
Cash dividends declared | | | | | | | | | | | | | | | (20.3 | ) | | | | | | | | | | | | | | | | | | | (20.3 | ) | | | | | | | | | | | | | | | (20.3 | ) | | | | | | | | | | | | | | | (20.3 | ) | | | | | | | (20.3 | ) |
Repurchases of common stock | | | | | | | | | | | | | | | | | | | 6.4 | | | | (499.4 | ) | | | | | | | | | | | (499.4 | ) | | | | | | | | | | | | | | | | | | | 6.4 | | | | (499.4 | ) | | | | | | | (499.4 | ) | | | | | | | (499.4 | ) |
Shares issued and equity grants made pursuant to stock compensation plans(b) | | | 1.9 | | | | | | | | 145.1 | | | | | | | | | | | | | | | | | | | | | | | | 145.1 | | |
Shares issued and equity grants made pursuant to stock-based compensation plans(c) | | | | 1.9 | | | | | | | | 145.1 | | | | | | | | | | | | | | | | | | | | 145.1 | | | | | | | | 145.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 29, 2008 | | | 113.8 | | | $ | 1.1 | | | $ | 1,017.6 | | | $ | 2,079.3 | | | | 14.3 | | | $ | (820.9 | ) | | $ | 112.6 | | | $ | — | | | $ | 2,389.7 | | | | 113.8 | | | $ | 1.1 | | | $ | 1,017.6 | | | $ | 2,079.3 | | | | 14.3 | | | $ | (820.9 | ) | | $ | 112.6 | | | $ | 2,389.7 | | | $ | 5.5 | | | $ | 2,395.2 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 406.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 406.0 | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | (69.7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (69.7 | ) | | | | | | | | | | | | |
Net realized and unrealized gains on derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | 84.1 | | | | | | | | | | |
Net unrealized gains onavailable-for-sale investments | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.3 | | | | | | | | | | |
Net unrealized losses on defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.5 | ) | | | | | | | | | |
Net realized and unrealized gains (losses) on derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | 84.1 | | | | | | | | | | | | | |
Net unrealized gains (losses) on available- for-sale investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.3 | | | | | | | | | | | | | |
Net unrealized gains (losses) on defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | | | | | (0.5 | ) | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 420.2 | | | | | | | | 420.2 | |
Noncontrolling interest transactions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5.5 | ) | | | (5.5 | ) |
Cash dividends declared | | | | | | | | | | | | | | | | (19.8 | ) | | | | | | | | | | | | | | | (19.8 | ) | | | | | | | (19.8 | ) |
Repurchases of common stock | | | | | | | | | | | | | | | | | | | | 2.1 | | | | (145.8 | ) | | | | | | | (145.8 | ) | | | | | | | (145.8 | ) |
Shares issued and equity grants made pursuant to stock-based compensation plans(c) | | | | 1.8 | | | | | | | | 90.8 | | | | | | | | | | | | | | | | | | | | 90.8 | | | | | | | | 90.8 | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at March 28, 2009 | | | | 115.6 | | | $ | 1.1 | | | $ | 1,108.4 | | | $ | 2,465.5 | | | | 16.4 | | | $ | (966.7 | ) | | $ | 126.8 | | | $ | 2,735.1 | | | $ | — | | | $ | 2,735.1 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | 479.5 | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | | 37.5 | | | | | | | | | | | | | |
Net realized and unrealized gains (losses) on derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | (11.0 | ) | | | | | | | | | | | | |
Net unrealized gains (losses) on available- for-sale investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | | | | | | | | | | |
Net unrealized gains (losses) on defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.7 | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 420.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 506.7 | | | | | | | | 506.7 | |
Cash dividends declared | | | | | | | | | | | | | | | (19.8 | ) | | | | | | | | | | | | | | | | | | | (19.8 | ) | | | | | | | | | | | | | | | (29.7 | ) | | | | | | | | | | | | | | | (29.7 | ) | | | | | | | (29.7 | ) |
Repurchases of common stock | | | | | | | | | | | | | | | | | | | 2.1 | | | | (145.8 | ) | | | | | | | | | | | (145.8 | ) | | | | | | | | | | | | | | | | | | | 3.2 | | | | (231.0 | ) | | | | | | | (231.0 | ) | | | | | | | (231.0 | ) |
Shares issued and equity grants made pursuant to stock compensation plans(b) | | | 1.8 | | | | | | | | 90.8 | | | | | | | | | | | | | | | | | | | | | | | | 90.8 | | |
Shares issued and equity grants made pursuant to stock-based compensation plans(c) | | | | 2.2 | | | | 0.1 | | | | 135.4 | | | | | | | | | | | | | | | | | | | | 135.5 | | | | | | | | 135.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 28, 2009 | | | 115.6 | | | $ | 1.1 | | | $ | 1,108.4 | | | $ | 2,465.5 | | | | 16.4 | | | $ | (966.7 | ) | | $ | 126.8 | | | $ | — | | | $ | 2,735.1 | | |
Balance at April 3, 2010 | | | | 117.8 | | | $ | 1.2 | | | $ | 1,243.8 | | | $ | 2,915.3 | | | | 19.6 | | | $ | (1,197.7 | ) | | $ | 154.0 | | | $ | 3,116.6 | | | $ | — | | | $ | 3,116.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | NetIncludes Class A and Class B common stock. In Fiscal 2010, 1.2 million shares of $3.6 million tax effect.Class B common stock was converted into an equal number of shares of Class A common stock pursuant to the terms of the security (see Note 18). |
|
(b) | | Accumulated other comprehensive income (loss). |
|
(c) | | Includes income tax benefits relating to the exercisestock-based compensation arrangements of employee stock options of approximately $25 million in Fiscal 2010, $12 million in Fiscal 2009 and $34 million in Fiscal 2008 and $33 million in Fiscal 2007.2008. |
See accompanying notes.
F-5
POLO RALPH LAUREN CORPORATION
| |
1. | Description of Business |
Polo Ralph Lauren Corporation (“PRLC”) is a global leader in the design, marketing and distribution of premium lifestyle products, including men’s, women’s and children’s apparel, accessories, fragrances and home furnishings. PRLC’s long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands and international markets. PRLC’s brand names includePolo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren Women’s Collection, Black Label, Blue Label, Lauren by Ralph Lauren, RRL, RLX, Rugby, Ralph Lauren Childrenswear, American Living, ChapsandClub Monaco, among others. PRLC and its subsidiaries are collectively referred to herein as the “Company,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
The Company classifies its businesses into three segments: Wholesale, Retail and Licensing. The Company’s wholesale sales are made principally to major department and specialty stores located throughout the U.S., Europe and Asia. The Company also sells directly to consumers through full-price and factory retail stores located throughout the U.S., Canada, Europe, South America and Asia, through concessions-based shop-within-shops located primarily in Asia, and through its retail internet sites located at www.RalphLauren.com and www.Rugby.com. In addition, the Company often licenses the right to unrelated third parties to use its various trademarks in connection with the manufacture and sale of designated products, such as apparel, eyewear and fragrances, in specified geographical areas for specified periods.
Basis of Consolidation
The consolidated financial statements present the financial position, results of operations and cash flows of the Company and all entities in which the Company has a controlling voting interest. The consolidated financial statements also include the accounts of any variable interest entities in which the Company is considered to be the primary beneficiary and such entities are required to be consolidated in accordance with accounting principles generally accepted in the U.S. (“US GAAP”).
Prior to the Company’s acquisition of the minority ownership interest in Polo Ralph Lauren Japan Corporation (“PRL Japan”) in May 2007, the Company consolidated PRL Japan, formerly a 50%-owned venture with Onward Kashiyama Co. Ltd and its affiliates (“Onward Kashiyama”) and The Seibu Department Stores, Ltd (“Seibu”), pursuant to the provisions of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). PRL Japan holds the master license to conduct the Company’s business in Japan. Additionally, prior to the acquisition of the minority ownership interests in Ralph Lauren Media, LLC (“RL Media”) in March 2007, the Company consolidated RL Media, formerly a 50%-owned venture with NBC-Lauren Media Holdings, Inc., a subsidiary wholly owned by the National Broadcasting Company, Inc. (“NBC”) and Value Vision Media, Inc. (“Value Vision”), pursuant to FIN 46R. RL Media conducts the Company’se-commerce initiatives through RalphLauren.com and Rugby.com. See Note 5 for further discussion of the acquisitions referred to above, including their respective bases of consolidation in the fiscal years presented.
All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company utilizes a52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2010 ended on April 3, 2010 and reflected a 53-week period (“Fiscal 2010”); fiscal year 2009 ended on March 28, 2009 and reflected a 52-week period (“Fiscal 2009”); and fiscal year 2008 ended on March 29, 2008 and also reflected a 52-week period (“Fiscal 2008”);. The inclusion of the 53rd week in Fiscal 2010 resulted in incremental revenues of approximately $70 million and fiscal year 2007 ended on March 31, 2007 and also reflected a 52-week period (“Fiscal 2007”).increased net income of approximately $13 million.
In April 2009, the Company performed an internal legal entity reorganization of certain of its wholly owned Japan subsidiaries. As a result of the reorganization, the Company’s former Polo Ralph Lauren Japan Corporation and Impact 21 Co., Ltd. subsidiaries were merged into a new wholly owned subsidiary named Polo Ralph Lauren Kabushiki Kaisha (“PRL KK”). The financial position and operating results of the Company’s consolidated PRL Japan and Impact 21 Co., Ltd. (“Impact 21”) entities located in JapanKK entity are reported on a one-month lag. Accordingly, the Company’s operating
F-6
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
results for Fiscal 2010, Fiscal 2009 and Fiscal 2008 include the operating results of PRL Japan and Impact 21KK for the twelve-month periods ended February 28, 2010, February 28, 2009 and February 29, 2008, respectively, and the Company’s operating results for Fiscal 2007 include the operating results of PRL Japan for the twelve-month period ended February 28, 2007.respectively. The net effect of this reporting lag is not material to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ materially from those estimates.
F-6
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant estimates inherent in the preparation of the consolidated financial statements include reserves for customer returns, discounts,end-of-season markdowns and operational chargebacks; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; accounting for income taxes and related uncertain tax positions; the valuation of stock-based compensation and related expected forfeiture rates; reserves for restructuring; and accounting for business combinations.
Reclassifications
On December 31, 2009, the Company acquired certain assets from Dickson Concepts International Limited (“Dickson”), its former licensee of Polo-branded apparel in Asia-Pacific (excluding Japan), and assumed direct control of its business in that region (the “Asia-Pacific Licensed Operations Acquisition”). Dickson formerly conducted the Company’s business in Asia-Pacific (excluding Japan) through a combination of freestanding owned stores, freestanding licensed stores and shop-within-shops at department stores or malls. The terms of trade for shop-within-shops were largely conducted on a concessions basis, whereby inventory continued to be owned by the Company (not the department store) until ultimate sale to the end consumer and the salespeople involved in the sales transaction were employees of the Company. As management believes that this concessions-based sales model possesses more attributes of a retail model than a wholesale model, it was determined that all concessions-based sales arrangements (including those conducted in Japan) should be classified within the Company’s Retail segment, in contrast to the historical classification within its Wholesale segment. Accordingly, effective with the closing of the Asia-Pacific Licensed Operations Acquisition at the beginning of the fourth quarter of Fiscal 2010, the Company restated its segment presentation to reclassify concessions-based sales arrangements to its Retail segment from its Wholesale segment. There have been no changes in total revenue, total operating income or total assets as a result of this change. Segment information for Fiscal 2009 has been recast to conform to the current period’s presentation. In periods prior to Fiscal 2009, segment information has not been recast to conform to the current period’s presentation, as it is impracticable to do so. See Note 22 for further discussion of the Company’s segment information.
Certain other reclassifications have been made to the prior years’ financial information in order to conform to the current year’s presentation.presentation, including to reflect the adoption of recent accounting guidance related to noncontrolling interests.
| |
3. | Summary of Significant Accounting Policies |
Revenue Recognition
Revenue is recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable, and collectibility is reasonably assured.
Revenue within the Company’s Wholesale segment is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of returns, discounts,end-of-season markdowns, operational chargebacks and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates forend-of-season markdown reserves are based on historical trends, seasonal results, an evaluation of current economic and market conditions and retailer performance. Estimates for operational chargebacks are based on actual notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on a quarterly basis. The Company’s historical estimates of these costs have not differed materially from actual results.
Retail store and concessions-based shop-within-shop revenue is recognized net of estimated returns at the time of sale to consumers.E-commerce revenue from sales of products ordered through the Company’s retail internet sites at RalphLauren.com and Rugby.com is recognized upon delivery and receipt of the shipment by its customers. Such revenue also is reduced by an estimate of returns.
Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being
F-7
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property.
Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (a) contractually guaranteed minimum royalty levels or (b) actual sales and royalty data, or estimates thereof, received from the Company’s licensees.
The Company accounts for sales and other related taxes on a net basis, excluding such taxes from revenue.
F-7
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 foreign currency exchange contracts related to the hedging of inventory purchases also are recognized within cost of goods sold when the inventory being hedged is sold. The costs of selling merchandise, including those associated with preparing the merchandise for sale, such as picking, packing, warehousing and order charges, are included in selling, general and administrative (“SG&A”) expenses.
Shipping and Handling Costs
The costs associated with shipping goods to customers are reflected as a component of SG&A expenses in the consolidated statements of operations. Shipping and handling costs incurred approximated $83 million in Fiscal 2010, $95 million in Fiscal 2009 and $108 million in Fiscal 2008 and $92 million in Fiscal 2007.2008. Shipping and handling charges billed to customers are included in revenue.
Advertising Costs
In accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”)No. 93-7, “Reporting on Advertising Costs,” advertising costs, including the costs to produce advertising, are expensed when the advertisement is first exhibited. In accordance with Emerging Issues Task Force (“EITF”) IssueNo. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” costsCosts ofout-of-store advertising paid to wholesale customers under cooperative advertising programs are expensed as an advertising cost if both the identified advertising benefit is sufficiently separable from the purchase of the Company’s products by customers and the fair value of such benefit is measurable. Otherwise, such costs are reflected as a reduction of revenue. Costs of in-store advertising paid to wholesale customers under cooperative advertising programs are not included in advertising costs, but are reflected as a reduction of revenues since the benefits are not sufficiently separable from the purchases of the Company’s products by customers.
Advertising expense amounted to approximately $157 million for Fiscal 2010, $171 million for Fiscal 2009 and $188 million for Fiscal 2008 and $181 million for Fiscal 2007.2008. Deferred advertising costs, which principally relate to advertisements that have not yet been exhibited or services that have not yet been received, were approximately $6$4 million and $8$6 million at the end of Fiscal 20092010 and Fiscal 2008,2009, respectively.
Foreign Currency Translation and Transactions
The financial position and operating results of foreign operations are primarily consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenue and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses are included in the consolidated statements of stockholders’ equity as a component of accumulated other comprehensive income (loss). Gains and losses on translation of intercompany loans with foreign subsidiaries of a long-term investment nature also are included within this component of stockholders’ equity.
The Company also recognizes gains and losses on transactions that are denominated in a currency other than the respective entity’s functional currency. Foreign currency transaction gains and losses also include amounts realized on the settlement of intercompany loans with foreign subsidiaries that are either of a short-term investment nature or were previously of a long-term investment nature and deferred as a component of stockholders’ equity. Foreign currency transaction gains and losses are recognized in earnings and separately disclosed in the consolidated statements of operations.
F-8
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Comprehensive Income (Loss)
Comprehensive income (loss), which is reported in the consolidated statements of stockholders’ equity, consists of net income (loss) and other gains and losses affecting equity that, under US GAAP, are excluded from net income (loss). The components of other comprehensive income (loss) for the Company primarily consist of foreign currency translation gains and losses; unrealized gains and losses onavailable-for-sale investments; unrealized gains and losses related to the accounting for defined benefit plans; and deferred gains and losses on hedging instruments, such as forward foreign currency exchange contracts designated as cash flow hedges and changes in the fair value offoreign currency gains (losses) on the Company’s Euro-denominated debt designated as a hedge of changes in the fair value of the Company’sits net investment in certain of its European subsidiaries.
Net Income Per Common Share
Net income per common share is determined in accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, “Earnings per Share” (“FAS 128”). Under the provisions of FAS 128, basicBasic net income per common share is computed by dividing the net income applicable to common shares after preferred dividend requirements, if any, 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 effects of outstanding stock options, restricted stock, restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to those shares used in calculating diluted net income per common share as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | (millions) | | | | | | | (millions) | | | |
|
Basic | | | 99.2 | | | | 102.3 | | | | 104.4 | | | | 98.9 | | | | 99.2 | | | | 102.3 | |
Dilutive effect of stock options, restricted stock and restricted stock units | | | 2.1 | | | | 2.9 | | | | 3.2 | | | | 2.4 | | | | 2.1 | | | | 2.9 | |
| | | | | | | | | | | | | | |
Diluted shares | | | 101.3 | | | | 105.2 | | | | 107.6 | | | | 101.3 | | | | 101.3 | | | | 105.2 | |
| | | | | | | | | | | | | | |
Options to purchase shares of 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. In addition, the Company has outstanding restricted stock units that are issuable only upon the achievement of certain serviceand/or performance goals. Such performance-based restricted stock units are included in the computation of diluted shares only to the extent the underlying performance conditions (a) are satisfied prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of the end of Fiscal 2010, Fiscal 2009 and Fiscal 2008, and Fiscal 2007, there was an aggregate of approximately 1.2 million, 3.5 million 1.5 million and 1.01.5 million, respectively, of additional shares issuable upon the exercise of anti-dilutive optionsand/or and the contingent vesting of restricted stock and performance-based restricted stock units that were excluded from the diluted share calculations.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with FAS No. 123R, “Share-Based Payment” (“FAS 123R”), which requiresexpenses all share-based payments to employees and non-employee directors to be expensed based on the grant date fair value of the awards over the requisite service period, adjusted
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for estimated forfeitures. The Company uses the Black-Scholes valuation method to determine the grant date fair value of its stock option awards.
See Note 1920 for further discussion of the Company’s stock-based compensation.
F-9
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of three months90 days or less, including investments in debt securities. Investments in debt securities are diversified among high-credit quality securities in accordance with the Company’s risk-management policies, and primarily include commercial paper and money market funds.
Restricted Cash
From time to time, the Company is 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 of March 28, 2009 and March 29, 2008, the Company had approximately $72 million and $110 million of cash held in escrow, respectively. Such cash has been classified as restricted cash and reported as a component of either other current assets or non-current assets in the Company’s consolidated balance sheets.
Short-term Investments
Short-term investments consist of investments which the Company expects to convert into cash within one year, including time deposits which have a maturity greater than three months. Short-term investments classified as available-for-sale are reported at fair value. Short-term investments classified as held-to-maturity are reported at cost, which approximates market value. Cash inflows and outflows related to the sale and purchase of short-term investments are classified as investing activities within the Company’s consolidated statements of cash flows.
Accounts Receivable
In the normal course of business, the Company extends credit to customers that satisfy defined credit criteria. Accounts receivable, net, as shown in the Company’s consolidated balance sheets, is net of certain reserves and allowances. These reserves and allowances consist of (a) reserves for returns, discounts,end-of-season markdowns and operational chargebacks and (b) allowances for doubtful accounts. These reserves and allowances are discussed in further detail below.
A reserve for sales returns is determined based on an evaluation of current market conditions and historical returns experience. Charges to increase the reserve are treated as reductions of revenue.
A reserve for trade discounts is determined based on open invoices where trade discounts have been extended to customers, and charges to increase the reserve are treated as reductions of revenue.
Estimatedend-of-season markdown charges are included as reductions of revenue. The related markdown provisions are based on retail sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions.
A reserve for operational chargebacks represents various deductions by customers relating to individual shipments. Charges to increase this reserve, net of expected recoveries, are included as reductions of revenue. The reserve is based on actual notifications of order fulfillment discrepancies and past experience.
F-10
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A rollforward of the activity in the Company’s reserves for returns, discounts,end-of-season markdowns and operational chargebacks is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | (millions) | | | | | | | (millions) | | | |
|
Beginning reserve balance | | $ | 161.1 | | | $ | 129.4 | | | $ | 107.5 | | | $ | 170.4 | | | $ | 161.1 | | | $ | 129.4 | |
Amount charged against revenue to increase reserve | | | 480.2 | | | | 496.7 | | | | 388.4 | | | | 460.1 | | | | 480.2 | | | | 496.7 | |
Amount credited against customer accounts to decrease reserve | | | (461.0 | ) | | | (473.4 | ) | | | (369.2 | ) | | | (443.7 | ) | | | (461.0 | ) | | | (473.4 | ) |
Foreign currency translation | | | (9.9 | ) | | | 8.4 | | | | 2.7 | | | | (0.8 | ) | | | (9.9 | ) | | | 8.4 | |
| | | | | | | | | | | | | | |
Ending reserve balance | | $ | 170.4 | | | $ | 161.1 | | | $ | 129.4 | | | $ | 186.0 | | | $ | 170.4 | | | $ | 161.1 | |
| | | | | | | | | | | | | | |
An allowance for doubtful accounts is determined through analysis of periodic aging of accounts receivable, assessments of collectibility based on an evaluation of historic and anticipated trends, the financial condition of the Company’s customers, and an evaluation of the impact of economic conditions. A rollforward of the activity in the Company’s allowance for doubtful accounts is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (millions) | | | | | (millions) | | | |
|
Beginning reserve balance | | $ | 10.9 | | | $ | 8.7 | | | $ | 7.5 | | | $ | 20.5 | | | $ | 10.9 | | | $ | 8.7 | |
Amount charged to expense to increase reserve(a) | | | 13.9 | | | | 2.6 | | | | 1.9 | | | | 4.7 | | | | 13.9 | | | | 2.6 | |
Amount written off against customer accounts to decrease reserve | | | (3.0 | ) | | | (1.6 | ) | | | (1.2 | ) | | | (5.1 | ) | | | (3.0 | ) | | | (1.6 | ) |
Foreign currency translation | | | (1.3 | ) | | | 1.2 | | | | 0.5 | | | | — | | | | (1.3 | ) | | | 1.2 | |
| | | | | | | | | | | | | | |
Ending reserve balance | | $ | 20.5 | | | $ | 10.9 | | | $ | 8.7 | | | $ | 20.1 | | | $ | 20.5 | | | $ | 10.9 | |
| | | | | | | | | | | | | | |
| | |
(a) | | Amounts charged to bad debt expense are included within SG&A expense in the consolidated statements of operations. |
Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department and specialty stores across the U.S., Canada, Europe and Asia and extends credit based on an evaluation of each customer’s financial capacity and condition, usually without requiring collateral. In its 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 sevenfive key department-store customers that generate significant sales volume. For Fiscal 2009,2010, these customers in the aggregate contributed approximately 50%45% of all wholesale revenues. Further, as of March 28, 2009,April 3, 2010, the Company’s sevenfive key department-store customers represented approximately 40%30% of gross accounts receivable.
Inventories
The Company holds inventory that is sold through wholesale distribution channels to major department stores and specialty retail stores, including its own retail stores. The Company also holds retail inventory that is sold in its own stores directly to consumers. Wholesale and retail inventories are stated at the lower of cost or estimated realizable value. Cost for wholesale inventories is determined using thefirst-in, first-out (“FIFO”) method andvalue with cost for retail inventories isprimarily determined on a moving-averageweighted-average cost basis.
The Company continually evaluates the composition of its inventories, assessing slow-turning product and all fashion product. 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 the value of current orders in-house relating to future sales of inventory. Estimates may differ from actual results due to quantity,
F-11
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
quality and mix of products in inventory, consumer and retailer preferences and market conditions. The Company’s historical estimates of these costs and its provisions have not differed materially from actual results.
Reserves for inventory shrinkage, representing the risk over physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Investments
Investments in companies in which the Company has significant influence, but less than a controlling voting interest, are accounted for using the equity method. This is generally presumed to exist when the Company owns between 20% and 50% of the investee. However, as a matter of policy, if the Company had a greater than 50% ownership interest in an investee and the minoritynoncontrolling shareholders held certain rights that allowed them to participate in theday-to-day operations of the business, the Company would also generally use the equity method of accounting.
Under the equity method, only the Company’s investment in and amounts due to and from the equity investee are included in the consolidated balance sheets; only the Company’s share of the investee’s earnings (losses) is included in the consolidated operating results; and only the dividends, cash distributions, loans or other cash received from the investee and additional cash investments, loan repayments or other cash paid to the investee are included in the consolidated cash flows.
Investments in companies in which the Company does not have a controlling interest, or is unable to exert significant influence, are accounted for asavailable-for-sale investments and, if the investments are publicly traded and there are no resale restrictions greater than one year, recorded at fair value. If resale restrictions greater than one year exist, or if the investment is not publicly traded, the investment is accounted for at cost.
Investments in debt securities are recorded at cost, adjusted for the amortization of premiums and discounts, which approximates fair value. Investments in debt securities that the Company has the intent and ability to retain until maturity are classified asheld-to-maturity.
The Company evaluates investments held in unrealized loss positions forother-than-temporary impairment on a quarterly basis. Such evaluation involves a variety of considerations, including assessments of risks and uncertainties associated with general economic conditions and distinct conditions affecting specific issuers. Factors considered by the Company include (i) the length of time and the extent to which the fair value has been below cost, (ii) the financial condition, credit worthiness and near-term prospects of the issuer, (iii) the length of time to maturity, (iv) future economic conditions and market forecasts, and (v) the Company’s intent and ability to retain its investment for a period of time sufficient to allow for recovery of market value, and (vi) an assessment of whether it is more-likely-than-not that the Company will be required to sell its investment before recovery of market value. The Company has not recognized any significantother-than-temporary impairment charges in any of the fiscal years presented.
Equity-method Investments
The Company’s investments include a joint venture named the Ralph Lauren Watch and Jewelry Company, S.A.R.L. (the “RL Watch Company”), formed with Financiere Richemont SA (“Richemont”), the Swiss Luxury Goods Group, in March 2007. The joint venture is a Swiss corporation, whose purpose is to design, develop, manufacture, sell and distribute luxury watches and fine jewelry through Ralph Lauren boutiques, as well as through fine independent jewelry and luxury watch retailers throughout the world. The Company accounts for its 50% interest in the RL Watch Company under the equity method of accounting, and such investment is classified in other non-current assets in the consolidated balance sheets. Royalty payments due to the Company under the related license agreement for use of certain of the Company’s trademarks will beare reflected as licensing revenue within the consolidated statementstatements of operations. The RL Watch Company commenced operations during the first quarter of Fiscal 2008 and products were introduced in January 2009.
Available-for-sale Investments
Investments also consisted of auction rate securities at a fair value of $2.3 million as of March 28, 2009 and $14.5 million as of March 29, 2008. Auction rate securities have characteristics similar to short-term investments because, at pre-determined short-term intervals, there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end of such periods, the Company chooses to either roll over its
F-12
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
holdings or seeks to redeem the investments for cash. Notwithstanding these short-term characteristics, the Company has classified these securities as non-current within other assets in its consolidated balance sheet as current market conditions call into question its ability to redeem these investments for cash within the next twelve months. Auction rate securities are categorized asavailable-for-sale investments and are stated at fair value. Unrealized gains or losses are classified as a component of accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets, and related realized gains or losses are classified as a component of interest and other income, net, in the Company’s 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.
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, fixtures, computer software and computer equipment; from three to ten years for machinery and equipment; 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 life of the lease.
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”).recoverable. In evaluating long-lived assets for recoverability, including finite-lived intangibles as described below, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal are reported at the lower of carrying value or fair value less costs to sell.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are accounted for in accordance with the provisions of FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). At acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consist of license agreements, customer relationships, non-compete agreements and order backlog. The fair value of these intangible assets is 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 is recorded as goodwill. Under FAS 142, goodwill,Goodwill, including any goodwill included in the carrying value of investments accounted for using the equity method of accounting, 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 based on comparisons of their respective fair values to their carrying values. 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 amounts may not be recoverable in accordance with FAS 144.recoverable. See discussion of the Company’s accounting policy for long-lived asset impairment as described earlier under the caption“Property and Equipment, Net.”
Officers’ Life Insurance Policies
The Company maintains several whole-life and certain split-dollar life insurance policies for select senior executives. Whole-life policies are recorded at their cash-surrender value, and split-dollarThese policies are recorded at the lesser of their cash-surrender value or aggregate premiumspaid-to-date in the consolidated balance sheets. As of the end of both Fiscal 20092010 and Fiscal 2008,2009, amounts of approximately $33 million and $48 million, respectively,
F-13
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
relating to officers’ split-dollar life insurance policies held by the Company were classified within other non-current assets in the consolidated balance sheets.
In May 2009, the Company liquidated all of its whole-life insurance policies held at cash-surrender value. As of the end of Fiscal 2009, the related asset balance of approximately $16 million was classified within short-term investments in the consolidated balance sheet.
Income Taxes
Income taxes are provided using the asset and liability method prescribed by FAS No. 109, “Accounting for Income Taxes” (“FAS 109”).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 US GAAP and tax reporting. Deferred income taxes reflect the tax effect of certain net operating loss, capital loss and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and
F-13
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 to those balances.
Effective April 1, 2007,In determining the income tax provision for financial reporting purposes, the Company adopted FIN No. 48, “Accountingestablishes a reserve for Uncertainty in Income Taxes — An Interpretation of FAS No. 109” (“FIN 48”). Upon the adoption of the provisions of FIN 48, the Company changed its policy related to the accounting for incomeuncertain tax uncertainties.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 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”,“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, if any, are recorded within the provision for income taxes in the Company’s consolidated statements of operations and are classified on the consolidated balance sheets with the related liability for unrecognized tax benefits.
See Note 13 for further discussion of the Company’s income taxes and the adoption of FIN 48.taxes.
Leases
The Company leases certain facilities and equipment, including its retail stores. Such leasing arrangements are accounted for under the provisions of FAS No. 13, “Accounting for Leases,” and other related authoritative accounting literature (collectively, “FAS 13”). Certain of the Company’s leases contain renewal options, rent escalation clausesand/or landlord incentives. Rent expense for noncancelable operating leases with scheduled rent increasesand/or landlord incentives is recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date. The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred rent liability. As of the end of Fiscal 20092010 and Fiscal 2008,2009, deferred rent
F-14
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
obligations of approximately $125$148 million and $112$137 million, respectively, were classified within other non-current liabilities in the Company’s consolidated balance sheets.
For leases in whichIn certain lease arrangements the Company is involved with the construction of the building (generally on land owned by the landlord), the Company accounts for the lease during the construction period under the provisions of EITFNo. 97-10, “The Effect of Lessee Involvement in Asset Construction”(“EITF 97-10”). If the Company concludes that it has substantively all of the risks of ownership during construction of a leased property and therefore is deemed the owner of the project for accounting purposes, it records an asset and related financing obligation for the amount of total project costs related toconstruction-in-progress and the pre-existing building. Once construction is complete, the Company considers the requirements under FAS No. 98, “Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of Lease Term, and Initial Direct Costs of Direct Financing Leases,” for sale-leaseback treatment.treatment, including the transfer back of all risks of ownership and whether the Company has any continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback treatment, the Company continues to amortize the financing obligation and depreciate the building over the lease term.
Derivatives and Financial Instruments (including Derivatives)
The Company accounts for derivative instruments in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and subsequent amendments (collectively, “FAS 133”). FAS 133 requires thatrecords all derivative instruments be recognized on the balance sheet at fair value. In addition, FAS 133 provides that, for derivative instruments that qualify for hedge accounting, the effective portion of changes in the fair value areis either (a) offset against the changes in fair value of the hedged assets, liabilities, or firm commitments through earnings or (b) recognized in stockholders’ equity as a component of accumulated other comprehensive income until the hedged item is
F-14
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows, respectively.
Each derivative instrument entered into by the Company which qualifies for hedge accounting is considered highly effective at reducing the risk associated with the exposure being hedged. For each derivative designated as a hedge, the Company formally documents the risk management objective and strategy, including the identification of the hedging instrument, the hedged item and the risk exposure, as well as how effectiveness is to be assessed prospectively and retrospectively. To assess effectiveness, the Company uses non-statistical methods, including the dollar-offset method, which compare the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in fair value or cash flows is assessed and documented by the Company at least on a quarterly basis. Any ineffectivenessTo the extent that a derivative contract designated as a hedge is not considered to be effective, any changes in hedging relationshipsfair value relating to the ineffective portion is immediately recognized immediately in earnings.earnings within foreign currency gains (losses). If it is determined that a derivative has not been highly effective, and will continue not to be highly effective at hedging the designated exposure, hedge accounting is discontinued. If a hedge relationship is terminated, the change in fair value of the derivative previously recorded in accumulated other comprehensive income is realized when the hedged item affects earnings consistent with the original hedging strategy, unless the forecasted transaction is no longer probable of occurring in which case the accumulated amount is immediately recognized in earnings.
The Company does not enter into derivative transactions for speculative or trading purposes. All undesignated hedges of the Company are entered into to hedge specific economic risks, such as foreign currency exchange and interest rate risk. The Company does not enter into derivative transactions for speculative or trading purposes. Changes in fair value relating to undesignated derivative instruments are immediately recognized in earnings.
As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The Company’s established policies and procedures for mitigating credit risk on derivative transactions include continually reviewing and assessing the creditworthiness of counterparties. As of March 28, 2009, the Company has approximately 48% of its derivative instruments in asset positions placed with one creditworthy financial institution.
For cash flow reporting purposes, the Company classifies proceeds received or amounts paid upon the settlement of a derivative instrument in the same manner as the related item being hedged.
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The carrying value of the Company’s financial instruments approximates fair value, except for certain differences relating to fixed-rate debt, investments in other entities accounted for using the equity method of accounting and certain other financial instruments. However, other than differences in the fair value of fixed-rate debt as disclosed in Note 14, these differences were not significant as of April 3, 2010 or March 28, 2009 or March 29, 2008.2009. The fair value of financial instruments generally is determined by reference to fair market values resulting from the trading of the instruments on a national securities exchange or anover-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates derived through the use of present value or other valuation techniques.
See Note 1516 for further discussion of the Company’s derivatives and financial instruments.instruments, including derivatives.
| |
4. | Recently Issued Accounting Standards |
Consolidation of Variable Interest Entities
In June 2009, the Financial Accounting Standards Board (“FASB”) issued revised guidance for accounting for a variable interest entity (“VIE”) (formerly referred to as Statement of Financial Accounting Standards (“FAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)”), which has been codified within Accounting Standards Codification (“ASC”) topic 810, “Consolidation” (“ASC 810”). The revised guidance within ASC 810 changes the
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approach to determining the primary beneficiary of a VIE, replacing the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. ASC 810 also now requires ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE, as well as additional disclosures about an enterprise’s involvement in VIEs. The revised accounting guidance within ASC 810 is effective for the Company as of the beginning of fiscal year 2011 and its adoption is not expected to have a material effect on the Company’s consolidated financial statements.
Fair Value MeasurementMeasurements
In September 2006, the FASB issued ASC topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) (formerly referred to as FAS No. 157, “Fair Value Measurements” (“FAS 157” or the “Standard”)Measurements,” as amended). FAS 157ASC 820 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date within an identified principal or most advantageous market, establishes a framework for measuring fair value in accordance with US GAAP and expands disclosures regarding fair value measurements. The Company adopted the provisions of FAS 157ASC 820 for all of its financial assets and liabilities within the Standard’s scope as of the beginning of Fiscal 2009 (March 30, 2008). FAS 157 will become effectiveIn addition, the Company adopted the provisions of ASC 820 for all of its nonfinancial assets and liabilities of the Company within the scope of FAS 157 as of the beginning of Fiscal 2010 (March 29, 2009). The adoption of the provisions of FAS 157 effective during Fiscal 2009ASC 820 did not have a significant impact on the Company’s consolidated financial statements. The Company does not expect that the provisions of FAS 157 to be adopted in Fiscal 2010 will have a material effect on its consolidated financial statements. See Note 15 for further discussion onof the impact of adoption on the Company’s consolidated financial statements.
Business Combinations and Noncontrolling Interests
In December 2007, the FASB issued ASC topic 805, “Business Combinations” (“ASC 805”) (formerly referred to as FAS No. 141(R), “Business Combinations,” as amended, which replaces FAS No. 141). ASC 805 was issued to create greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable and relevant information for investors and other users of financial statements. ASC 805 establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes resulting from ASC 805 include the need for the acquirer to record 100% of all assets and liabilities of the acquired business, including goodwill, generally at fair value for all business combinations (whether partial, full or step acquisitions); the need to recognize contingent consideration at fair value on the acquisition date and, for certain arrangements, to recognize changes in fair value in earnings until settlement; and the need for acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. ASC 805 also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. The Company adopted the provisions of ASC 805 as of the beginning of Fiscal 2010 (March 29, 2009). The adoption of the provisions of ASC 805 did not have a significant impact on the Company’s consolidated financial statements. See Note 5 for further discussion of the business combination entered into by the Company during Fiscal 2010.
In December 2007, the FASB issued revised guidance for accounting for noncontrolling interests (formerly referred to as FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51”), which has been codified within ASC 810. The revised guidance within ASC 810 establishes accounting and reporting standards for noncontrolling interests in a subsidiary (previously referred to as “minority interests”) and for the deconsolidation of a subsidiary, to ensure consistency with the requirements of ASC 805. ASC 810 states that noncontrolling interests should be classified as a separate component of equity, and establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted the revised accounting guidance for noncontrolling interests within ASC 810 as of the beginning of Fiscal 2010 (March 29, 2009). The new guidance
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
is being applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption did not have a significant impact on the Company’s consolidated financial statements, but could impact the accounting for future acquisitions in which the Company does not acquire 100% of an entity, the future deconsolidation of a subsidiary and a future change in the Company’s ownership percentage of a subsidiary.
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN 48, which clarifiesrevised guidance for the accounting for uncertainty in income tax positions. positions (formerly referred to as FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FAS No. 109” (“FIN 4848”)), which has been codified within ASC topic 740, “Income Taxes” (“ASC 740”). The revised guidance within ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48revised accounting guidance for uncertainty in income taxes within ASC 740 as of the beginning of Fiscal 2008 (April 1, 2007) and recorded a related $62.5 million reduction in retained earnings as the cumulative effect to adjust its net liability for unrecognized tax benefits as of April 1, 2007. This adjustment consisted of a $99.9 million increase to the Company’s liabilities for unrecognized tax benefits, offset in part by a $37.4 million increase to the Company’s deferred tax assets principally representing the value of future tax benefits that could be realized at the U.S. federal level if the related liabilities for unrecognized tax benefits at the state and local levels ultimately are required to be settled. See Note 13 for further discussion of the Company’s income taxes and the adoption of FIN 48.
Financial Statement Misstatements
In September 2006, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify and evaluate financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying and evaluating the effects of financial statement misstatements: (i) the balance sheet (“iron curtain”) method and (ii) the income statement (“rollover”) method. The iron curtain method quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the reporting period. The rollover method quantifies a misstatement based on the amount of the error originating in the current period income statement, including the reversing effect of prior year misstatements. The use of the rollover method can lead to the accumulation of
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
misstatements in the balance sheet. Prior to the adoption of SAB 108, the Company historically used the rollover method for quantifying and evaluating identified financial statement misstatements.
By issuing SAB 108, the SEC staff established an approach that requires quantification and evaluation of financial statement misstatements based on the effects of the misstatements under both the iron curtain and rollover methods. This model is commonly referred to as a “dual approach.”
SAB 108 required companies to initially apply its provisions either by (i) restating prior financial statements as if the dual approach had always been applied or (ii) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment recorded to the opening balance of retained earnings. The Company adopted the provisions of SAB 108 in Fiscal 2007 and elected to record the effects of applying SAB 108 using the cumulative effect transition method and, as such, recorded a $16.9 million reduction in retained earnings as of April 2, 2006. The following table summarizes the effects of applying SAB 108 for each period in which the identified misstatement originated through April 2, 2006:
| | | | | | | | | | | | |
| | Period in which
| | | | |
| | Misstatement Originated(a) | | | | |
| | Cumulative
| | | Fiscal Year
| | | Adjustment
| |
| | Prior to
| | | Ended
| | | Recorded as of
| |
| | April 2,
| | | April 1,
| | | April 2,
| |
| | 2005 | | | 2006 | | | 2006 | |
| | (millions) | |
|
Inventory(b) | | $ | (9.3 | ) | | $ | — | | | $ | (9.3 | ) |
Other non-current liabilities — accrued rent(c) | | | (3.5 | ) | | | 0.3 | | | | (3.2 | ) |
Other non-current assets — equity method investments(d) | | | (2.1 | ) | | | 0.2 | | | | (1.9 | ) |
Other non-current liabilities — minority interest(d) | | | (1.0 | ) | | | — | | | | (1.0 | ) |
Deferred income taxes(e) | | | 1.9 | | | | (3.4 | ) | | | (1.5 | ) |
| | | | | | | | | | | | |
Impact on net income and retained earnings | | $ | (14.0 | ) | | $ | (2.9 | ) | | $ | (16.9 | ) |
| | | | | | | | | | | | |
| | |
(a) | | The Company previously quantified these errors under the rollover method and concluded that they were immaterial, individually and in the aggregate, to the Company’s consolidated financial statements. |
|
(b) | | The Company historically did not eliminate certain intercompany profits on the transfer of inventory, which resulted in a cumulative overstatement of its inventory by $5.0 million in years prior to Fiscal 2006. In addition, the Company included $4.3 million of certain product development costs in its inventory in years prior to Fiscal 2006 that, in hindsight, were not considered to be capitalizable. To correct these misstatements, the Company reduced inventory by $9.3 million as of April 2, 2006, with a corresponding pretax reduction in retained earnings. |
|
(c) | | In connection with a specialized retail store construction project in one of its international locations, the Company did not recognize rent expense upon taking possession of the leased property and commencing construction in Fiscal 2005. To correct these misstatements, the Company recorded a $3.2 million net increase in its liability for accrued rent as of April 2, 2006, with a corresponding pretax reduction in retained earnings. |
|
(d) | | The Company historically did not properly account for differences between its investment bases in certain consolidated and unconsolidated investees and its share of the underlying equity of such investees. To correct these misstatements, the Company reduced the carrying value of its equity method investment by $1.9 million and increased its minority interest liability by $1.0 million as of April 2, 2006, with a corresponding pretax reduction of $2.9 million in total to retained earnings. |
|
(e) | | As a result of the misstatements described above and $5.1 million of deferred tax balances that were not supportable based on a subsequent analysis of underlying book-tax basis differences, the Company’s provision for income taxes was cumulatively overstated by $1.9 million in years prior to Fiscal 2006 and understated by $3.4 million in Fiscal 2006. To correct these misstatements, the Company increased its net deferred income tax liability by a total of $1.5 million as of April 2, 2006, with a corresponding decrease in retained earnings. |
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-Based Compensation
In December 2004, the FASB issued FAS No. 123R, “Share-Based Payment” (“FAS 123R”). FAS 123R supersedes both Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which permitted the use of the intrinsic-value method in accounting for stock-based compensation, and FAS No. 123, “Accounting for Stock-Based Compensation,” as amended by FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“FAS 123”), which allowed companies applying APB 25 to just disclose in their financial statements the pro forma effect on net income from applying the fair-value method of accounting for stock-based compensation. FAS 123R requires all share-based payments to employees and non-employee directors to be expensed based on the grant date fair value of the awards over the requisite service period. The Company adopted the provisions of FAS 123R effective as of the beginning of Fiscal 2007 and recorded a related $42.7 million reclassification within stockholders’ equity as of April 2, 2006. See Note 19 for further discussion of the Company’s stock-based compensation.
Other Recently Issued Accounting Standards
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 amends FAS 133 to provide enhanced disclosure requirements surrounding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company adopted the disclosure requirements of FAS 161 as of the fourth quarter of Fiscal 2009 (see Note 15). The adoption of FAS 161 did not have an impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued FAS No. 141R, “Business Combinations” (“FAS 141R”), which replaces FAS No. 141. FAS 141R was issued to create greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable and relevant information for investors and other users of financial statements. FAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from current practice resulting from FAS 141R include the need for the acquirer to record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values for all business combinations (whether partial, full or step acquisitions); the need to recognize contingent consideration at its fair value on the acquisition date and, for certain arrangements, to recognize changes in fair value in earnings until settlement; and the need to expense acquisition-related transaction and restructuring costs rather than to treat them as part of the cost of the acquisition. FAS 141R also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective for the Company as of the beginning of Fiscal 2010 and will be applied prospectively to business combinations that close on or after March 29, 2009.
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (“FAS 160”). FAS 160 establishes accounting and reporting standards for noncontrolling interests (previously referred to as “minority interests”) in a subsidiary and for the deconsolidation of a subsidiary, to ensure consistency with the requirements of FAS 141R. FAS 160 states that noncontrolling interests should be classified as a separate component of equity, and establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. FAS 160 is effective for the Company as of the beginning of Fiscal 2010 and its application is not expected to have a material effect on the Company’s consolidated financial statements.
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FAS No. 115” (“FAS 159”). FAS 159 permits companies to choose to measure, on aninstrument-by-instrument basis, financial instruments and certain other items at fair value that are
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option is elected will be recognized in earnings at each subsequent reporting date. The Company did not elect the fair value option for any of its financial assets or financial liabilities upon adoption of FAS 159 in the beginning of Fiscal 2009. Therefore, the initial application of FAS 159 did not have a material effect on the Company’s consolidated financial statements.taxes.
| |
5. | Acquisitions and Joint Ventures |
Fiscal 20092010 Transactions
Agreement to Acquire Southeast AsiaAsia-Pacific Licensed Operations Acquisition
In FebruaryOn December 31, 2009, in connection with the transition of the Polo-branded apparel business in Asia-Pacific (excluding Japan) from a licensed to a wholly owned operation, the Company entered into an agreement withacquired certain net assets from Dickson Concepts International Limited (“Dickson”) to assume direct control of its Polo-branded licensed apparel businesses in Southeast Asia effective January 1, 2010 in exchange for aan initial payment of approximately $20 million and certain other consideration.consideration of approximately $17 million (the “Asia-Pacific Licensed Operations Acquisition”). Dickson is currentlywas the Company’s licensee for Polo-branded apparel in the Southeast AsiaAsia-Pacific region (excluding Japan), which is comprised of China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand. In connection with this agreement, the Company entered into a one-year extension of its underlyingsub-license agreement with Dickson, which was originally scheduled to expire on December 31, 2008. The transaction is subject to certain customary closing conditions. The Company expects to accountfunded the Asia-Pacific Licensed Operations Acquisition with available cash on-hand.
The Company accounted for this transactionthe Asia-Pacific Licensed Operations Acquisition as an asset purchasea business combination during the fourth quarter of Fiscal 2010. The acquisition cost of $37 million (excluding transaction costs) has been allocated on a preliminary basis to the net assets acquired based on their respective fair values as follows: inventory of $2 million; customer relationship intangible asset of $29 million; tax-deductible goodwill of $1 million and other net assets of $5 million. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs of $4 million were expensed as incurred and classified within SG&A expense in the consolidated statement of operations.
The customer relationship intangible asset was valued using the excess earnings method. This approach discounts the estimated after tax cash flows associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base. The customer relationship intangible asset is being amortized over its estimated useful life of ten years.
The results of operations for the Polo-branded apparel business in Asia-Pacific have been consolidated in the Company’s results of operations commencing January 1, 2010.
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 2009 Transactions
Japanese Childrenswear and Golf Acquisition
On August 1, 2008, in connection with the transition of the Polo-branded childrenswear and golf apparel businesses in Japan from a licensed to a wholly owned operation, the Company acquired certain net assets (including inventory) from Naigai Co. Ltd. (“Naigai”) in exchange for a payment of approximately ¥2.8 billion (approximately $26 million as of the acquisition date) and certain other consideration (the “Japanese Childrenswear and Golf Acquisition”). The Company funded the Japanese Childrenswear and Golf Acquisition with available cash on-hand. Naigai was the Company’s licensee for childrenswear, golf apparel and hosiery under thePolo by Ralph LaurenandRalph Laurenbrands in Japan. In conjunction with the Japanese Childrenswear and Golf Acquisition, the Company also entered into an additional5-year licensing and design-related agreement with Naigai for Polo and Chaps-branded hosiery in Japan and a transition services agreement for the provision of a variety of operational, human resources and information systems-related services over a period of up to eighteen months from the date of the closing of the transaction.
The Company accounted for the Japanese Childrenswear and Golf Acquisition as an asset purchase during the second quarter of Fiscal 2009. Based on the results of valuation analyses performed, the Company allocated all of the consideration exchanged in the Japanese Childrenswear and Golf Acquisition to the net assets acquired in connection with the transaction. No settlement loss associated with any pre-existing relationships was recognized. The acquisition cost of $28 million (including transaction costs of approximately $2 million) has been allocated to the net assets acquired based on their respective fair values as follows: inventory of $16 million; customer relationship intangible asset of $13 million; and other net liabilities of $1 million.
The results of operations for the Polo-branded childrenswear and golf apparel businesses in Japan have been consolidated in the Company’s results of operations commencing August 2, 2008.
Fiscal 2008 Transactions
Japanese Business Acquisitions
On May 29, 2007, the Company acquired control of certain of its Japanese businesses that were formerly conducted under licensed arrangements, consistent with the Company’s long-term strategy of international
F-19
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expansion. In particular, the Company acquired approximately 77% of the outstanding shares of Impact 21 that it did not previously own in a cash tender offer (the “Impact 21 Acquisition”), thereby increasing its ownership in Impact 21 from approximately 20% to approximately 97%. Impact 21 previously conducted the Company’s men’s, women’s and jeans apparel and accessories business in Japan under a pre-existing,sub-license arrangement. In addition, the Company acquired the remaining 50% interest in PRL Japan, which holds the master license to conduct Polo’s business in Japan, from Onward Kashiyama and Seibu (the “PRL Japan Minority Interest Acquisition”). Collectively, the Impact 21 Acquisition and the PRL Japan Minority Interest Acquisition are herein referred to as the “Japanese Business Acquisitions.”
The purchase price initially paid in connection with the Japanese Business Acquisitions was approximately $360 million, including transaction costs of approximately $12 million. In February 2008, the Company acquired approximately 1% of the remaining Impact 21 shares outstanding at an aggregate cost of $5 million. During the first quarter of Fiscal 2009, the Company acquired the remaining 2% of Impact 21 shares outstanding at an aggregate cost of approximately $9 million and completed the process of acquiring the remaining outstanding shares not exchanged as of the close of the tender offer period (the “minority squeeze-out”). As a result of these transactions, Impact 21 is a 100%-owned subsidiary of the Company.
The Company funded the Japanese Business Acquisitions with available cash on-hand and ¥20.5 billion of borrowings under a one-year term loan agreement pursuant to an amendment and restatement to the Company’s
F-18
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
existing credit facility. The Company repaid the borrowing by its maturity date on May 22, 2008 using $196.8 million of Impact 21’s cash on-hand acquired as part of the acquisition.
Based on the results of valuation analyses performed, the Company allocated all of the consideration exchanged to the purchase of the Japanese businesses. The acquisition cost of approximately $374 million has been allocated to the net assets acquired based on their respective fair values as follows: cash of $189 million; trade receivables of $26 million; inventory of $38 million; finite-lived intangible assets of $75 million (consisting of the re-acquired licenses of $21 million and customer relationships of $54 million); non-tax-deductible goodwill of $140 million; assumed pension liabilities of $5 million; net deferred tax liabilities of $31 million; and other net liabilities of $58 million.
The results of operations for Impact 21, which were previously accounted for using the equity method of accounting, have been consolidated in the Company’s results of operations commencing April 1, 2007. Accordingly, the Company recorded within minority interest expensepresented the amount of Impact 21’s net income allocable to the holders of the approximate 80% of the Impact 21 shares not owned by the Company prior to the closing date of the tender offer.offer within net income attributable to noncontrolling interest in the consolidated statement of operations. The results of operations for PRL Japan had already been consolidated by the Company in all prior periods.
Acquisition of Small Leathergoods Business
On April 13, 2007, the Company acquired from Kellwood Company (“Kellwood”) substantially all of the assets of New Campaign, Inc., the Company’s licensee for men’s and women’s belts and other small leather goods under theRalph Lauren,LaurenandChapsbrands in the U.S. (the “Small Leathergoods Business Acquisition”). The assets acquired from Kellwood are operated under the name of “Polo Ralph Lauren Leathergoods” and allowed the Company to further expand its accessories business. The acquisition cost was $10.4 million.
The Company determined that the terms of the pre-existing licensing relationship were reflective of market. As such, the Company allocated all of the consideration exchanged to the Small Leathergoods Business Acquisition and no settlement gain or loss was recognized in connection with the transaction. The results of operations for the Polo Ralph Lauren Leathergoods business have been consolidated in the Company’s results of operations commencing April 1, 2007. In addition, the acquisition cost has been allocated as follows: inventory of $7.0 million; finite-lived intangible assets of $2.1 million (consisting of the re-acquired license of $1.3 million, customer
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
relationships of $0.7 million and order backlog of $0.1 million); other net assets of $0.7 million; and tax-deductible goodwill of $0.6 million.
Formation of Ralph Lauren Watch and Jewelry Joint Venture
In March 2007, the Company formed a joint venture with Richemont to design, develop, manufacture, sell and distribute luxury watches and fine jewelry. See Note 3 for further discussion of the joint venture.
Fiscal 2007 Transactions
Acquisition of RL Media Minority Interest
On March 28, 2007, the Company acquired the remaining 50% equity interest in RL Media formerly held by NBC (37.5%) and Value Vision (12.5%) (the “RL Media Minority Interest Acquisition”). RL Media conducts the Company’se-commerce initiatives through the RalphLauren.com and Rugby.com internet sites. The results of operations for RL Media have already been consolidated by the Company as described further in Note 2 to the consolidated financial statements. The acquisition cost was $175 million.
The Company evaluated the terms of all significant pre-existing relationships between itself and RL Media to determine if a settlement of the pre-existing relationships existed. In addition, valuation analyses of RL Media were performed. Based on these analyses, as well as the rights and obligations of the parties under the RL Media partnership agreement, the Company determined that all of the consideration exchanged should be allocated to the acquisition of the RL Media minority interest. Accordingly, no settlement gain or loss was recognized in connection with this transaction.
The excess of the acquisition cost over the pre-existing minority interest liability of $33 million has been allocated as follows: inventory of $8 million; finite-lived intangible assets of $58 million (consisting of the re-acquired license of $56 million and customer list of $2 million); and tax-deductible goodwill of $76 million.
Supplemental Pro Forma Information
There were no acquisitions during Fiscal 2009 that had a material effect on the Company’s financial position and results of operations, and would have warranted the disclosure of related supplemental pro forma information. However, summarized below is certain supplemental pro forma information related to the Company’s significant acquisitions that occurred during Fiscal 2008 and Fiscal 2007.
The following unaudited condensed pro forma information (herein referred to as the “pro forma information”) assumes the Japanese Business Acquisitions, the RL Media Minority Interest Acquisition and the Small Leathergoods Business Acquisition had occurred as of the beginning of Fiscal 2008 and Fiscal 2007 for the applicable fiscal years presented. The pro forma information has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the fiscal years presented, nor is it indicative of the Company’s future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may occur as a result of the integration and consolidation of the acquisitions.
The pro forma information set forth below reflects nonrecurring charges related to (a) the amortization of thewrite-ups to fair value of inventory included within cost of goods sold as part of the preliminary purchase price allocations, which were fully recognized within six months of each respective acquisition date; (b) the amortization of thewrite-up to fair value of the acquired licenses as part of the preliminary purchase price allocation for the Japanese Business Acquisitions, which was fully amortized within nine months of the acquisition date; and (c) the write-off of foreign currency option contracts entered into to manage certain foreign currency exposures associated with the Japanese Business Acquisitions which expired unexercised during the first quarter of Fiscal 2008. These
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POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
charges included in the Company’s pro forma results were approximately $47 million for Fiscal 2008 and Fiscal 2007, respectively.
| | | | | | | | | | | | | | | | |
| | Historical | | | Pro Forma (unaudited) | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 29,
| | | March 31,
| | | March 29,
| | | March 31,
| |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | (millions, except per share data) | |
|
Net revenues | | $ | 4,880.1 | | | $ | 4,295.4 | | | $ | 4,880.1 | | | $ | 4,582.0 | |
Gross profit | | | 2,638.1 | | | | 2,336.2 | | | | 2,638.1 | | | | 2,413.4 | |
Amortization of intangible assets | | | (47.2 | ) | | | (15.6 | ) | | | (47.8 | ) | | | (50.5 | ) |
Operating income | | | 653.4 | | | | 652.6 | | | | 652.8 | | | | 636.5 | |
Net income | | | 419.8 | | | | 400.9 | | | | 419.8 | | | | 383.7 | |
Net income per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 4.10 | | | $ | 3.84 | | | $ | 4.10 | | | $ | 3.68 | |
Diluted | | $ | 3.99 | | | $ | 3.73 | | | $ | 3.99 | | | $ | 3.57 | |
Inventories consist of the following:
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Raw materials | | $ | 5.4 | | | $ | 6.7 | | | $ | 5.9 | | | $ | 5.4 | |
Work-in-process | | | 1.7 | | | | 1.7 | | | | 1.3 | | | | 1.7 | |
Finished goods | | | 518.0 | | | | 506.5 | | | | 496.8 | | | | 518.0 | |
| | | | | | | | | | |
Total inventory | | $ | 525.1 | | | $ | 514.9 | | |
Total inventories | | | $ | 504.0 | | | $ | 525.1 | |
| | | | | | | | | | |
F-19
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
7. | Property and Equipment |
Property and equipment, net, consist of the following:
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Land and improvements | | $ | 9.9 | | | $ | 9.9 | | | $ | 9.9 | | | $ | 9.9 | |
Buildings and improvements | | | 112.6 | | | | 97.4 | | | | 113.8 | | | | 112.6 | |
Furniture and fixtures | | | 491.1 | | | | 464.0 | | | | 515.0 | | | | 491.1 | |
Machinery and equipment | | | 305.0 | | | | 276.9 | | | | 339.3 | | | | 305.0 | |
Leasehold improvements | | | 643.3 | | | | 604.6 | | | | 700.0 | | | | 643.3 | |
Construction in progress | | | 49.6 | | | | 56.7 | | | | 102.5 | | | | 49.6 | |
| | | | | | | | | | |
| | | 1,611.5 | | | | 1,509.5 | | | | 1,780.5 | | | | 1,611.5 | |
Less: accumulated depreciation | | | (959.9 | ) | | | (799.6 | ) | | | (1,083.3 | ) | | | (959.9 | ) |
| | | | | | | | | | |
Property and equipment, net | | $ | 651.6 | | | $ | 709.9 | | | $ | 697.2 | | | $ | 651.6 | |
| | | | | | | | | | |
| |
8. | Goodwill and Other Intangible Assets |
As discussed in Note 3, the Company accounts for goodwill and other intangible assets in accordance with FAS 142. Under FAS 142, goodwill and certain other intangible assets deemed to have indefinite useful lives are not
F-22
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amortized. Rather, goodwill and such indefinite-lived intangible assets are subject to annual impairment testing. Finite-lived intangible assets continue to be amortized over their respective estimated useful lives. Based on the results of the Company’s annual impairment testing of goodwill and indefinite-lived intangible assets in Fiscal 2010, Fiscal 2009 and Fiscal 2008, and Fiscal 2007, no impairment charges were deemed necessary.
Goodwill
The following analysis details the changes in goodwill for each reportable segment during Fiscal 20092010 and Fiscal 2008:2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Wholesale | | Retail | | Licensing | | Total | | Wholesale | | Retail | | Licensing | | Total | |
| | (millions) | | (millions) | |
| |
Balance at March 31, 2007 | | $ | 518.9 | | | $ | 155.1 | | | $ | 116.5 | | | $ | 790.5 | | |
Acquisition-related activity(a) | | | 122.5 | | | | (3.9 | ) | | | 16.8 | | | | 135.4 | | |
Other adjustments(b) | | | 43.4 | | | | 0.9 | | | | 4.9 | | | | 49.2 | | |
| | | | | | | | | |
Balance at March 29, 2008 | | $ | 684.8 | | | $ | 152.1 | | | $ | 138.2 | | | $ | 975.1 | | | $ | 684.8 | | | $ | 152.1 | | | $ | 138.2 | | | $ | 975.1 | |
Acquisition-related activity(a) | | | 4.8 | | | | — | | | | — | | | | 4.8 | | | | 4.8 | | | | — | | | | — | | | | 4.8 | |
Other adjustments(b) | | | (15.5 | ) | | | (1.3 | ) | | | 3.3 | | | | (13.5 | ) | | | (15.5 | ) | | | (1.3 | ) | | | 3.3 | | | | (13.5 | ) |
| | | | | | | | | | | | | | | | | | |
Balance at March 28, 2009 | | $ | 674.1 | | | $ | 150.8 | | | $ | 141.5 | | | $ | 966.4 | | | | 674.1 | | | | 150.8 | | | | 141.5 | | | | 966.4 | |
Acquisition-related activity(a) | | | | — | | | | — | | | | 1.0 | | | | 1.0 | |
Other adjustments(b) | | | | (45.8 | ) | | | 65.0 | | | | — | | | | 19.2 | |
| | | | | | | | | | | | | | | | | | |
Balance at April 3, 2010 | | | $ | 628.3 | | | $ | 215.8 | | | $ | 142.5 | | | $ | 986.6 | |
| | | | | | | | | | |
| | |
(a) | | Fiscal 2010 acquisition-related activity primarily includes the Asia-Pacific Licensed Operations Acquisition. Fiscal 2009 acquisition-related activity primarily includes the minority squeeze-out related to the Japanese Business Acquisitions. Fiscal 2008 acquisition-related activity primarily includes the Japanese Business Acquisitions and the Small Leathergoods Business Acquisition, as well as other adjustments related to revisions in the estimated purchase price allocation of the RL Media Minority Interest Acquisition. See Note 5 for further discussion of the Company’s acquisitions. |
|
(b) | | OtherFiscal 2010 other adjustments principallyinclude the reallocation of approximately $65 million of goodwill in connection with the Company’s reclassification of its concessions-based sales arrangements to the Retail segment from the Wholesale segment at the beginning of the fourth quarter (see Note 2), as well as changes in foreign currency exchange rates. Fiscal 2009 other adjustments primarily include changes in foreign currency exchange rates. |
F-20
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Intangible Assets
Other intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 28, 2009 | | March 29, 2008 | | | April 3, 2010 | | March 28, 2009 | |
| | Gross
| | | | | | Gross
| | | | | | | Gross
| | | | | | Gross
| | | | | |
| | Carrying
| | Accum.
| | | | Carrying
| | Accum.
| | | | | Carrying
| | Accum.
| | | | Carrying
| | Accum.
| | | |
| | Amount | | Amort. | | Net | | Amount | | Amort. | | Net | | | Amount | | Amort. | | Net | | Amount | | Amort. | | Net | |
| | (millions) | | | (millions) | |
|
Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Re-acquired licensed trademarks | | $ | 226.0 | | | $ | (58.7 | ) | | $ | 167.3 | | | $ | 223.5 | | | $ | (47.5 | ) | | $ | 176.0 | | | $ | 229.4 | | | $ | (70.6 | ) | | $ | 158.8 | | | $ | 226.0 | | | $ | (58.7 | ) | | $ | 167.3 | |
Customer relationships/lists | | | 206.7 | | | | (34.1 | ) | | | 172.6 | | | | 186.7 | | | | (22.4 | ) | | | 164.3 | | | | 244.7 | | | | (49.3 | ) | | | 195.4 | | | | 206.7 | | | | (34.1 | ) | | | 172.6 | |
Other | | | 7.4 | | | | (7.1 | ) | | | 0.3 | | | | 7.4 | | | | (7.1 | ) | | | 0.3 | | | | 7.4 | | | | (7.2 | ) | | | 0.2 | | | | 7.4 | | | | (7.1 | ) | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets subject to amortization | | | 440.1 | | | | (99.9 | ) | | | 340.2 | | | | 417.6 | | | | (77.0 | ) | | | 340.6 | | | | 481.5 | | | | (127.1 | ) | | | 354.4 | | | | 440.1 | | | | (99.9 | ) | | | 340.2 | |
Intangible assets not subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trademarks and brands | | | 8.7 | | | | — | | | | 8.7 | | | | 8.7 | | | | — | | | | 8.7 | | | | 8.8 | | | | — | | | | 8.8 | | | | 8.7 | | | | — | | | | 8.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 448.8 | | | $ | (99.9 | ) | | $ | 348.9 | | | $ | 426.3 | | | $ | (77.0 | ) | | $ | 349.3 | | | $ | 490.3 | | | $ | (127.1 | ) | | $ | 363.2 | | | $ | 448.8 | | | $ | (99.9 | ) | | $ | 348.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
F-23
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortization
Based on the amount of intangible assets subject to amortization as of March 28, 2009,April 3, 2010, the expected amortization for each of the next five fiscal years and thereafter is as follows:
| | | | | | | | |
| | Amortization
| | | Amortization
| |
| | Expense | | | Expense | |
| | (millions) | | | (millions) | |
|
Fiscal 2010 | | $ | 20.4 | | |
Fiscal 2011 | | | 20.1 | | | $ | 23.6 | |
Fiscal 2012 | | | 19.5 | | | | 23.3 | |
Fiscal 2013 | | | 19.1 | | | | 22.6 | |
Fiscal 2014 | | | 19.1 | | | | 22.6 | |
Fiscal 2015 and thereafter | | | 242.0 | | |
Fiscal 2015 | | | | 22.6 | |
Fiscal 2016 and thereafter | | | | 239.7 | |
| | | | | | |
Total | | $ | 340.2 | | | $ | 354.4 | |
| | | | | | |
The expected future amortization expense above reflects weighted-average estimated useful lives of 20.319.3 years for re-acquired licensed trademarks, 16.514.5 years for customer relationships/lists and 18.316.6 years for the Company’s finite-lived intangible assets in total.
F-21
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
9. | Other Current and Non-Current Assets |
Prepaid expenses and other current assets consist of the following:
| | | | | | | | |
| | April 3,
| | | March 28,
| |
| | 2010 | | | 2009 | |
| | (millions) | |
|
Prepaid rent expense | | $ | 23.5 | | | $ | 17.6 | |
Restricted cash | | | 21.8 | | | | — | |
Derivative financial instruments | | | 15.5 | | | | 26.4 | |
Other prepaid expenses and current assets | | | 78.9 | | | | 91.0 | |
| | | | | | | | |
Total prepaid expenses and other current assets | | $ | 139.7 | | | $ | 135.0 | |
| | | | | | | | |
Other non-current assets consist of the following:
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Equity-method investments | | $ | 4.2 | | | $ | 2.4 | | | $ | 4.8 | | | $ | 4.2 | |
Officers’ life insurance policies | | | 32.9 | | | | 48.3 | | | | 33.1 | | | | 32.9 | |
Restricted cash and other non-current investments | | | 101.1 | | | | 138.6 | | |
Restricted cash | | | | 53.6 | | | | 71.4 | |
Other non-current assets | | | 91.9 | | | | 131.5 | | | | 57.2 | | | | 91.9 | |
| | | | | | | | | | |
Total other non-current assets | | $ | 230.1 | | | $ | 320.8 | | | $ | 148.7 | | | $ | 200.4 | |
| | | | | | | | | | |
| |
10. | Other Current and Non-Current Liabilities |
Accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Accrued operating expenses | | $ | 221.9 | | | $ | 243.8 | | | $ | 237.6 | | | $ | 200.3 | |
Accrued payroll and benefits | | | 110.7 | | | | 88.2 | | | | 187.1 | | | | 130.6 | |
Accrued inventory | | | 44.6 | | | | 42.0 | | | | 43.8 | | | | 44.6 | |
Deferred income | | | 45.9 | | | | 50.1 | | | | 50.5 | | | | 47.6 | |
Other | | | 49.2 | | | | 43.6 | | | | 40.7 | | | | 49.2 | |
| | | | | | | | | | |
Total accrued expenses and other current liabilities | | $ | 472.3 | | | $ | 467.7 | | | $ | 559.7 | | | $ | 472.3 | |
| | | | | | | | | | |
Other non-current liabilities consist of the following:
| | | | | | | | |
| | April 3,
| | | March 28,
| |
| | 2010 | | | 2009 | |
| | (millions) | |
|
Capital lease obligations | | $ | 38.2 | | | $ | 38.4 | |
Deferred rent obligations | | | 147.9 | | | | 136.7 | |
Deferred income | | | 123.3 | | | | 145.6 | |
Other | | | 67.5 | | | | 65.4 | |
| | | | | | | | |
Total other non-current liabilities | | $ | 376.9 | | | $ | 386.1 | |
| | | | | | | | |
F-24F-22
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other non-current liabilities consist of the following:
| | | | | | | | |
| | March 28,
| | | March 29,
| |
| | 2009 | | | 2008 | |
| | (millions) | |
|
Capital lease obligations | | $ | 76.6 | | | $ | 73.2 | |
Deferred rent obligations | | | 124.7 | | | | 112.3 | |
Deferred income | | | 145.6 | | | | 168.8 | |
Minority interest | | | — | | | | 5.5 | |
Other | | | 39.2 | | | | 79.4 | |
| | | | | | | | |
Total other non-current liabilities | | $ | 386.1 | | | $ | 439.2 | |
| | | | | | | | |
| |
11. | Impairments of Assets |
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 amounts may not be recoverable in accordance with FAS 144.recoverable. In evaluating long-lived assets for recoverability, 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 the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value.
Fiscal 2010 Impairment
During Fiscal 2010, the Company recorded a non-cash impairment charge of $6.6 million to reduce the net carrying value of certain long-lived assets primarily in its Retail segment to their estimated fair value, which was determined based on discounted expected cash flows. This impairment charge was primarily related to thelower-than-expected operating performance of certain retail stores, largely related to the Company’s Club Monaco retail business.
Fiscal 2009 Impairment
During Fiscal 2009, the Company recorded total non-cash impairment charges of $55.4 million to reduce the net carrying value of certain long-lived assets to their estimated fair value, which was determined based on discounted expected cash flows. Total Fiscal 2009 impairment charges were comprised of $7.2 million recorded during the second quarter and $48.2 million recorded during the fourth quarter.
Total Fiscal 2009These impairment charges included a $52.0 million write-down of Retail store assets and a $3.4 million write-down of certain capitalized software costs (primarily in the Wholesale segment) that were determined to no longer be used over the intended service period. The Retail store asset impairment was associated withlower-than-expected operating performance for the fiscal year for certainRalph Lauren,Club MonacoandRugbyfull-price stores primarily located in the U.S. due in part to the significant contraction in consumer spending experienced during the latter half of the fiscal year and which is expected to continue to negatively impact such stores’ future operating performance.
Fiscal 2008 Impairment
During Fiscal 2008, the Company recorded non-cash impairment charges of $5.0 million to reduce the carrying value of certain long-lived assets in its Retail segment to their estimated fair value. These impairment charges were primarily recorded as a result oflower-than-expected operating cash flow performance for certain stores that, along with projections of future performance, indicated that the carrying values of the related fixed assets were not recoverable.
No impairment charges were recorded in Fiscal 2007.
The Company has recorded restructuring liabilities in recent years relating to various cost-savings initiatives, as well as certain of its acquisitions. Through Fiscal 2009, in accordance with then applicable US GAAP, restructuring costs incurred in connection with acquisitions were capitalized as part of the purchase accounting for the transaction. As of the beginning of Fiscal 2010, restructuring costs incurred in connection with acquisitions that are not obligations of the acquiree as of the acquisition date are expensed. Such acquisition-related restructuring costs were not material in any period. Liabilities for costs associated with non-acquisition-related restructuring initiatives are expensed and initially measured at fair value when incurred. A description of the nature of significant non-acquisition-related restructuring activities and related costs is presented below.
Fiscal 2010 Restructuring
During Fiscal 2010, the Company recognized $6.9 million of net restructuring charges primarily related to employee termination costs, as well as the write-down of an asset associated with exiting a retail store in Japan.
F-25F-23
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
non-acquisition-related restructuring initiatives are expensed and initially measured at fair value when incurred in accordance with US GAAP. A description of the nature of significant non-acquisition-related restructuring activities and related costs is presented below.
Fiscal 2009 Restructuring
During the fourth quarter of Fiscal 2009, the Company initiated a restructuring plan designed to better align its cost base with the slowdown in consumer spending that has been negatively affecting sales and operating margins and to improve overall operating effectiveness (the “Fiscal 2009 Restructuring Plan”). The Fiscal 2009 Restructuring Plan included the termination of approximately 500 employees and the closure of certain underperforming retail stores.
In connection with the Fiscal 2009 Restructuring Plan, the Company recorded $20.8 million in restructuring charges during the fourth quarter of Fiscal 2009. A summary of the activity in the related liability is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Severance
| | Lease
| | | | | | | Severance
| | Lease
| | | | | |
| | and Benefits
| | Termination
| | Other
| | | | | and Benefits
| | Termination
| | Other
| | | |
| | Costs | | Costs | | Costs(a) | | Total | | | Costs | | Costs | | Costs(a) | | Total | |
| | (millions) | | | (millions) | |
|
Balance at March 29, 2008 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Additions charged to expense | | | 13.4 | | | | 5.8 | | | | 1.6 | | | | 20.8 | | |
Additions (reductions) charged to expense | | | | 13.4 | | | | 5.8 | | | | 1.6 | | | | 20.8 | |
Cash payments charged against reserve | | | (0.8 | ) | | | (0.9 | ) | | | — | | | | (1.7 | ) | | | (0.8 | ) | | | (0.9 | ) | | | — | | | | (1.7 | ) |
Non-cash adjustments | | | — | | | | — | | | | (1.6 | ) | | | (1.6 | ) | | | — | | | | — | | | | (1.6 | ) | | | (1.6 | ) |
| | | | | | | | | | | | | | | | | | |
Balance at March 28, 2009 | | $ | 12.6 | | | $ | 4.9 | | | $ | — | | | $ | 17.5 | | | | 12.6 | | | | 4.9 | | | | — | | | | 17.5 | |
Additions (reductions) charged to expense | | | | (2.8 | ) | | | (0.1 | ) | | | — | | | | (2.9 | ) |
Cash payments charged against reserve | | | | (9.5 | ) | | | (4.0 | ) | | | — | | | | (13.5 | ) |
| | | | | | | | | | | | | | | | | | |
Balance at April 3, 2010 | | | $ | 0.3 | | | $ | 0.8 | | | $ | — | | | $ | 1.1 | |
| | | | | | | | | | |
| | |
(a) | | Primarily related to write-downs of certain fixed assets. |
Payments related to severance and benefits and lease termination costs are expected to be paid in full primarily by the end of Fiscal 2010.
In addition to those restructuring charges incurred in connection with the Fiscal 2009 Restructuring Plan implemented during the fourth quarter as discussed above, the Company recognized $2.8 million of other restructuring charges earlier in the fiscal year, primarily related to severance costs associated with the transition of certain sourcing and production facilities in Southeast AsiaAsia-Pacific during Fiscal 2009.
There were no significant restructuring charges recognized by the Company during Fiscal 2008.
Fiscal 2007 Restructuring
During the fourth quarter of Fiscal 2006, the Company initiated a plan to restructure its Club Monaco retail business. In particular, this plan consisted of the closure of all five Club Monaco factory stores and the intention to dispose of by sale or closure all eight of the Caban Concept Stores (collectively, the “Club Monaco Restructuring Plan”). In connection with this plan, during Fiscal 2007 the Company ultimately decided to close all of the Caban Concept Stores and recognized $4.0 million of associated restructuring charges, primarily relating to lease termination costs. The remaining liability under the plan was $0.9 million as of March 28, 2009.
Additionally, the Company recognized $0.6 million of other restructuring charges primarily related to severance costs associated with the transition of certain sourcing and production functions from Colombia to the U.S. during Fiscal 2007.
F-26
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Taxes on Income
Domestic and foreign pretax income are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | (millions) | | | | | | | (millions) | | | |
|
Domestic | | $ | 351.1 | | | $ | 473.7 | | | $ | 508.6 | | | $ | 448.3 | | | $ | 351.1 | | | $ | 473.7 | |
Foreign | | | 236.4 | | | | 168.4 | | | | 134.7 | | | | 241.0 | | | | 236.4 | | | | 170.5 | |
| | | | | | | | | | | | | | |
Total income before provision for income taxes | | $ | 587.5 | | | $ | 642.1 | | | $ | 643.3 | | | $ | 689.3 | | | $ | 587.5 | | | $ | 644.2 | |
| | | | | | | | | | | | | | |
F-24
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Current and deferred income taxes (tax benefits) provided are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | (millions) | | | | | | | (millions) | | | |
|
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal(a) | | $ | 126.6 | | | $ | 157.5 | | | $ | 250.7 | | | $ | 138.0 | | | $ | 126.6 | | | $ | 157.5 | |
State and local(a) | | | 25.6 | | | | 15.4 | | | | 50.2 | | | | 16.3 | | | | 25.6 | | | | 15.4 | |
Foreign | | | 64.4 | | | | 57.1 | | | | 53.9 | | | | 55.7 | | | | 64.4 | | | | 57.1 | |
| | | | | | | | | | | | | | |
| | | 216.6 | | | | 230.0 | | | | 354.8 | | | | 210.0 | | | | 216.6 | | | | 230.0 | |
| | | | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | (15.3 | ) | | | 10.0 | | | | (99.2 | ) | | | 12.0 | | | | (15.3 | ) | | | 10.0 | |
State and local | | | (7.4 | ) | | | 3.9 | | | | (12.8 | ) | | | (1.4 | ) | | | (7.4 | ) | | | 3.9 | |
Foreign | | | (12.4 | ) | | | (21.6 | ) | | | (0.4 | ) | | | (10.8 | ) | | | (12.4 | ) | | | (21.6 | ) |
| | | | | | | | | | | | | | |
| | | (35.1 | ) | | | (7.7 | ) | | | (112.4 | ) | | | (0.2 | ) | | | (35.1 | ) | | | (7.7 | ) |
| | | | | | | | | | | | | | |
Total provision for income taxes | | $ | 181.5 | | | $ | 222.3 | | | $ | 242.4 | | | $ | 209.8 | | | $ | 181.5 | | | $ | 222.3 | |
| | | | | | | | | | | | | | |
| | |
(a) | | Excludes federal, state and local tax benefits of approximately $25 million in Fiscal 2010, $12 million in Fiscal 2009 and $34 million in Fiscal 2008 and $33 million in Fiscal 2007 resulting from the exercise of employee stock options. In addition, excludes federal, state and local tax benefits of $31 million for Fiscal 2007 primarily related to the repayment of the approximate €227 million principal amount of 6.125% notes outstanding that were due on November 22, 2006, from an original issuance of €275 million in 1999 (the “1999 Euro Debt”).stock-based compensation arrangements. Such amounts were credited to stockholders’ equity. |
F-27
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and income taxes provided are as set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | (millions) | | | | | | | (millions) | | | |
|
Provision for income taxes at the U.S. federal statutory rate | | $ | 205.6 | | | $ | 224.7 | | | $ | 225.1 | | | $ | 241.3 | | | $ | 205.6 | | | $ | 224.7 | |
Increase (decrease) due to: | | | | | | | | | | | | | | | | | | | | | | | | |
State and local income taxes, net of federal benefit | | | 11.9 | | | | 12.2 | | | | 25.7 | | | | 5.7 | | | | 11.9 | | | | 12.2 | |
Foreign income taxed at different rates, net of U.S. foreign tax credits | | | (40.1 | ) | | | (22.3 | ) | | | (11.2 | ) | | | (45.6 | ) | | | (40.1 | ) | | | (22.3 | ) |
Other | | | 4.1 | | | | 7.7 | | | | 2.8 | | | | 8.4 | | | | 4.1 | | | | 7.7 | |
| | | | | | | | | | | | | | |
Total provision for income taxes | | $ | 181.5 | | | $ | 222.3 | | | $ | 242.4 | | | $ | 209.8 | | | $ | 181.5 | | | $ | 222.3 | |
| | | | | | | | | | | | | | |
The Company’s effective tax rate is lower than the statutory rate principally as a result of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S.
F-25
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Taxes
Significant components of the Company’s net deferred tax assets (liabilities) are as follows:
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Current deferred tax assets (liabilities): | | | | | | | | | | | | | | | | |
Receivable allowances and reserves | | $ | 40.2 | | | $ | 30.2 | | | $ | 49.6 | | | $ | 40.2 | |
Inventory basis difference | | | 21.5 | | | | 19.0 | | | | 23.8 | | | | 21.5 | |
Other | | | 36.4 | | | | 25.6 | | | | 27.2 | | | | 36.4 | |
Net operating losses and other tax attributed carryforwards | | | 0.1 | | | | 2.1 | | | | — | | | | 0.1 | |
Valuation allowance | | | — | | | | (0.3 | ) | |
| | | | | | | | | | |
Net current deferred tax assets (liabilities)(a) | | | 98.2 | | | | 76.6 | | | | 100.6 | | | | 98.2 | |
| | | | | | | | | | |
Non-current deferred tax assets (liabilities): | | | | | | | | | | | | | | | | |
Property, plant and equipment | | | 62.1 | | | | 42.5 | | | | 71.1 | | | | 62.1 | |
Goodwill and other intangible assets | | | (153.8 | ) | | | (142.0 | ) | | | (169.2 | ) | | | (153.8 | ) |
Net operating losses carryforwards | | | 9.7 | | | | 3.2 | | |
Net operating losses carry for wards | | | | 30.2 | | | | 29.3 | |
Cumulative translation adjustment and hedges | | | 0.6 | | | | 20.4 | | | | 1.1 | | | | 0.6 | |
Deferred compensation | | | 56.4 | | | | 61.0 | | | | 55.0 | | | | 56.4 | |
Deferred income | | | 56.4 | | | | 58.4 | | | | 48.3 | | | | 56.4 | |
Unrecogized tax benefits | | | 37.7 | | | | 39.1 | | | | 26.4 | | | | 37.7 | |
Other | | | 16.7 | | | | 10.2 | | | | 29.3 | | | | 16.7 | |
Valuation allowance | | | (5.6 | ) | | | (0.8 | ) | | | (20.8 | ) | | | (25.2 | ) |
| | | | | | | | | | |
Net non-current deferred tax assets (liabilities)(b) | | | 80.2 | | | | 92.0 | | | | 71.4 | | | | 80.2 | |
| | | | | | | | | | |
Net deferred tax assets (liabilities) | | $ | 178.4 | | | $ | 168.6 | | | $ | 172.0 | | | $ | 178.4 | |
| | | | | | | | | | |
| | |
(a) | | Net current deferred tax balance as of April 3, 2010 and March 28, 2009 included current deferred tax liabilities of $2.4 million and $3.6 million, respectively, included within accrued expenses and other in the consolidated balance sheet. |
|
(b) | | Net non-current deferred tax balances as of April 3, 2010 and March 28, 2009 and March 29, 2008 were comprised of non-current deferred tax assets of $102.8$101.9 million and $116.9$102.8 million, respectively, included within deferred tax assets, and non-current deferred tax liabilities of $22.6$30.5 million and $24.9$22.6 million, respectively, included within other non-current liabilities in the consolidated balance sheets. |
F-28
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has available federal, state and foreign net operating loss carryforwards of $0.5 million, $6.8$6.3 million and $13.8$27.5 million, respectively, for tax purposes to offset future taxable income. The net operating loss carryforwards expire beginning in Fiscal 2010. The utilization of the federal net operating loss carryforwards is subject to the limitations of Internal Revenue Code Section 382, which applies following certain changes in ownership of the entity generating the loss carryforward.2011.
Also, the Company has available state and foreign net operating loss carryforwards of $7.9$4.2 million and $11.0$66.0 million, respectively, for which no net deferred tax asset has been recognized. A full valuation allowance has been recorded since management does not believe that the Company will more likely than not be able to utilize these carryforwards to offset future taxable income. Subsequent recognition of these deferred tax assets would result in an income tax benefit in the year of such recognition. The valuation allowance increaseddecreased by $4.5$4.4 million in Fiscal 20092010 as a result of the inabilityability to utilize certain foreign net operating loss carryforwards.
Provision has not been made for U.S. or additional foreign taxes on $841.4 million$1.118 billion of undistributed earnings of foreign subsidiaries. Those earnings have been and are expected to continue to be reinvested. These earnings could become subject to tax if they were remitted as dividends, if foreign earnings were lent to Polo Ralph Lauren Corporation (“PRLC”),PRLC, a subsidiary or a U.S. affiliate of PRLC, 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 practical. Management believes that the amount of the additional taxes that might be payable on the earnings of foreign subsidiaries, if remitted, would be partially offset by U.S. foreign tax credits.
F-26
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Uncertain Income Tax Benefits
Impact of FIN 48 Adoption
As a result of the adoption of FIN 48, the Company recognized a $62.5 million reduction in retained earnings as the cumulative effect to adjust its net liability for unrecognized tax benefits as of April 1, 2007. This adjustment consisted of a $99.9 million increase to the Company’s liabilities for unrecognized tax benefits, offset in part by a $37.4 million increase to the Company’s deferred tax assets principally representing the value of future tax benefits that could be realized at the U.S. federal level if the related liabilities for unrecognized tax benefits at the state and local levels ultimately are required to be settled. The total balance of unrecognized tax benefits, including interest and penalties, was $173.8 million as of April 1, 2007.
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. Accordingly, included in the liability for unrecognized tax benefits was a liability for interest and penalties in the amount of $45.7 million as of April 1, 2007.
F-29
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 20092010 and Fiscal 20082009 Activity
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for Fiscal 20092010 and Fiscal 20082009 is presented below:
| | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Unrecognized tax benefits beginning balance | | $ | 117.5 | | | $ | 128.1 | | | $ | 113.7 | | | $ | 117.5 | |
Additions related to current period tax positions | | | 5.4 | | | | 11.5 | | | | 6.1 | | | | 5.4 | |
Additions related to prior periods tax positions | | | 19.4 | | | | 15.5 | | |
Reductions related to prior periods tax positions | | | (17.8 | ) | | | (22.2 | ) | |
Additions related to prior period tax positions | | | | 5.1 | | | | 19.4 | |
Reductions related to prior period tax positions | | | | (13.4 | ) | | | (17.8 | ) |
Reductions related to settlements with taxing authorities | | | (5.8 | ) | | | (10.2 | ) | | | (15.5 | ) | | | (5.8 | ) |
Reductions related to expiration of statutes of limitations | | | — | | | | (5.2 | ) | |
Additions (reductions) charged to foreign currency translation | | | (5.0 | ) | | | — | | | | 0.2 | | | | (5.0 | ) |
| | | | | | | | | | |
Unrecognized tax benefits ending balance | | $ | 113.7 | | | $ | 117.5 | | | $ | 96.2 | | | $ | 113.7 | |
| | | | | | | | | | |
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for Fiscal 20092010 and Fiscal 20082009 is presented below:
| | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Accrued interest and penalties beginning balance | | $ | 48.0 | | | $ | 45.7 | | | $ | 41.1 | | | $ | 48.0 | |
Additions (reductions) charged to expense | | | (0.8 | ) | | | 7.6 | | |
Net reductions charged to expense | | | | (3.3 | ) | | | (0.8 | ) |
Reductions related to settlements with taxing authorities | | | (5.1 | ) | | | (5.1 | ) | | | (8.0 | ) | | | (5.1 | ) |
Reductions related to expiration of statutes of limitations | | | — | | | | (1.4 | ) | |
Additions (reductions) charged to foreign currency translation | | | (1.0 | ) | | | 1.2 | | |
Reductions charged to foreign currency translation | | | | — | | | | (1.0 | ) |
| | | | | | | | | | |
Accrued interest and penalties ending balance | | $ | 41.1 | | | $ | 48.0 | | | $ | 29.8 | | | $ | 41.1 | |
| | | | | | | | | | |
The total amount of unrecognized tax benefits, including interest and penalties, was $126.0 million as of April 3, 2010 and $154.8 million as of March 28, 2009 and was included within non-current liability for unrecognized tax benefits in the consolidated balance sheet. The total amount of unrecognized tax benefits, including interest and penalties, was $165.5 million as of March 29, 2008, of which $10.3 was included within accrued expenses and other and $155.2 million was included within non-current liability for unrecognized tax benefits in the consolidated balance sheet.sheets. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $99.6 million as of April 3, 2010 and $117.1 million as of March 28, 2009 and $123.6 million as of March 29, 2008.2009.
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, the settlements of ongoing auditsand/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, it is reasonably possiblethe Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, could potentially be reduced by up to approximately $25 millionwill change significantly during the next 12 months. However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future.
F-30
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company files tax returns in the U.S. federal and various state, local and foreign jurisdictions. With few exceptions for those tax returns, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2000.2004.
F-27
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt consists of the following:
| | | | | | | | | | | | | | | | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Revolving credit facility | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
1.2% Yen-denominated term loan due May 2008 | | | — | | | | 206.4 | | |
4.5% Euro-denominated notes due October 2013 | | | 406.4 | | | | 472.8 | | | | 282.1 | | | | 406.4 | |
| | | | | | |
Total debt | | | 406.4 | | | | 679.2 | | |
Less: current maturities of debt | | | — | | | | (206.4 | ) | |
| | | | | | | | | | |
Total long-term debt | | $ | 406.4 | | | $ | 472.8 | | | $ | 282.1 | | | $ | 406.4 | |
| | | | | | | | | | |
Euro Debt
TheAs of April 3, 2010, the Company hashad outstanding approximately €300€209.2 million principal amount of 4.5% notes due October 4, 2013 (the “Euro Debt”). The Company has the option to redeem all of the outstanding Euro Debt at any time at a redemption price equal to the principal amount plus a premium. The Company also has the option to redeem all of the outstanding Euro Debt at any time at par plus accrued interest in the event of certain developments involving U.S. tax law. Partial redemption of the Euro Debt is not permitted in either instance. In the event of a change of control of the Company, each holder of the Euro Debt has the option to require the Company to redeem the Euro Debt at its principal amount plus accrued interest. The indenture governing the Euro Debt (the “Indenture”) contains certain limited covenants that restrict the Company’s ability, subject to specified exceptions, to incur liens or enter into a sale and leaseback transaction for any principal property. The Indenture does not contain any financial covenants.
In July 2009, the Company completed a cash tender offer and used $121.0 million to repurchase €90.8 million of principal amount of its then outstanding €300 million principal amount of 4.5% notes due October 4, 2013 at a discounted purchase price of approximately 95%. A net pretax gain of $4.1 million related to this extinguishment of debt was recorded during the second quarter of Fiscal 2010 and has been classified as a component of interest and other income, net, in the Company’s consolidated statement of operations. The Company may from timeused its cash on hand to time repurchase all or a portion of its Euro Debt infund the open market, via tender offer or otherwise.debt extinguishment.
Refer to Note 1516 for discussion of the designation of the Company’s Euro Debt as a hedge of its net investment in certain of its European subsidiaries.
Revolving Credit Facility and Term Loan
The Company has a credit facility that provides for a $450 million unsecured revolving line of credit through November 2011 (the “Credit Facility”). The Credit Facility also is used to support the issuance of letters of credit. As of March 28, 2009,April 3, 2010, there were no borrowings outstanding under the Credit Facility and the Company was contingently liable for $13.7$13.9 million of outstanding letters of credit (primarily relating to inventory purchase commitments). The Company has the ability to expand its borrowing availability to $600 million subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Credit Facility.
Borrowings under the Credit Facility bear interest, at the Company’s option, either at (a) a base rate determined by reference to the higher of (i) the prime commercial lending rate of JP Morgan Chase Bank, N.A. in effect from time to time and (ii) the weighted-average overnight Federal funds rate (as published by the Federal Reserve Bank of New York) plus 50 basis points or (b) a LIBOR rate in effect from time to time, as adjusted for the Federal Reserve Board’s Euro currency liabilities maximum reserve percentage plus a margin defined in the Credit Facility
F-31
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(“ (“the applicable margin”). The applicable margin of 35 basis points is subject to adjustment based on the Company’s credit ratings.
F-28
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition to paying interest on any outstanding borrowings under the Credit Facility, the Company is required to pay a commitment fee to the lenders under the Credit Facility in respect of the unutilized commitments. The commitment fee rate of 8 basis points under the terms of the Credit Facility also is subject to adjustment based on the Company’s credit ratings.
The 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 and contingent liabilities; sell or dispose of assets, including equity interests; 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 investments. The Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the “leverage ratio”) of no greater than 3.75 as of the date of measurement for four consecutive quarters. Adjusted Debt is defined generally as consolidated debt outstanding plus 8 times consolidated rent expense for the last twelve months. EBITDAR is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense and (iv) consolidated rent expense. As of March 28, 2009,April 3, 2010, no Event of Default (as such term is defined pursuant to the Credit Facility) has occurred under the Company’s Credit Facility.
Upon the occurrence of an Event of Default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility, and declare all amounts outstanding to be immediately due and payable. The 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 and interest payments or to satisfy the covenants, including the financial covenant described above. Additionally, the Credit Facility provides that an Event of Default will occur if Mr. Ralph Lauren, the Company’s Chairman and Chief Executive Officer, and related entities controlled by Mr.the Lauren family fail to maintain a specified minimum percentage of the voting power of the Company’s common stock.
The Credit Facility was amended and restated as of May 22, 2007 to provide for the addition of a ¥20.5 billion loan (the “Term Loan”). The Term Loan was, made to Polo JP Acqui B.V., a wholly owned subsidiary of the Company, and was guaranteed by the Company, as well as the other subsidiaries of the Company which currently guarantee the Credit Facility.Company. The proceeds of the Term Loan were used to finance the Company’s acquisition of certain of its formerly-licensed Japanese Business Acquisitions. Borrowings under the Term Loan bore interest at a fixed rate of 1.2%.businesses. The Company repaid the borrowingTerm Loan by its maturity date on May 22, 2008 using $196.8 million of Impact 21’sthe cash on-hand acquired as part of the acquisition. See Note 5 for further discussion of the Japanese Business Acquisitions.
Fair Value of Debt
Based on the prevailing level of market interest rates as of April 3, 2010, the fair value of the Company’s Euro Debt exceeded its carrying value by approximately $10 million. As of March 28, 2009, and March 29, 2008, the carrying value of the Company’s Euro Debt exceeded its fair value by approximately $86 million and $50 million, respectively. As of March 31, 2008, the carrying value of the Company’s Term Loan approximated its fair value.million. Unrealized gains or losses on debt do not result in the realization or expenditure of cash, unless the debt is retired prior to its maturity.
| |
15. | Financial InstrumentsFair Value Measurements |
Fair Value Measurement
FAS 157US GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs
F-32
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
used in valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). 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 and 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. |
F-29
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement. |
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 following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | |
| | | | | | April 3,
| | March 28,
| |
| | March 28, 2009(a) | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Financial assets carried at fair value: | | | | | | | | | | | | |
Derivative financial instruments | | $ | 27.7 | | |
Auction rate securities | | | 2.3 | | |
Variable rate municipal securities(a) | | | $ | 66.5 | | | $ | — | |
Auction rate securities(b) | | | | 2.3 | | | | 2.3 | |
Derivative financial instruments(b) | | | | 16.6 | | | | 27.7 | |
| | | | | | | | |
Total | | $ | 30.0 | | | $ | 85.4 | | | $ | 30.0 | |
| | | | | | | | |
Financial liabilities carried at fair value: | | | | | | | | | | | | |
Derivative financial instruments | | $ | 3.4 | | |
Derivative financial instruments(b) | | | $ | 4.2 | | | $ | 3.4 | |
| | | | | | | | |
Total | | $ | 3.4 | | | $ | 4.2 | | | $ | 3.4 | |
| | | | | | | | |
| | |
(a) | | Based on Level 1 measurements. |
|
(b) | | Based on Level 2 measurements. |
Derivative financial instruments designated as cash flow hedges are recorded at fair value in the Company’s consolidated balance sheets and, tosheets. To the extent these instruments are designated as cash flow hedges and highly effective at reducing the risk associated with the exposure being hedged, the related unrealized gains or losses are deferred in stockholders’ equity as a component of accumulated other comprehensive income. The Company’s derivative financial instruments are valued using a pricing model, primarily based on market observable external inputs including forward and spot rates for foreign currencies, which considers the impact of the Company’s own credit risk, if any. The Company mitigates the impact of counterparty credit risk by entering into contracts with select financial institutions based on credit ratings and other factors, adhering to established limits for credit exposure and continually assessing the creditworthiness of its counterparties. Changes in counterparty credit risk are considered in the valuation of derivative financial instruments.
The Company’s derivative financial instruments have beenvariable rate municipal securities (“VRMS”) are classified as Level 2 assetsavailable-for-sale securities and are recorded at fair value in the Company’s consolidated balance sheet based upon quoted market prices, with unrealized gains or liabilitieslosses deferred in equity as a component of March 28, 2009.accumulated other comprehensive income.
The Company’s auction rate securities are classified asavailable-for-sale securities and are recorded at fair value in the Company’s consolidated balance sheets, with unrealized gains andor losses deferred in stockholders’ equity as a component of accumulated other comprehensive income (loss).income. Third-party pricing institutions may value auction rate securities at par, which may not necessarily reflect prices that would be obtained in the current market. When quoted market prices are unobservable, fair value is estimated based on a number of known factors and external pricing data, including known maturity dates, the coupon rate based upon the most recent reset market clearing rate, the price/yield representing the average rate of recently successful traded securities, and the total principal balance of each security.
Cash and cash equivalents, restricted cash, short-term and non-current investments held-to-maturity, and accounts receivable are recorded at carrying value, which approximates fair value. The Company’s Euro Debt, which is adjusted for foreign currency fluctuations, is also reported at carrying value.
F-33F-30
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
principal balanceThe Company’s non-financial instruments, which primarily consist of each security. Auction rate securities have been classified as Level 2goodwill, intangible assets, as of March 28, 2009.
Cash and cash equivalents, short-term investmentsproperty and accounts receivableequipment, are recordednot required to be measured at carryingfair value which approximates fair value. Restricted cash ison a recurring basis and are reported at carrying value. The Company’s Euro Debt, which is adjustedHowever, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be recoverable (and at least annually for foreign currency fluctuations, is also reportedgoodwill), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at carryingfair value.
| |
16. | Financial Instruments |
Derivative Financial Instruments
The Company primarily has exposure to changes in foreign currency exchange rates relating to certain anticipated cash flows from its international operations and possible declines in the fair value of reported net assets of certain of its foreign operations, as well as changes in the fair value of its fixed-rate debt relating to changes in interest rates. Consequently, the Company periodically uses derivative financial instruments to manage such risks.
The following tables summarizetable summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in the consolidated balance sheets as of April 3, 2010 and March 28, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amounts | | | Derivative Assets | | | Derivative Liabilities | |
| | | | | | | | Balance
| | | | | Balance
| | | | | Balance
| | | | | Balance
| | | |
| | April 3,
| | | March 28,
| | | Sheet
| | Fair
| | | Sheet
| | Fair
| | | Sheet
| | Fair
| | | Sheet
| | Fair
| |
Derivative Instrument(a) | | 2010 | | | 2009 | | | Line(b) | | Value | | | Line(b) | | Value | | | Line(b) | | Value | | | Line(b) | | Value | |
| | | | | | | | April 3, 2010 | | | March 28, 2009 | | | April 3, 2010 | | | March 28, 2009 | |
| | (millions) | |
|
Designated Hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | 294.0 | | | $ | 239.4 | | | PP | | $ | 14.5 | | | PP | | $ | 22.5 | | | AE | | $ | (2.4 | ) | | AE | | $ | (0.7 | ) |
FC — I/C royalty payments | | | 84.4 | | | | 89.9 | | | (c) | | | 2.1 | | | (d) | | | 3.9 | | | ONCL | | | (0.1 | ) | | AE | | | (1.2 | ) |
FC — Interest payments | | | 13.9 | | | | 17.9 | | | — | | | — | | | PP | | | 0.1 | | | AE | | | (1.2 | ) | | — | | | — | |
FC — Other | | | 2.8 | | | | 3.7 | | | — | | | — | | | PP | | | 0.1 | | | AE | | | (0.1 | ) | | AE | | | (0.4 | ) |
NI — Euro Debt | | | 282.1 | | | | 406.4 | | | — | | | — | | | — | | | — | | | LTD | | | (291.7 | ) | | LTD | | | (320.0 | )(e) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Designated Hedges | | $ | 677.2 | | | $ | 757.3 | | | | | $ | 16.6 | | | | | $ | 26.6 | | | | | $ | (295.5 | ) | | | | $ | (322.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Undesignated Hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | — | | | $ | 16.9 | | | — | | $ | — | | | PP | | $ | 0.5 | | | — | | $ | — | | | AE | | $ | (0.3 | ) |
FC — Other | | | 13.6 | | | | 15.5 | | | — | | | — | | | PP | | | 0.6 | | | AE | | | (0.4 | ) | | AE | | | (0.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Undesignated Hedges | | $ | 13.6 | | | $ | 32.4 | | | | | $ | — | | | | | $ | 1.1 | | | | | $ | (0.4 | ) | | | | $ | (1.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Hedges | | $ | 690.8 | | | $ | 789.7 | | | | | $ | 16.6 | | | | | $ | 27.7 | | | | | $ | (295.9 | ) | | | | $ | (323.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | FC = Forward exchange contracts for the sale or purchase of foreign currencies; NI = Net Investment; Euro Debt = Euro-denominated 4.5% notes due October 2013. |
|
(b) | | PP = Prepaid expenses and other; OA = Other assets; AE = Accrued expenses and other; ONCL = Other non-current liabilities; LTD = Long-term debt. |
|
(c) | | $1.1 million included within PP and $1.0 million included within OA. |
|
(d) | | $2.6 million included within PP and $1.3 million included within OA. |
|
(e) | | The Company’s Euro Debt is reported at carrying value in the Company’s consolidated balance sheets. The carrying value of the Euro Debt was $282.1 million as of April 3, 2010 and $406.4 million as of March 28, 2009. |
F-31
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the related impact of the Company’s derivative instruments on its consolidated financial statements as of March 28, 2009 and March 29, 2008:for the fiscal years presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amounts | | | Derivative Assets | | | Derivative (Liabilities) | |
| | | | | | | | Balance
| | | | | | Balance
| | | | | | Balance
| | | | | | Balance
| | | | |
| | March 28,
| | | March 29,
| | | Sheet
| | | Fair
| | | Sheet
| | | Fair
| | | Sheet
| | | Fair
| | | Sheet
| | | Fair
| |
Derivative Instrument(a) | | 2009 | | | 2008 | | | Line(b) | | | Value | | | Line(b) | | | Value | | | Line(b) | | | Value | | | Line(b) | | | Value | |
| | | | | | | | March 28, 2009 | | | March 29, 2008 | | | March 28, 2009 | | | March 29, 2008 | |
| | (millions) | |
|
Designated Hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | 239.4 | | | $ | 257.0 | | | | PP | | | $ | 22.5 | | | | PP | | | $ | 1.4 | | | | AE | | | $ | (0.7 | ) | | | AE | | | $ | (21.9 | ) |
FC — I/C royalty payments | | | 89.9 | | | | 14.2 | | | | (e) | | | | 3.9 | | | | — | | | | — | | | | AE | | | | (1.2 | ) | | | AE | | | | (1.0 | ) |
FC — Interest payments | | | 17.9 | | | | 19.2 | | | | PP | | | | 0.1 | | | | PP | | | | 1.9 | | | | — | | | | — | | | | — | | | | — | |
FC — I/C marketing contributions | | | 3.0 | | | | 1.9 | | | | — | | | | — | | | | PP | | | | 0.1 | | | | AE | | | | (0.4 | ) | | | — | | | | — | |
FC — Operational obligations | | | 0.7 | | | | 30.2 | | | | PP | | | | 0.1 | | | | PP | | | | 0.5 | | | | — | | | | — | | | | — | | | | — | |
Net Investment — Euro Debt | | | 406.4 | | | | 381.2 | | | | — | | | | — | | | | — | | | | — | | | | LTD | | | | (320.0 | )(c) | | | LTD | | | | (423.0 | )(c) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Designated Hedges | | $ | 757.3 | | | $ | 703.7 | | | | | | | $ | 26.6 | | | | | | | $ | 3.9 | | | | | | | $ | (322.3 | ) | | | | | | $ | (445.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Undesignated Hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | 16.9 | | | $ | 11.7 | | | | PP | | | $ | 0.5 | | | | — | | | $ | — | | | | AE | | | $ | (0.3 | ) | | | AE | | | $ | (0.3 | ) |
FC — Forecasted sales | | | — | | | | 48.2 | | | | — | | | | — | | | | PP | | | | 1.7 | | | | — | | | | — | | | | — | | | | — | |
FC — Other(d) | | | 15.5 | | | | 5.0 | | | | PP | | | | 0.6 | | | | — | | | | — | | | | AE | | | | (0.8 | ) | | | AE | | | | (0.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Undesignated Hedges | | $ | 32.4 | | | $ | 64.9 | | | | | | | $ | 1.1 | | | | | | | $ | 1.7 | | | | | | | $ | (1.1 | ) | | | | | | $ | (0.7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Derivatives | | $ | 789.7 | | | $ | 768.6 | | | | | | | $ | 27.7 | | | | | | | $ | 5.6 | | | | | | | $ | (323.4 | ) | | | | | | | (446.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses)
| | | Gains (Losses)
| | | |
| | Recognized in
| | | Reclassified from
| | | |
| | OCI(b) | | | AOCI(b)to Earnings | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | | | Location of Gains (Losses)
|
| | April 3,
| | | March 28,
| | | March 29,
| | | April 3,
| | | March 28,
| | | March 29,
| | | Reclassified from AOCI(b)
|
Derivative Instrument(a) | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | | | to Earnings |
| | | | | | | | (millions) | | | | | | | | | |
|
Designated Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | (8.4 | ) | | $ | 38.5 | | | $ | (25.5 | ) | | $ | 12.6 | | | $ | (3.8 | ) | | $ | (8.4 | ) | | Cost of goods sold |
FC — I/C royalty payments | | | (1.3 | ) | | | 3.8 | | | | (1.0 | ) | | | (2.0 | ) | | | (1.0 | ) | | | (1.0 | ) | | Foreign currency gains (losses) |
FC — Interest payments | | | (0.8 | ) | | | (1.2 | ) | | | 1.5 | | | | 1.2 | | | | (0.7 | ) | | | 1.8 | | | Foreign currency gains (losses) |
FC — Other | | | 0.2 | | | | (0.9 | ) | | | 0.6 | | | | 0.2 | | | | 0.2 | | | | 0.2 | | | (c) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | (10.3 | ) | | $ | 40.2 | | | $ | (24.4 | ) | | $ | 12.0 | | | $ | (5.3 | ) | | $ | (7.4 | ) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Designated Hedge of Net Investment: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Euro Debt | | $ | (1.8 | ) | | $ | 66.6 | | | $ | (73.8 | ) | | $ | — | | | $ | — | | | $ | — | | | (d) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Designated Hedges | | $ | (12.1 | ) | | $ | 106.8 | | | $ | (98.2 | ) | | $ | 12.0 | | | $ | (5.3 | ) | | $ | (7.4 | ) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Gains (Losses)
| | | | |
| | Recognized in Earning | | | | |
| | Fiscal Years Ended | | | Location of Gains (Losses)
| |
Derivative Instrument(a) | | April 3, 2010 | | | March 28, 2009 | | | March 29, 2008 | | | Recognized in Earnings | |
| | (millions) | | | | |
|
Undesignated Hedges: | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | 0.5 | | | $ | 0.5 | | | $ | (0.2 | ) | | | Foreign currency gains (losses | ) |
FC — Other | | | 0.2 | | | | (0.8 | ) | | | 0.1 | | | | Foreign currency gains (losses | ) |
| | | | | | | | | | | | | | | | |
Total Undesignated Hedges | | $ | 0.7 | | | $ | (0.3 | ) | | $ | (0.1 | ) | | | | |
| | | | | | | | | | | | | | | | |
| | |
(a) | | FC = Forward exchange contracts for the sale or purchase of foreign currencies; Euro Debt = €300 million principal notes due October 2013. |
|
(b) | | PP = Prepaid expenses and other; OA = Other assets; AE = Accrued expenses and other; LTD = Long-term debt. |
|
(c) | | The Company’s Euro Debt is reported at carrying value in the Company’s consolidated balance sheets. The carrying value of the Euro Debt was $406.4 as of March 28, 2009 and $472.8 million as of March 29, 2008. |
|
(d) | | Primarily related to forward foreign exchange contracts entered into in connection with the Company’s Japanese Business Acquisitions minority squeeze-out, as discussed in Note 5. |
|
(e) | | $2.6 million included within PP and $1.3 million included within OA. |
F-34
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | |
| | Gains (Losses)
| | | Gains (Losses)
| | | |
| | Recognized in
| | | Reclassified from
| | | |
| | OCI(b) | | | AOCI(b) to Earnings | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | | | |
| | March 28,
| | | March 29,
| | | March 28,
| | | March 29,
| | | Location of Gains (Losses)
|
Derivative Instrument(a) | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | Reclassified from AOCI to Earnings |
| | (millions) | | | |
|
Designated Cash Flow Hedges: | | | | | | | | | | | | | | | | | | |
FC — Inventory purchases | | $ | 38.5 | | | $ | (25.5 | ) | | $ | (3.8 | ) | | $ | (8.4 | ) | | Cost of goods sold |
FC — I/C royalty payments | | | 3.8 | | | | (1.0 | ) | | | (1.0 | ) | | | (1.0 | ) | | Foreign currency gains (losses) |
FC — Interest payments | | | (1.2 | ) | | | 1.5 | | | | (0.7 | ) | | | 1.8 | | | Foreign currency gains (losses) |
FC — I/C marketing contributions | | | (0.4 | ) | | | 0.1 | | | | (0.2 | ) | | | 0.2 | | | Foreign currency gains (losses) |
FC — Operational obligations | | | (0.5 | ) | | | 0.5 | | | | 0.4 | | | | — | | | Selling, general and administrative expenses |
| | | | | | | | | | | | | | | | | | |
| | $ | 40.2 | | | $ | (24.4 | ) | | $ | (5.3 | ) | | $ | (7.4 | ) | | |
| | | | | | | | | | | | | | | | | | |
Designated Hedge of Net Investment: | | | | | | | | | | | | | | | | | | |
Euro Debt | | $ | 66.6 | | | $ | (73.8 | ) | | $ | — | | | $ | — | | | (c) |
| | | | | | | | | | | | | | | | | | |
Total Designated Hedges | | $ | 106.8 | | | $ | (98.2 | ) | | $ | (5.3 | ) | | $ | (7.4 | ) | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Gains (Losses)
| | | | |
| | Recognized in Earnings | | | | |
| | Fiscal Years Ended | | | | |
| | March 28,
| | | March 29,
| | | Location of Gains (Losses)
| |
Derivative Instrument(a) | | 2009 | | | 2008 | | | Recognized in Earnings | |
| | (millions) | | | | |
|
Undesignated Hedges: | | | | | | | | | | | | |
FC — Inventory purchases | | $ | 0.5 | | | $ | (0.2 | ) | | | Foreign currency gains (losses | ) |
FC — Forecasted revenues | | | 1.0 | | | | 1.6 | | | | Foreign currency gains (losses | ) |
FC — Other(d) | | | (1.8 | ) | | | (1.5 | ) | | | Foreign currency gains (losses | ) |
| | | | | | | | | | | | |
Total Undesignated Hedges | | $ | (0.3 | ) | | $ | (0.1 | ) | | | | |
| | | | | | | | | | | | |
| | |
(a) | | FC = Forward exchange contracts for the sale or purchase of foreign currencies; Euro Debt = €300 million principalEuro-denominated 4.5% notes due October 2013. |
|
(b) | | Accumulated other comprehensive income (“AOCI”), including the respective fiscal year’s other comprehensive income (“OCI”), is classified as a component of total stockholders’ equity. |
|
(c) | | Principally recorded within foreign currency gains (losses). |
|
(d) | | To the extent applicable, to be recognized as a gain (loss) on the sale or liquidation of the hedged net investment. |
|
(d) | | Primarily related to forward foreign exchange contracts entered into in connection with the Company’s Japanese Business Acquisitions minority squeeze-out, as discussed in Note 5. |
Over the next twelve months, it is expected that approximately $23$12 million of net gains deferred in accumulated other comprehensive income related to foreign currency exchange contractsderivative financial instruments outstanding as of March 28, 2009April 3, 2010 will be recognized in earnings. The Company recognized an aggregate net gain on foreign currency exchange contracts in earnings of approximately $4 million for Fiscal 2007. The Company recorded within accumulated other comprehensive income the translation effects of the Euro Debt to U.S. dollars, resulting in an aggregate loss of $30.8 million for Fiscal 2007. No material gains or losses relating to ineffective hedges were recognized during any of the fiscal years presented.
The following is a summary of the Company’s risk management strategies and the effect of those strategies on the consolidated financial statements.
F-35
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign Currency Risk Management
Forward Foreign Currency Exchange Contracts
The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risk from exchange rate fluctuations on inventory purchases, intercompany royalty payments made by certain of its international operations, intercompany contributions made to fund certain marketing efforts of its international operations, interest payments made in connection with outstanding debt, other foreign currency-denominated
F-32
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operational obligations including payroll, rent, insurance and benefit payments, and foreign currency-denominated revenues. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the Swiss Franc, and the British Pound Sterling, the Company hedges a portion of its foreign currency exposures anticipated over the ensuing twelve-month to two-year periods. In doing so, the Company uses foreign currency exchange forward contracts that generally have maturities of three months to two years to provide continuing coverage throughout the hedging period.
The Company records its foreign currency exchange contracts at fair value in its consolidated balance sheets. ForeignTo the extent foreign currency exchange contracts designated as cash flow hedges at hedge inception are accounted forhighly effective in accordance with FAS 133. As such, tooffsetting the extent these hedges are effective,change in the value of the hedged item, the related gains (losses) are deferred in stockholders’ equity as a component of accumulated other comprehensive income. These deferred gains (losses) are then recognized in our consolidated statements of operations as follows:
| | |
| • | Forecasted Inventory Purchases— Recognized as part of the cost of the inventory being hedged within cost of goods sold when the related inventory is sold. |
|
| • | Intercompany Royalty PaymentsandMarketing Contributions— Recognized within foreign currency gains (losses) in the period in which the related royalties or marketing contributions being hedged are received or paid. |
|
| • | Operational Obligations— Recognized primarily within SG&A expenses in the period in which the hedged forecasted transaction affects earnings. |
|
| • | Interest Payments on Euro Debt— Recognized within foreign currency gains (losses) in the period in which the recorded liability impacts earnings due to foreign currency exchange remeasurement. |
ToDuring the extent that anyfirst quarter of theseFiscal 2010, the Company entered into two foreign currency exchange contracts are not considered to be perfectly effectivemitigate the foreign exchange cash flow variability associated with the then forecasted repurchase of a portion of the Company’s outstanding Euro-denominated 4.5% notes in offsetting the change in theJuly 2009. The exchange contracts had an aggregate notional value of the hedged item, any changes in fair value relating$123.0 million and were designated as cash flow hedges. Refer to the ineffective portion are immediately recognized in earnings. If a hedge relationship is terminated, the change in fair valueNote 14 for further discussion of the derivative previously recorded in accumulated other comprehensive income is realized when the hedged item affects earnings consistent with the original hedging strategy, unless the forecasted transaction is no longer probableCompany’s partial repurchase of occurring in which case the accumulated amount is immediately recognized in earnings. In addition, changes in fair value relating to undesignated foreign currency exchange contracts are immediately recognized in earnings.its Euro-denominated 4.5% notes.
Hedge of a Net Investment in Certain European Subsidiaries
The Company designated the entire principal amount of its outstanding Euro Debt as a hedge of its net investment in certain of its European subsidiaries. As required by FAS 133, theThe changes in fair value of a derivative instrument or changes in a non-derivative financial instrument (such as debt) that is designated as a hedge of a net investment in a foreign operation are reported in the same manner as a translation adjustment, under FAS No. 52, “Foreign Currency Translation,” to the extent it is effective as a hedge. As such, changes in the fair value of the Euro Debt resulting from changes in the Euro exchange rate have been, and continue to be, reported in stockholders’ equity as a component of accumulated other comprehensive income.
F-36
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In assessing effectiveness, the Company uses the spot rate method of accounting to value foreign currency exchange rate changes in both its foreign subsidiaries and the derivative designated as a hedge of a net investment. If the notional amount of the derivative designated as a hedge of a net investment is greater than the portion of the net investment being hedged, hedge ineffectiveness is recognized immediately in earnings. Changes in the fair value of the hedging instrument are recorded in stockholders’ equity as a component of accumulated other comprehensive income until the sale or liquidation of the hedged net investment.
Interest Rate Risk ManagementInvestments
DuringThe Company classifies its investments in securities at the first six monthstime of Fiscal 2007,purchase as eitherheld-to-maturity,available-for-sale or trading, and re-evaluates such classifications on a quarterly basis.
F-33
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Held-to-maturity investments consist of debt securities that the Company entered into three forward-startinghas the intent and ability to retain until maturity. These securities are recorded at cost, adjusted for the amortization of premiums and discounts, which approximates fair value.
Available-for-sale investments primarily consist of VRMS and auction rate securities. VRMS represent long-term municipal bonds with interest rates that reset at pre-determined short-term intervals, and can typically be put to the issuer and redeemed for cash upon demand, or shortly thereafter. Auction rate swap contracts in anticipation of the Company’s proposed refinancing of the 1999 Euro Debt, which was completed in October 2006. These contracts were designated as cash flow hedges of a forecasted transactionsecurities also have characteristics similar to issue new debt in connection with the planned refinancing. The interest rate swaps hedged a total of €200.0 million, a portion of the underlying interest rate exposure on the anticipated refinancing. Under the terms of the swaps,short-term investments. However, the Company paid a weighted-average fixed rate of interest of 4.1% and received variable interest based on six-month EURIBOR. The Company terminatedhas classified these securities as non-current investments in its consolidated balance sheet as current market conditions call into question its ability to redeem these investments for cash within the swaps on September 28, 2006, which was the date the interest rate for the Euro Debt was determined. As a result, the Company made a payment of approximately €3.5 million ($4.4 million) in settlement of the swaps. An amount of $0.2 million was recognized as a loss in Fiscal 2007 due to the partial ineffectiveness of the cash flow hedge as a result of the forecasted transaction closing on October 5, 2006 instead of November 22, 2006 (the maturity date of the 1999 Euro Debt). The remaining loss of $4.2 million was deferrednext twelve months.Available-for-sale investments are recorded at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive income within stockholders’ equity(loss) in the consolidated balance sheets, and is beingrelated realized gains or losses classified as a component of interest and other income, net, in the consolidated statements of operations. No material unrealized or realized gains or losses onavailable-for-sale investments were recognized in earnings as an adjustment to interest expense over the seven-year termduring any of the Euro Debt.fiscal years presented.
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.
The following table summarizes the Company’s short-term and non-current investments recorded in the consolidated balance sheets as of April 3, 2010 and March 28, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | April 3, 2010 | | | March 28, 2009 | |
| | Short-term
| | | Non-current
| | | | | | Short-term
| | | Non-current
| | | | |
Type of Investment | | < 1 year | | | 1 - 3 years | | | Total | | | < 1 year | | | 1 - 3 years | | | Total | |
| | (millions) | |
|
Held-to-Maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury bills | | $ | 126.6 | | | $ | — | | | $ | 126.6 | | | $ | 101.2 | | | $ | — | | | $ | 101.2 | |
Municipal bonds | | | 102.2 | | | | 67.8 | | | | 170.0 | | | | 14.8 | | | | 11.6 | | | | 26.4 | |
Commercial paper | | | 2.0 | | | | — | | | | 2.0 | | | | — | | | | — | | | | — | |
Other securities | | | — | | | | 5.0 | | | | 5.0 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Totalheld-to-maturity investments | | $ | 230.8 | | | $ | 72.8 | | | $ | 303.6 | | | $ | 116.0 | | | $ | 11.6 | | | $ | 127.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-Sale: | | | | | | | | | | | | | | | | | | | | | | | | |
VRMS | | $ | 66.5 | | | $ | — | | | $ | 66.5 | | | $ | — | | | $ | — | | | $ | — | |
Auction rate securities | | | — | | | | 2.3 | | | | 2.3 | | | | — | | | | 2.3 | | | | 2.3 | |
Other securities | | | — | | | | 0.4 | | | | 0.4 | | | | — | | | | 0.4 | | | | 0.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Totalavailable-for-sale investments | | $ | 66.5 | | | $ | 2.7 | | | $ | 69.2 | | | $ | — | | | $ | 2.7 | | | $ | 2.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other: | | | | | | | | | | | | | | | | | | | | | | | | |
Time deposits and other | | $ | 286.8 | | | $ | — | | | $ | 286.8 | | | $ | 222.7 | | | $ | 15.4 | | | $ | 238.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Investments | | $ | 584.1 | | | $ | 75.5 | | | $ | 659.6 | | | $ | 338.7 | | | $ | 29.7 | | | $ | 368.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
16.17. | Commitments and Contingencies |
Leases
The Company operates its retail stores under various leasing arrangements. The Company also occupies various office and warehouse facilities and uses certain equipment under numerous lease agreements. Such leasing arrangements are accounted for under the provisions of FAS 13 as either operating leases or capital leases. In this context, capital leases include leases whereby the Company is considered to have the substantive risks of ownership during construction of a leased property pursuant to the provisions ofEITF 97-10.property. Information on the Company’s operating and capital leasing activities is set forth below.
F-34
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Operating Leases
The Company is typically required to make minimum rental payments, and often contingent rental payments, under its operating leases. Substantially all factory and full-price retail store leases provide for contingent rentals based upon sales, and certain rental agreements require payment based solely on a percentage of sales. Terms of the Company’s leases generally contain renewal options, rent escalation clauses and landlord incentives. Rent expense, net of sublease income which was not significant, was approximately $267 million in Fiscal 2010, $237 million in Fiscal 2009 and $208 million in Fiscal 2008 and $172 million in Fiscal 2007.2008. Such amounts include contingent rental charges of approximately $16$39 million for Fiscal 2010, $33 million for Fiscal 2009 and $14 million for Fiscal 2008 and $12 million for Fiscal 2007.2008. In addition to such amounts, the Company is normally required to pay taxes, insurance and occupancy costs relating to the leased real estate properties.
F-37
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of March 28, 2009,April 3, 2010, future minimum rental payments under noncancelable operating leases with lease terms in excess of one year were as follows:
| | | | | | | | |
| | Annual Minimum
| | | Minimum
| |
| | Operating Lease
| | | Operating Lease
| |
| | Payments(a) | | | Payments(a) | |
| | (millions) | | | (millions) | |
|
Fiscal 2010 | | $ | 179.9 | | |
Fiscal 2011 | | | 167.6 | | | $ | 205.6 | |
Fiscal 2012 | | | 159.2 | | | | 198.2 | |
Fiscal 2013 | | | 151.9 | | | | 196.0 | |
Fiscal 2014 | | | 143.0 | | | | 184.4 | |
Fiscal 2015 and thereafter | | | 831.0 | | |
Fiscal 2015 | | | | 169.8 | |
Fiscal 2016 and thereafter | | | | 877.3 | |
| | | | | | |
Total | | $ | 1,632.6 | | | $ | 1,831.3 | |
| | | | | | |
| | |
(a) | | Net of sublease income, which is not significant in any period. |
Capital Leases
Assets under capital leases amounted to approximately $39 million at the end of Fiscal 2010 and $38 million at the end of both Fiscal 2009 and Fiscal 2008.2009. Such assets are classified within property and equipment in the consolidated balance sheets. As of March 28, 2009,April 3, 2010, future minimum rental payments under noncancelable capital leases with lease terms in excess of one year were as follows:
| | | | | | | | |
| | Annual Minimum
| | | Minimum
| |
| | Capital Lease
| | | Capital Lease
| |
| | Payments(a) | | | Payments(a) | |
| | (millions) | | | (millions) | |
|
Fiscal 2010 | | $ | 8.3 | | |
Fiscal 2011 | | | 9.1 | | | $ | 9.9 | |
Fiscal 2012 | | | 9.0 | | | | 7.7 | |
Fiscal 2013 | | | 9.0 | | | | 6.2 | |
Fiscal 2014 | | | 9.0 | | | | 6.2 | |
Fiscal 2015 and thereafter | | | 47.3 | | |
Fiscal 2015 | | | | 6.2 | |
Fiscal 2016 and thereafter | | | | 46.0 | |
| | | | | | |
Total | | $ | 91.7 | | | $ | 82.2 | |
| | | | | | |
| | |
(a) | | Net of sublease income, which is not significant in any period. |
F-35
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employment 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, which include inventory purchase commitments, outstanding letters of credit and minimum funding commitments to investees, amounted to approximately $600$776 million as of March 28, 2009. In addition, as discussed in Note 5, the Company has entered into an agreement to assume direct control of its Polo-branded licensed apparel business in Southeast Asia effective January 1, 2010 in exchange for a
F-38
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cash payment of $20 million and certain other consideration. The transaction is subject to certain customary closing conditions.April 3, 2010.
Litigation
California Class Action Litigation
On October 11, 2007 and November 2, 2007, two class action lawsuits were filed by two customers in state court in California asserting that while they were shopping at certain of the Company’s factory stores in California, the Company allegedly required them to provide certain personal information at thepoint-of-sale in order to complete a credit card purchase. The plaintiffs purported to represent a class of customers in California who allegedly were injured by being forced to provide their address and telephone numbers in order to use their credit cards to purchase items from the Company’s stores, which allegedly violated Section 1747.08 of California’s Song-Beverly Act. The complaints sought an unspecified amount of statutory penalties, attorneys’ fees and injunctive relief. The Company subsequently had the actions moved to the United States District Court for the Eastern and Central Districts of California. The Company commenced mediation proceedings with respect to these lawsuits and on October 17, 2008, the Company agreed in principle to settle these claims by agreeing to issue $20 merchandise discount coupons with six month expiration dates to eligible parties and paying the plaintiffs’ attorneys’ fees. The termscourt granted preliminary approval of the final settlement remain subject to court approval.terms on July 17, 2009. In connection with this settlement, the Company recorded a $5 million reserve against its expected loss exposure during the second quarter of Fiscal 2009. As part of the required settlement process, the Company notified the relevant attorneys general regarding the potential settlement, and no objections were registered. At a hearing on December 7, 2009, the Court held that the terms of the settlement were fair, just and reasonable and provided fair compensation for class members. In addition, the Court overruled an objection that had been filed by a single customer. The Court then denied the objector’s subsequent motion for the Court to reconsider its order on the fairness of the settlement. The period within which the objector had to appeal or otherwise seek relief from the Court’s orders expired in February 2010 without an appeal and the settlement is effective. Accordingly, the coupons were issued in February with an expiration date of August 16, 2010. Based on coupon redemption experience to date, the Company reversed $1.7 million of its original $5 million reserve into income during the fourth quarter of Fiscal 2010.
Wathne Imports Litigation
On August 19, 2005, Wathne Imports, Ltd. (“Wathne”), our then domestic licensee for luggage and handbags, filed a complaint in the U.S. District Court in the Southern District of New York against usthe Company and Ralph Lauren, our Chairman and Chief Executive Officer, asserting, among other things, federal trademark law violations, breach of contract, breach of obligations of good faith and fair dealing, fraud and negligent misrepresentation. The complaint sought, among other relief, injunctive relief, compensatory damages in excess of $250 million and punitive damages of not less than $750 million. On September 13, 2005, Wathne withdrew this complaint from the U.S. District Court and filed a complaint in the Supreme Court of the State of New York, New York County, making substantially the same allegations and claims (excluding the federal trademark claims), and seeking similar relief. On February 1, 2006, the court granted our motion to dismiss all of the causes of action, including the cause of action against Mr. Lauren, except for the breach of contract related claims, and denied Wathne’s motion for a preliminary injunction. We believe this lawsuit to be without merit, andFollowing some discovery, we moved for summary judgment on the remaining
F-36
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
claims. Wathne cross-moved for partial summary judgment. A hearing on these motions occurred on November 1, 2007. The judge presiding in this case provided a written ruling on the summary judgment motion onIn an April 11, 2008. The Court2008 Decision and Order, the court granted Polo’s summary judgment motion to dismiss in large measure,most of the claims against the Company, and denied Wathne’s cross-motion.cross-motion for summary judgment. Wathne appealed the dismissal of its claims and a hearing in connection with this appeal was held beforeto the Appellate Division of the Supreme CourtCourt. Following a hearing on May 19, 2009. A ruling from2009, the Appellate Division with respect to this appealissued a Decision and Order on June 9, 2009 which, in large part, affirmed the lower court’s ruling. Discovery on those claims that were not dismissed is not expected for several months. Aongoing and a trial date has not yet been established in connection with this matter.set. We intend to continue to contest the remaining claims in this lawsuit vigorously. Accordingly, managementManagement does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company’s liquidity or financial position.
California Labor Law Litigation
On March 2, 2006, a former employee at our Club Monaco store in Los Angeles, California filed a lawsuit against the Company in the San Francisco Superior Court alleging violations of California wage and hour laws. The plaintiff purported to represent a class of Club Monaco store employees who allegedly were injured by being improperly classified as exempt employees and thereby did not receive compensation for overtime and did not receive meal and rest breaks. The complaint sought an unspecified amount of compensatory damages,
F-39
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
disgorgement of profits, attorneys’ fees and injunctive relief. On August 21, 2007, eleven former and then current employees of the Company’s Club Monaco stores in California filed a lawsuit in Los Angeles Superior Court alleging similar claims as the Club Monaco action in San Francisco. The complaint sought an unspecified amount of compensatory damages, attorneys’ fees and punitive damages. The parties to these two Club Monaco litigations agreed to retain a mediator in an effort to resolve both matters and agreed to settle all claims involving both litigations at an aggregate cost of $1.2 million. The terms of the settlement were recently approved by both the Los Angeles and San Francisco courts.
On May 30, 2006, four former employees of our Ralph Lauren stores in Palo Alto and San Francisco, California filed a lawsuit in the San Francisco Superior Court alleging violations of California wage and hour laws. The plaintiffs purportpurported to represent a class of employees who allegedly havehad been injured by not properly being paid commission earnings, not being paid overtime, not receiving rest breaks, being forced to work off of the clock while waiting to enter or leave the storestores and being falsely imprisoned while waiting to leave the store.stores. The complaint seekssought an unspecified amount of compensatory damages, damages for emotional distress, disgorgement of profits, punitive damages, attorneys’ fees and injunctive and declaratory relief. We have filed a cross-claim against one of the plaintiffs for his role in allegedly assisting a former employee to misappropriate Company property. Subsequent to answering the complaint, we had the action moved to the United States District Court for the Northern District of California. On July 8, 2008, the United States District Court for the Northern District of California granted plaintiffs’ motion for class certification. We believe this suit is without meritcertification and intendsubsequently denied our motion to contest it vigorously. Accordingly, management does not expect thatdecertify the ultimateclass. On November 5, 2008, the District Court stayed litigation of the rest break claims pending the resolution of this mattera separate California Supreme Court case on the standards of class treatment for rest break claims. On January 25, 2010, the District Court granted plaintiffs’ motion to sever the rest break claims from the rest of the case and denied our motion to decertify the waiting time claims. The District Court also ordered that a trial be held on the waiting time and overtime claims, which commenced on March 8, 2010. During trial, the parties reached an agreement to settle all of the claims in the litigation, including the rest break claims, for $4 million. The District Court held a hearing on May 14, 2010 and advised the parties that it would grant preliminary approval of the settlement. Once the Court enters an order granting preliminary approval of the settlement, the members of the class will have a material adverse effect on60 days from the Company’s liquiditydate of preliminary approval to submit claims or financial position.
Club Monaco International Licensing Litigation
On May 15, 2009,object to the Company’s subsidiary, Club Monaco Corp., commenced an action insettlement. A hearing has been scheduled for August 20, 2010 for the SupremeDistrict Court to determine if final approval of the State of New York, New York County, against LCJG Distribution Co., Ltd. (“LCJG”) and Lane Crawford Joyce Group Limited (“Lane Crawford”). LCJG is a Club Monaco Corp. licensee in Asia pursuant to a Club Monaco Store License Agreement, dated as of February 28, 2005 (as amended, the “License Agreement”). Lane Crawford is the guarantor of LCJG’s obligations under the License Agreement, pursuant to a Guaranty, dated as of February 28, 2005, which was executed by Lane Crawford (the “Guaranty”). The License Agreement requires that LCJG pay royalties and other payments to Club Monaco Corp. for the use by LCJG of the Club Monaco brand insettlement should be granted. In connection with this settlement, the operation of various Club Monaco stores in Asia. Club Monaco Corp.’s Complaint alleges that LCJG and Lane Crawford have breachedCompany recorded a $4 million reserve against its expected loss exposure during the License Agreement and Guaranty by, among other things, failing to pay Club Monaco certain royalties and other payments which both LCJG and Lane Crawford are responsible for under the License Agreement and Guaranty. Management does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company’s liquidity, financial position or results of operations.
Credit Card Matter
In the thirdfourth quarter of Fiscal 2007, the Company was notified of an alleged compromise of its retail store information systems that process its credit card data for certain Club Monaco stores in Canada. As of the end of Fiscal 2007, the Company had recorded a total reserve of $5.0 million for this matter based on its best estimate of its potential exposure at that time. In October 2008, the Company was notified that this matter had been fully resolved. The Company’s aggregate losses in this matter were less than $0.4 million. The Company reversed $4.1 million of its original $5.0 million reserve into income during Fiscal 2008 based on favorable developments in this matter at that point, and the remaining $0.5 million excess reserve was reversed into income during the second quarter of Fiscal 2009.
F-40
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2010.
Other Matters
We are otherwise involved, from time to time, in litigation, other legal claims and proceedings involving matters associated with or incidental to our business, including, among other things, matters involving credit card fraud, trademark and other intellectual property, licensing, and employee relations and other matters incidental to our business.relations. We believe that the resolution of these other matters currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, our assessment of the current litigation or other legal claims could change in light of the discovery of facts not presently known to us 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.
| |
17.18. | Stockholders’ 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
F-37
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, Chairman of the Board and Chief Executive Officer, and related entities.entities controlled by the Lauren family and are convertible at any time into shares of Class A common stock on aone-for-one basis.
Class B Common Stock Conversion
During Fiscal 2010, Mr. Ralph Lauren converted 1.2 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. This transaction resulted in a reclassification within equity, and had no net effect on the Company’s consolidated balance sheet for the fiscal year ended April 3, 2010.
Common Stock Repurchase Program
In May 2008,On November 4, 2009, the Company’s Board of Directors approved an expansion of the Company’s existing common stock repurchase program that allows the Company to repurchase up to an additional $250$225 million of Class A common stock. Repurchases of shares of Class A common stock are subject to overall business and market conditions.
In Fiscal 2010, 2.9 million shares of Class A common stock were repurchased by the Company at a cost of $215.9 million under its repurchase program. The remaining availability under the Company’s common stock repurchase program was approximately $275 million as of April 3, 2010. In addition, in Fiscal 2010, 0.3 million shares of Class A common stock at a cost of $15.1 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company’s 1997 Long-Term Stock Incentive Plan, as amended (the “1997 Plan”).
In Fiscal 2009, 1.8 million shares of Class A common stock were repurchased by the Company at a cost of $126.2 million under its repurchase program.million. Also, during the first quarter of Fiscal 2009, 0.4 million shares traded prior to the end of Fiscal 2008 were settled at a cost of $24.0 million. The remaining availability under the common stock repurchase program was approximately $266 million as of March 28, 2009.
In addition, in Fiscal 2009, 0.3 million shares of Class A common stock at a cost of $19.6 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company’s 1997 Long-Term Stock Incentive Plan, as amended and restated.Plan.
In Fiscal 2008, share repurchases amounted to 6.1 million shares of Class A common stock at a cost of $476.4 million, including $24.0 million (0.4 million shares) that was traded prior to the end of the fiscal year for which settlement occurred in April 2008. In addition, in Fiscal 2008, 0.3 million shares of Class A common stock at a cost of $23.0 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company’s 1997 Long-Term Stock Incentive Plan, as amended and restated.Plan.
In Fiscal 2007,Repurchased and surrendered shares are accounted for as treasury stock at cost and will be held in treasury for future use.
On May 18, 2010, the Company’s Board of Directors approved a further expansion of the Company’s existing common stock repurchase program that allows the Company repurchased 3.5to repurchase up to an additional $275 million shares of Class A common stock at a cost of $231.3 million.stock.
Dividends
Since 2003, the Company has maintained a regular quarterly cash dividend of $0.05 per share, or $0.20 per share on an annual basis,program on its common stock. On November 4, 2009, the Company’s Board of Directors approved an increase to the Company’s quarterly cash dividend on its common stock from $0.05 per share to $0.10 per share. Dividends paid amounted to $24.7 million in Fiscal 2010, $19.9 million in Fiscal 2009 and $20.5 million in Fiscal 2008 and $20.9 million in Fiscal 2007.2008.
F-41F-38
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
18.19. | Accumulated Other Comprehensive Income |
The following summary sets forth the components of other comprehensive income (loss), net of tax, accumulated in stockholders’ equity:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Net
| | | | |
| | Foreign
| | | Net Unrealized
| | | Net Unrealized
| | | Unrealized
| | | Total
| |
| | Currency
| | | Gains (Losses)
| | | Gains (Losses)
| | | Gains
| | | Accumulated
| |
| | Translation
| | | on Derivative
| | | on Available-
| | | (Losses) on
| | | Other
| |
| | Gains
| | | Financial
| | | for-Sale
| | | Defined
| | | Comprehensive
| |
| | (Losses) | | | Instruments(a) | | | Investments | | | Benefit Plans | | | Income (Loss) | |
| | (millions) | |
|
Balance at April 1, 2006 | | $ | 61.0 | | | $ | (45.5 | ) | | $ | — | | | $ | — | | | $ | 15.5 | |
Fiscal 2007 pretax activity(b) | | | 53.1 | | | | (34.8 | ) | | | — | | | | — | | | | 18.3 | |
Fiscal 2007 tax benefit (provision)(b) | | | 1.2 | | | | 5.5 | | | | — | | | | — | | | | 6.7 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2007 | | | 115.3 | | | | (74.8 | ) | | | — | | | | — | | | | 40.5 | |
Fiscal 2008 pretax activity(c) | | | 144.7 | | | | (90.8 | ) | | | (0.4 | ) | | | (0.2 | ) | | | 53.3 | |
Fiscal 2008 tax benefit (provision)(c) | | | (8.9 | ) | | | 27.5 | | | | 0.2 | | | | — | | | | 18.8 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 29, 2008 | | | 251.1 | | | | (138.1 | ) | | | (0.2 | ) | | | (0.2 | ) | | | 112.6 | |
Fiscal 2009 pretax activity(d) | | | (75.5 | ) | | | 112.1 | | | | 0.4 | | | | (0.6 | ) | | | 36.4 | |
Fiscal 2009 tax benefit (provision)(d) | | | 5.8 | | | | (28.0 | ) | | | (0.1 | ) | | | 0.1 | | | | (22.2 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 28, 2009 | | $ | 181.4 | | | $ | (54.0 | ) | | $ | 0.1 | | | $ | (0.7 | ) | | $ | 126.8 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Net
| | | | |
| | Foreign
| | | Net Unrealized
| | | Net Unrealized
| | | Unrealized
| | | Total
| |
| | Currency
| | | Gains (Losses)
| | | Gains (Losses)
| | | Gains
| | | Accumulated
| |
| | Translation
| | | on Derivative
| | | on Available-
| | | (Losses) on
| | | Other
| |
| | Gains
| | | Financial
| | | for-Sale
| | | Defined
| | | Comprehensive
| |
| | (Losses) | | | Instruments(a) | | | Investments | | | Benefit Plans | | | Income (Loss) | |
| | (millions) | |
|
Balance at March 31, 2007 | | $ | 115.3 | | | $ | (74.8 | ) | | $ | — | | | $ | — | | | $ | 40.5 | |
Fiscal 2008 pretax activity(b) | | | 144.7 | | | | (90.8 | ) | | | (0.4 | ) | | | (0.2 | ) | | | 53.3 | |
Fiscal 2008 tax benefit (provision)(b) | | | (8.9 | ) | | | 27.5 | | | | 0.2 | | | | — | | | | 18.8 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 29, 2008 | | | 251.1 | | | | (138.1 | ) | | | (0.2 | ) | | | (0.2 | ) | | | 112.6 | |
Fiscal 2009 pretax activity(c) | | | (75.5 | ) | | | 112.1 | | | | 0.4 | | | | (0.6 | ) | | | 36.4 | |
Fiscal 2009 tax benefit (provision)(c) | | | 5.8 | | | | (28.0 | ) | | | (0.1 | ) | | | 0.1 | | | | (22.2 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at March 28, 2009 | | | 181.4 | | | | (54.0 | ) | | | 0.1 | | | | (0.7 | ) | | | 126.8 | |
Fiscal 2010 pretax activity(d) | | | 36.0 | | | | (13.0 | ) | | | — | | | | 1.2 | | | | 24.2 | |
Fiscal 2010 tax benefit (provision)(d) | | | 1.5 | | | | 2.0 | | | | — | | | | (0.5 | ) | | | 3.0 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at April 3, 2010 | | $ | 218.9 | | | $ | (65.0 | ) | | $ | 0.1 | | | $ | — | | | $ | 154.0 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | Includes deferred gains and losses on hedging instruments, such as foreign currency exchange contracts designated as cash flow hedges and changes in the fair value of the Company’s Euro-denominated debt designated as a hedge of changes in the fair value of the Company’s net investment in certain of its European subsidiaries. |
|
(b) | | Includes a net reclassification adjustment of $3.1$6.6 million (net of $0.5$1.2 million tax effect) for realized derivative financial instrument gainslosses in the current period that were included as an unrealized gainloss in comprehensive income in a prior period. |
|
(c) | | Includes a net reclassification adjustment of $6.6$20.3 million (net of $1.2$1.1 million tax effect) for realized derivative financial instrument losses in the current period that were included as an unrealized loss in comprehensive income in a prior period. |
|
(d) | | Includes a net reclassification adjustment of $20.3$22.6 million (net of $1.1$2.3 million tax effect) for realized derivative financial instrument lossesgains in the current period that were included as an unrealized lossgain in comprehensive income in a prior period. |
| |
19.20. | Stock-Based Compensation |
Long-term Stock Incentive Plan
The Company’s 1997 Long-Term Stock Incentive Plan as amended and restated (the “1997 Plan”), authorizes the grant of awards to participants with respect to a maximum of 26.0 million shares of the Company’s Class A common stock; however, there are limits as to the number of shares available for certain awards and to any one participant. Equity awards that may be made under the 1997 Plan include (a) stock options, (b) restricted stock and (c) restricted stock units (“RSUs”). The Company also granted awards under the 1997 Non-Employee Director Option Plan prior to that plan’s expiration on December 31, 2006. No future awards will be made under the 1997 Non-Employee Director Option Plan.
F-42F-39
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impact on Results
A summary of the total compensation expense recorded within SG&A expense and associated income tax benefits recognized related to stock-based compensation arrangements is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | |
| | (millions) | | (millions) | |
|
Compensation expense | | $ | (49.7 | ) | | $ | (70.7 | ) | | $ | (43.6 | ) | | $ | (59.7 | ) | | $ | (49.7 | ) | | $ | (70.7 | ) |
| | | | | | | | | | | | | | |
Income tax benefit | | $ | 18.5 | | | $ | 20.2 | | | $ | 17.5 | | | $ | 21.8 | | | $ | 18.5 | | | $ | 20.2 | |
| | | | | | | | | | | | | | |
Stock Options
Stock options are granted to employees and non-employee directors with exercise prices equal to fair market value at the date of grant. Generally, the options become exercisable ratably (a graded-vesting schedule), over a three-year vesting period. Stock options generally expire seven years from the date of grant. The Company recognizes compensation expense for share-based awards that have graded vesting and no performance conditions on an accelerated basis. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term — The estimate of expected term is based on the historical exercise behavior of employees and non-employee directors, as well as the contractual life of the option grants.
Expected Volatility — The expected volatility factor is based on the historical volatility of the Company’s common stock for a period equal to the stock option’s expected term.
Expected Dividend Yield — The expected dividend yield is based on the regularCompany’s quarterly cash dividend of (a) $0.05 per share.share for grants made prior to the third quarter of Fiscal 2010 and (b) $0.10 per share for grants made during and after the third quarter of Fiscal 2010.
Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the option’s expected term.
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the fiscal years presented were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
|
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 |
|
Expected term (years) | | | 4.3 | | | | 4.8 | | | | 4.5 | | | | 4.6 | | | | 4.3 | | | | 4.8 | |
Expected volatility | | | 32.1 | % | | | | 29.9 | % | | | | 33.2 | % | | | | 43.3% | | | | 32.1% | | | | 29.9% | |
Expected dividend yield | | | 0.29 | % | | | | 0.26 | % | | | | 0.39 | % | | | | 0.46% | | | | 0.29% | | | | 0.26% | |
Risk-free interest rate | | | 3.0 | % | | | | 4.6 | % | | | | 4.9 | % | | | | 2.2% | | | | 3.0% | | | | 4.6% | |
Weighted-average option grant date fair value | | | $17.2 | 7 | | | | $32.6 | 5 | | | | $19.4 | 0 | | | | $21.77 | | | | $17.27 | | | | $32.65 | |
F-43F-40
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the stock option activity under all plans during Fiscal 20092010 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted-
| | | | | | | | | Weighted-
| | | |
| | | | Weighted-
| | Average
| | | | | | | Weighted-
| | Average
| | | |
| | | | Average
| | Remaining
| | Aggregate
| | | | | Average
| | Remaining
| | Aggregate
| |
| | Number of
| | Exercise
| | Contractual
| | Intrinsic
| | | Number of
| | Exercise
| | Contractual
| | Intrinsic
| |
| | Shares | | Price | | Term | | Value(a) | | | Shares | | Price | | Term | | Value(a) | |
| | (thousands) | | | | (years) | | (millions) | | | (thousands) | | | | (years) | | (millions) | |
|
Options outstanding at March 29, 2008 | | | 6,011 | | | $ | 39.93 | | | | 5.3 | | | $ | 132.8 | | |
Options outstanding at March 28, 2009 | | | | 5,698 | | | $ | 44.22 | | | | 4.8 | | | $ | 50.0 | |
Granted | | | 861 | | | | 57.52 | | | | | | | | | | | | 1,055 | | | | 58.58 | | | | | | | | | |
Exercised | | | (1,048 | ) | | | 27.64 | | | | | | | | | | | | (1,578 | ) | | | 31.99 | | | | | | | | | |
Cancelled/Forfeited | | | (126 | ) | | | 66.84 | | | | | | | | | | | | (120 | ) | | | 65.50 | | | | | | | | | |
| | | | | | |
Options outstanding at March 28, 2009 | | | 5,698 | | | $ | 44.22 | | | | 4.8 | | | $ | 50.0 | | |
Options outstanding at April 3, 2010 | | | | 5,055 | | | $ | 50.55 | | | | 4.6 | | | $ | 188.6 | |
| | | | | | |
Options vested and expected to vest at March 28, 2009(b) | | | 5,611 | | | $ | 43.97 | | | | 4.8 | | | $ | 50.0 | | |
Options exercisable at March 28, 2009 | | | 4,246 | | | $ | 36.22 | | | | 4.4 | | | $ | 49.9 | | |
Options vested and expected to vest at April 3, 2010(b) | | | | 4,978 | | | $ | 50.46 | | | | 4.6 | | | $ | 186.3 | |
Options exercisable at April 3, 2010 | | | | 3,340 | | | $ | 44.51 | | | | 3.9 | | | $ | 144.9 | |
| | |
(a) | | The intrinsic value is the amount by which the market price at the end of the period of the underlying share of stock exceeds the exercise price of the stock option. |
|
(b) | | The number of options expected to vest takes into consideration estimated expected forfeitures. |
Additional information pertaining to the Company’s stock option plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
|
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 |
| | (millions) | | | (millions) |
|
Aggregate intrinsic value of stock options exercised(a) | | $ | 33.2 | | | $ | 67.0 | | | $ | 88.7 | | | $ | 67.6 | | | $ | 33.2 | | | $ | 67.0 | |
Cash received from the exercise of stock options | | | 29.0 | | | | 40.1 | | | | 51.4 | | | | 50.5 | | | | 29.0 | | | | 40.1 | |
Tax benefits realized on exercise | | | 12.1 | | | | 34.4 | | | | 33.2 | | | | 26.1 | | | | 12.1 | | | | 34.4 | |
| | |
(a) | | The intrinsic value is the amount by which the average market price during the period exceeded the exercise price of the stock option exercised. |
As of March 28, 2009,April 3, 2010, there was $11.3$16.0 million of total unrecognized compensation expense related to nonvested stock options granted, expected to be recognized over a weighted-average period of 1.41.5 years.
Restricted Stock and RSUs
The Company grants restricted shares of Class A common stock and service-based RSUs to certain of its senior executives and non-employee directors. In addition, the Company grants performance-based RSUs to such senior executives and other key executives, and certain other employees of the Company.
Restricted shares of Class A common stock, which entitle the holder to receive a specified number of shares of Class A common stock at the end of a vesting period, are accounted for at fair value at the date of grant. In addition, 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. Generally, restricted stock grants vest over a five-year period of time, subject to the executive’s continuing employment. Restricted stock shares granted to non-employee directors vest over a three-year period of time.
RSUs entitle the grantee to receive shares of Class A common stock at the end of a vesting period. Service-based RSUs are payable in shares of Class A common stock and generally vest over a five-year period of time, subject to the executive’s continuing employment. Performance-based RSUs also are payable in shares of Class A common stock and generally vest (a) upon the completion of a three-year period of time (cliff vesting), subject to the
F-44F-41
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
employee’s continuing employment and the Company’s achievement of certain performance goals over the three-year period or (b) ratably, over a three-year period of time (graded vesting), subject to the employee’s continuing employment during the applicable vesting period and the achievement by the Company of certain performance goals either (i) in each year of the three-year vesting period for grants made prior to Fiscal 2008 or (ii) solely in the initial year of the three-year vesting period for grants made induring and after Fiscal 2008. In addition, holders of certain RSUs are entitled to receive dividend equivalents in the form of additional RSUs in connection with the payment of dividends on the Company’s Class A common stock. RSUs, including shares resulting from dividend equivalents paid on such units, are accounted for at fair value at the date of grant. The fair value of a restricted security is based on the fair value of unrestricted Class A common stock, as adjusted to reflect the absence of dividends for those restricted securities that are not entitled to dividend equivalents. Compensation expense for performance-based RSUs is recognized over the related service period when attainment of the performance goals is deemed probable.
A summary of the restricted stock and restricted stock unitRSU activity during Fiscal 20092010 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restricted
| | Service-based
| | Performance-based
| | | Restricted
| | Service-based
| | Performance-based
| |
| | Stock | | RSUs | | RSUs | | | Stock | | RSUs | | RSUs | |
| | | | Weighted-
| | | | Weighted-
| | | | Weighted-
| | | | | Weighted-
| | | | Weighted-
| | | | Weighted-
| |
| | | | Average
| | | | Average
| | | | Average
| | | | | Average
| | | | Average
| | | | Average
| |
| | Number of
| | Grant Date
| | Number of
| | Grant Date
| | Number of
| | Grant Date
| | | Number of
| | Grant Date
| | Number of
| | Grant Date
| | Number of
| | Grant Date
| |
| | Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value | | | Shares | | Fair Value | | Shares | | Fair Value | | Shares | | Fair Value | |
| | (thousands) | | | | (thousands) | | | | (thousands) | | | | | (thousands) | | | | (thousands) | | | | (thousands) | | | |
|
Nonvested at March 29, 2008 | | | 34 | | | $ | 42.60 | | | | 667 | | | $ | 47.55 | | | | 1,354 | | | $ | 65.41 | | |
Nonvested at March 28, 2009 | | | | 23 | | | $ | 47.58 | | | | 659 | | | $ | 57.15 | | | | 1,168 | | | $ | 71.67 | |
Granted | | | 7 | | | | 59.22 | | | | 178 | | | | 64.12 | | | | 533 | | | | 57.48 | | | | 13 | | | | 55.93 | | | | 7 | | | | 82.47 | | | | 805 | | | | 58.16 | |
Vested | | | (17 | ) | | | 40.86 | | | | (186 | ) | | | 29.33 | | | | (616 | ) | | | 52.62 | | | | (23 | ) | | | 45.44 | | | | (204 | ) | | | 38.33 | | | | (578 | ) | | | 59.22 | |
Cancelled | | | (1 | ) | | | 68.14 | | | | — | | | | — | | | | (103 | ) | | | 61.68 | | | | (2 | ) | | | 51.41 | | | | — | | | | — | | | | (36 | ) | | | 66.81 | |
| | | | | | | | | | | | | | |
Nonvested at March 28, 2009 | | | 23 | | | $ | 47.58 | | | | 659 | | | $ | 57.15 | | | | 1,168 | | | $ | 71.67 | | |
Nonvested at April 3, 2010 | | | | 11 | | | $ | 61.15 | | | | 462 | | | $ | 65.82 | | | | 1,359 | | | $ | 69.09 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Restricted
| | Service-based
| | Performance-based
| | Restricted
| | Service-based
| | Performance-based
|
| | Stock | | RSUs | | RSUs | | Stock | | RSUs | | RSUs |
|
Total unrecognized compensation at March 28, 2009 (millions) | | $ | 0.5 | | | $ | 10.7 | | | $ | 31.4 | | |
Total unrecognized compensation at April 3, 2010 (millions) | | | $ | 0.5 | | | $ | 6.1 | | | $ | 43.3 | |
Weighted-average years expected to be recognized over (years) | | | 0.8 | | | | 2.5 | | | | 1.4 | | | | 1.8 | | | | 2.6 | | | | 1.8 | |
Additional information pertaining to the restricted stock and restricted stock unitRSU activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
|
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 |
|
Restricted Stock | | | | | | | | | | | | | | | | | | | | | |
Weighted-average grant date fair value of awards granted | | $ | 59.22 | | | $ | 87.85 | | | $ | — | | | $ | 55.93 | | | $ | 59.22 | | | $ | 87.85 | |
Total fair value of awards vested (millions) | | | 1.1 | | | | 7.1 | | | | 4.2 | | | | 1.7 | | | | 1.1 | | | | 7.1 | |
Service-based RSUs | | | | | | | | | | | | | | | | | | | | | |
Weighted-average grant date fair value of awards granted | | $ | 64.12 | | | $ | 100.56 | | | $ | 55.43 | | | $ | 82.47 | | | $ | 64.12 | | | $ | 100.56 | |
Total fair value of awards vested (millions) | | | 10.2 | | | | 4.8 | | | | — | | | | 14.2 | | | | 10.2 | | | | 4.8 | |
Performance-based RSUs | | | | | | | | | | | | | | | | | | | | | |
Weighted-average grant date fair value of awards granted | | $ | 57.48 | | | $ | 86.98 | | | $ | 55.17 | | | $ | 58.16 | | | $ | 57.48 | | | $ | 86.98 | |
Total fair value of awards vested (millions) | | | 40.8 | | | | 43.4 | | | | 3.4 | | | | 32.6 | | | | 40.8 | | | | 43.4 | |
F-45F-42
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
20.21. | Employee Benefit Plans |
Profit Sharing Retirement Savings Plans
The Company sponsors two defined contribution benefit plans covering substantially all eligible U.S. employees 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 discretionary contributions to the plans and contributes an amount equal to 50% of the first 6% of salary contributed by an employee.
Under the terms of the plans, a participant is 100% vested in Company matching and discretionary contributions after five years of credited service. Contributions made by the Company under these plans approximated $6 million in both Fiscal 2009 and Fiscal 2008, and $4 million in Fiscal 2007.each of the three fiscal years presented.
Supplemental Retirement Plan
The Company has a non-qualified supplemental retirement plan for certain highly compensated employees whose benefits under the 401(k) profit sharing retirement savings plans are expected to be constrained by the operation of certain Internal Revenue Code limitations. These supplemental benefits vest over time and the related compensation expense is recognized over the vesting period.
In August 2008, the Company amended its non-qualified supplemental retirement plan. The amendments included a suspension of the annual contributions for substantially all plan participants effective for Fiscal 2009. Further, affected participants were provided with a one-time election to either withdraw all benefits vested in the plan in a lump sum amount during the first quarter of Fiscal 2010 or remain in the plan and receive future distributions of benefits vested over a5-year period. In connection with this one-time election, the Company paid out approximately $18 million to affected participants during the first quarter of Fiscal 2010.
The amountNotwithstanding amounts accrued for the one-time withdrawal payout noted above, amounts accrued under this plan was $29totaled $11 million as of March 28, 2009 comprised of $18 million classified within accrued expenses and other and $11 millionwere classified within other non-current liabilities in the consolidated balance sheets. An amount of $29 million wassheet. The amounts accrued under this plan totaled $10 million as of March 29, 2008April 3, 2010 and waswere classified within other non-current liabilities in the consolidated balance sheet. Total compensation expense recognized related to these benefits was $0.2 million, $2 million $4 million and $3$4 million in Fiscal 2010, Fiscal 2009 and Fiscal 2008, and Fiscal 2007, respectively.
Deferred Compensation Plans
The Company has deferred compensation arrangements for certain key executives which generally provide for payments upon retirement, death or termination of employment. The amounts accrued under these plans were approximately $1 million as of April 3, 2010 and $2 million as of both March 28, 2009, and March 29, 2008, and were classified within other non-current liabilities in the consolidated balance sheets. Total compensation expense related to these compensation arrangements was $0.3 million in each of the three fiscal years presented. The Company funds a portion of these obligations through the establishment of trust accounts on behalf of the executives participating in the plans. The trust accounts are classified within other assets in the consolidated balance sheets.
Union Pension Plan
The Company participates in a multi-employer pension plan and is required to make contributions to the UNITE HERE (which was previously known as the Union of Needletrades, Industrial and Textile Employees, prior to its merger with the Hotel Employees and Restaurant Employees International Union) (“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.
F-46F-43
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 withdrawal 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.
International Defined Benefit Plans
The Company sponsors certain single-employer defined benefit plans and participates in a multi-employer defined benefit plan at international locations which are not considered to be material individually or in the aggregate. 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 were net liabilities of $7.3$5.1 million and $6.6$7.3 million as of April 3, 2010 and March 28, 2009, and March 29, 2008, respectively, 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 $25.4 million and aggregate fair values of plan assets of $22.5 million as of April 3, 2010, compared to projected benefit obligations of $26.9 million and aggregate fair values of plan assets of $22.9 million as of March 28, 2009, compared to projected2009. The asset portfolio of the single-employer defined benefit obligationsplans primarily consists of $21.3 million anddebt securities, which have been measured at fair values of plan assets of $18.8 millionvalue largely using Level 2 inputs, as of March 29, 2008.defined in Note 15. Pension expense for these plans, recorded within SG&A expenses in the Company’s consolidated statements of operations, was $4.2 million in Fiscal 2010, $4.0 million in Fiscal 2009 and $3.6 million in Fiscal 2008 and $2.2 million in Fiscal 2007.2008.
On March 31, 2009, the Company withdrew from the remaining multi-employer defined benefit plan assumed in the Japanese Business Acquisitions. A related withdrawal liability of approximately $4 million iswas classified within other non-current liabilities in the Company’s consolidated balance sheetssheet as of March 28, 2009 and March 29, 2008.2009. Total contributions to the multi-employer plan were $0.1 million in Fiscal 2010, $0.6 million in Fiscal 2009 and $0.5 million in Fiscal 2009 and Fiscal 2008, respectively. The Company did not participate in any multi-employer defined benefit plans in Fiscal 2007.2008.
On April 1, 2009, the Company integrated all of its Japanese single-employer defined benefit plans into one defined contribution and cash balance plan (the “Integrated Japan Pension Plan”). The opening balance of the projected benefit obligation for the Integrated Japan Pension Plan was approximately $6.0 million. As a result of this integration, certain of the Company’s pre-existing Japanese single-employer defined benefit plans were settled. The Company expects to recordrecorded a related settlement charge of approximately $0.4$0.2 million in the consolidated statement of operations during the first quarter of Fiscal 2010.
| |
21.22. | Segment Information |
The Company has three reportable segments based on its business activities and organization: Wholesale, Retail and Licensing. Such segments offer a variety of products through different channels of distribution. The Wholesale segment consists of women’s, men’s and children’s apparel, accessories and related products which are sold to major department stores, specialty stores, golf and pro shops and the Company’s owned and licensed retail stores in the U.S. and overseas. The Retail segment consists of the Company’s worldwide retail operations, which sell products through its full-price and factory stores, its concessions-based shop-within-shops, as well as RalphLauren.com and Rugby.com, itse-commerce websites. The stores, concessions-based shop-within-shops and websites sell products purchased from the Company’s licensees, suppliers and Wholesale segment. The Licensing segment generates revenues from royalties earned on the sale of the Company’s apparel, home and other products internationally and domestically through licensing alliances. The licensing agreements grant the licensees rights to use the Company’s various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods.
The accounting policies of the Company’s segments are consistent with those described in Note 2 and Note 3. Sales and transfers between segments generally are 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 operating income before restructuring charges and certain other one-time items, such as legal charges, if any. Corporate overhead expenses (exclusive of certain expenses for senior
F-47F-44
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expenses for senior management, overall branding-related expenses and certain other corporate-related expenses) are allocated to the segments based upon specific usage or other allocation methods.
��
Due to changes in the Company’s segment presentation as discussed in Note 2, segment information for Fiscal 2009 has been recast to conform to the current period’s presentation. These changes entirely related to reclassifications between the Company’s Wholesale and Retail segments, and had no impact on total net revenues, total operating income or total assets. In addition, these changes had no impact on net revenues by geographic location. Segment information for Fiscal 2008 has not been recast to conform to the current period’s presentation, as it is impracticable to do so.
Net revenues and operating income for each segment under the Company’s new (recasted) basis of reporting are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Net revenues: | | | | | | | | | | | | | | | | | | | | |
Wholesale | | $ | 2,887.2 | | | $ | 2,758.1 | | | $ | 2,315.9 | | | $ | 2,532.4 | | | $ | 2,749.5 | |
Retail | | | 1,936.5 | | | | 1,912.6 | | | | 1,743.2 | | | | 2,263.1 | | | | 2,074.2 | |
Licensing | | | 195.2 | | | | 209.4 | | | | 236.3 | | | | 183.4 | | | | 195.2 | |
| | | | | | | | | | | | |
Total net revenues | | $ | 5,018.9 | | | $ | 4,880.1 | | | $ | 4,295.4 | | | $ | 4,978.9 | | | $ | 5,018.9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Operating income: | | | | | | | | | | | | | | | | | | | | |
Wholesale(a) | | $ | 613.3 | | | $ | 565.4 | | | $ | 477.8 | | | $ | 585.3 | | | $ | 619.9 | |
Retail(a) | | | 108.2 | | | | 204.2 | | | | 224.2 | | | | 254.1 | | | | 101.6 | |
Licensing | | | 103.6 | | | | 96.7 | | | | 141.6 | | | | 107.4 | | | | 103.6 | |
| | | | | | | | | | | | |
| | | 825.1 | | | | 866.3 | | | | 843.6 | | | | 946.8 | | | | 825.1 | |
Less: | | | | | | | | | | | | | | | | | | | | |
Unallocated corporate expenses(a) | | | (206.5 | ) | | | (217.0 | ) | | | (183.4 | ) | | | (229.9 | ) | | | (206.5 | ) |
Unallocated legal and restructuring charges(b) | | | (23.1 | ) | | | 4.1 | | | | (7.6 | ) | | | (10.0 | ) | | | (23.1 | ) |
| | | | | | | | | | | | |
Total operating income | | $ | 595.5 | | | $ | 653.4 | | | $ | 652.6 | | | $ | 706.9 | | | $ | 595.5 | |
| | | | | | | | | | | | |
Net revenues and operating income for each segment under the Company’s historical basis of reporting are as follows:
| | | | | | | | | | | | |
| | Fiscal Years Ended | |
| | April 3,
| | | March 28,
| | | March 29,
| |
| | 2010 | | | 2009 | | | 2008 | |
| | (millions) | |
|
Net revenues: | | | | | | | | | | | | |
Wholesale | | $ | 2,730.2 | | | $ | 2,887.2 | | | $ | 2,758.1 | |
Retail | | | 2,065.3 | | | | 1,936.5 | | | | 1,912.6 | |
Licensing | | | 183.4 | | | | 195.2 | | | | 209.4 | |
| | | | | | | | | | | | |
Total net revenues | | $ | 4,978.9 | | | $ | 5,018.9 | | | $ | 4,880.1 | |
| | | | | | | | | | | | |
F-45
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | |
| | Fiscal Years Ended | |
| | April 3,
| | | March 28,
| | | March 29,
| |
| | 2010 | | | 2009 | | | 2008 | |
| | (millions) | |
|
Operating income: | | | | | | | | | | | | |
Wholesale(a) | | $ | 593.2 | | | $ | 613.3 | | | $ | 565.4 | |
Retail(a) | | | 246.2 | | | | 108.2 | | | | 204.2 | |
Licensing | | | 107.4 | | | | 103.6 | | | | 96.7 | |
| | | | | | | | | | | | |
| | | 946.8 | | | | 825.1 | | | | 866.3 | |
Less: | | | | | | | | | | | | |
Unallocated corporate expenses(a) | | | (229.9 | ) | | | (206.5 | ) | | | (217.0 | ) |
Unallocated legal and restructuring charges(b) | | | (10.0 | ) | | | (23.1 | ) | | | 4.1 | |
| | | | | | | | | | | | |
Total operating income | | $ | 706.9 | | | $ | 595.5 | | | $ | 653.4 | |
| | | | | | | | | | | | |
| | |
(a) | | Fiscal 2009 and Fiscal 2008years presented included certain asset impairment charges. Fiscal 2010 included asset impairment charges of $6.6 million related to the write-down of certain long-lived assets, primarily in the Retail segment. Fiscal 2009 included asset impairment charges of $55.4 million, of which $52.0 million related to the write-down of certain Retail store assets, and $2.8 million in the Wholesale segment and $0.6 million in the Corporate office related to the write-down of certain capitalized software costs. Fiscal 2008 included asset impairment charges of $5.0 million related to the write-down of certain Retail store assets (see Note 11 for further discussion)11). |
|
(b) | | Fiscal 2009years presented included certain unallocated restructuring charges and legal-related activity. Restructuring charges, net for Fiscal 2010 consisted of $6.9 million, of which $5.4 million related to the Wholesale segment, $2.0 million related to the Retail segment and $0.5 million represented the reversal of an excess reserve related to Corporate operations. Restructuring charges for Fiscal 2009 consisted of $23.6 million, of which $12.7 million related to the Retail segment, $7.3 million related to the Wholesale segment and $3.6 million related to Corporate operations.operations (see Note 12). Legal-related activity for Fiscal 2007 restructuring2010 consisted of legal charges of $4.6$4.8 million primarily related to the Retail segmentCompany’s California Labor Litigation matter, offset in part by the reversal of an excess legal reserve of $1.7 million (see Note 12 for further discussion)17). Legal-related activity related to the Company’s Credit Card Matter (see Note 16 for further discussion)Fiscal 2009 and Fiscal 2008 consisted of the reversal of excess legal reserves in the amounts of $0.5 million for Fiscal 2009 and $4.1 million, for Fiscal 2008, as well as legal charges of $3.0 million for Fiscal 2007 .respectively. |
Depreciation and amortization expense and capital expenditures for each segment under the Company’s new (recasted) basis of reporting are as follows:
| | | | | | | | |
| | Fiscal Years Ended | |
| | April 3,
| | | March 28,
| |
| | 2010 | | | 2009 | |
| | (millions) | |
|
Depreciation and amortization: | | | | | | | | |
Wholesale | | $ | 51.0 | | | $ | 51.1 | |
Retail | | | 83.7 | | | | 85.1 | |
Licensing | | | 1.7 | | | | 2.4 | |
Unallocated corporate expenses | | | 44.8 | | | | 45.8 | |
| | | | | | | | |
Total depreciation and amortization | | $ | 181.2 | | | $ | 184.4 | |
| | | | | | | | |
F-48F-46
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | |
| | Fiscal Years Ended | |
| | April 3,
| | | March 28,
| |
| | 2010 | | | 2009 | |
| | (millions) | |
|
Capital expenditures: | | | | | | | | |
Wholesale | | $ | 29.2 | | | $ | 31.8 | |
Retail | | | 125.3 | | | | 114.5 | |
Licensing | | | — | | | | 1.1 | |
Corporate | | | 46.8 | | | | 37.6 | |
| | | | | | | | |
Total capital expenditures | | $ | 201.3 | | | $ | 185.0 | |
| | | | | | | | |
Depreciation and amortization expense and capital expenditures for each segment under the Company’s historical basis of reporting are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (millions) | | | (millions) | |
|
Depreciation and amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Wholesale | | $ | 55.5 | | | $ | 63.9 | | | $ | 47.0 | | | $ | 56.2 | | | $ | 55.5 | | | $ | 63.9 | |
Retail | | | 80.7 | | | | 73.4 | | | | 59.0 | | | | 78.5 | | | | 80.7 | | | | 73.4 | |
Licensing | | | 2.4 | | | | 19.7 | | | | 4.4 | | | | 1.7 | | | | 2.4 | | | | 19.7 | |
Unallocated corporate expenses | | | 45.8 | | | | 44.3 | | | | 34.3 | | | | 44.8 | | | | 45.8 | | | | 44.3 | |
| | | | | | | | | | | | | | |
Total depreciation and amortization | | $ | 184.4 | | | $ | 201.3 | | | $ | 144.7 | | | $ | 181.2 | | | $ | 184.4 | | | $ | 201.3 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (millions) | | | (millions) | |
|
Capital expenditures: | | | | | | | | | | | | | | | | | | | | | | | | |
Wholesale | | $ | 35.5 | | | $ | 46.0 | | | $ | 44.6 | | | $ | 34.4 | | | $ | 35.5 | | | $ | 46.0 | |
Retail | | | 110.8 | | | | 116.1 | | | | 83.1 | | | | 120.1 | | | | 110.8 | | | | 116.1 | |
Licensing | | | 1.1 | | | | 2.4 | | | | 3.0 | | | | — | | | | 1.1 | | | | 2.4 | |
Corporate | | | 37.6 | | | | 52.6 | | | | 53.3 | | | | 46.8 | | | | 37.6 | | | | 52.6 | |
| | | | | | | | | | | | | | |
Total capital expenditures | | $ | 185.0 | | | $ | 217.1 | | | $ | 184.0 | | | $ | 201.3 | | | $ | 185.0 | | | $ | 217.1 | |
| | | | | | | | | | | | | | |
Total assets for each segment under the Company’s new (recasted) basis of reporting are as follows:
| | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Total assets: | | | | | | | | | | | | | | | | |
Wholesale | | $ | 2,731.5 | | | $ | 2,434.2 | | | $ | 2,650.0 | | | $ | 2,691.1 | |
Retail | | | 968.8 | | | | 1,084.9 | | | | 1,255.6 | | | | 1,009.2 | |
Licensing | | | 207.9 | | | | 216.4 | | | | 155.7 | | | | 207.9 | |
Corporate | | | 448.3 | | | | 630.0 | | | | 587.6 | | | | 448.3 | |
| | | | | | | | | | |
Total assets | | $ | 4,356.5 | | | $ | 4,365.5 | | | $ | 4,648.9 | | | $ | 4,356.5 | |
| | | | | | | | | | |
F-49F-47
POLO 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 | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | March 31,
| | | April 3,
| | March 28,
| | March 29,
| |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (millions) | | | (millions) | |
|
Net revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
United States and Canada | | $ | 3,589.3 | | | $ | 3,653.1 | | | $ | 3,452.2 | | | $ | 3,462.3 | | | $ | 3,589.3 | | | $ | 3,653.1 | |
Europe | | | 1,028.4 | | | | 944.7 | | | | 767.9 | | | | 1,052.6 | | | | 1,028.4 | | | | 944.7 | |
Japan | | | 392.6 | | | | 272.4 | | | | 64.6 | | |
Asia(a) | | | | 459.7 | | | | 392.6 | | | | 272.4 | |
Other regions | | | 8.6 | | | | 9.9 | | | | 10.7 | | | | 4.3 | | | | 8.6 | | | | 9.9 | |
| | | | | | | | | | | | | | |
Total net revenues | | $ | 5,018.9 | | | $ | 4,880.1 | | | $ | 4,295.4 | | | $ | 4,978.9 | | | $ | 5,018.9 | | | $ | 4,880.1 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended | |
| | March 28,
| | March 29,
| | | April 3,
| | March 28,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (millions) | | | (millions) | |
|
Long-lived assets: | | | | | | | | | | | | | | | | |
United States and Canada | | $ | 452.8 | | | $ | 517.1 | | | $ | 441.6 | | | $ | 452.8 | |
Europe | | | 132.7 | | | | 131.1 | | | | 166.4 | | | | 132.7 | |
Japan | | | 60.9 | | | | 57.3 | | |
Asia(a) | | | | 84.1 | | | | 60.9 | |
Other regions | | | 5.2 | | | | 4.4 | | | | 5.1 | | | | 5.2 | |
| | | | | | | | | | |
Total long-lived assets | | $ | 651.6 | | | $ | 709.9 | | | $ | 697.2 | | | $ | 651.6 | |
| | | | | | | | | | |
| | |
(a) | | Includes Japan, China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand. |
| |
22.23. | Related Party Transactions |
In the ordinary course of conducting its business, the Company periodically enters into transactions with other entities or people that are considered related parties.
In connection with the launch of the RL Watch Company business, the Company will begin to receivereceives royalty payments pursuant to a related licensing agreement that allows the RL Watch Company to sell luxury watches and fine jewelry throughout the world using certain of the Company’s trademarks. The Company has a 50% interest in the RL Watch Company, which is accounted for under the equity method of accounting. Royalty payments received under this arrangement were approximately $0.1 million in Fiscal 2010. No related payments were received in Fiscal 2009 or Fiscal 2008. See Note 3 for further discussion of the Company’s investment in the RL Watch Company.
Prior to the Japanese Business Acquisitions that occurred in May 2007, the Company received royalty payments pursuant to a licensing agreement with Impact 21 that allowed Impact 21 to sell high quality apparel and related merchandise in Japan using certain of the Company’s trademarks. The Company had an approximately 20% interest in Impact 21, which was accounted for under the equity method of accounting. Royalty payments received under this arrangement were approximately $34 million inIn addition, during Fiscal 2007. See Note 5 for further discussion of the Company’s Japanese Business Acquisitions.
In addition,2008, Mr. Ralph Lauren, Chairman of the Company’s ChairmanBoard and Chief Executive Officer, sometimes used the services of certain employees of the Company for non-Company related purposes in Fiscal 2008 and Fiscal 2007.purposes. Mr. Lauren reimbursed the Company for the direct expenses incurred in connection with those services, including an allocation of such employees’ salaries and benefits. Such aggregate costs and related reimbursements were less than $1 million in both Fiscal 2008 and Fiscal 2007.2008. No related services were provided by the Company to Mr. Lauren in Fiscal 2010 or Fiscal 2009.
F-50F-48
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
23.24. | Additional Financial Information |
Cash Interest and Taxes
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | Fiscal Years Ended |
| | March 28,
| | March 29,
| | March 31,
| | April 3,
| | March 28,
| | March 29,
|
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 |
| | (millions) | | (millions) |
|
Cash paid for interest | | $ | 25.1 | | | $ | 22.9 | | | $ | 20.9 | | | $ | 24.4 | | | $ | 25.1 | | | $ | 22.9 | |
| | | | | | | | | | | | | | |
Cash paid for income taxes | | $ | 165.0 | | | $ | 248.8 | | | $ | 244.6 | | | $ | 196.4 | | | $ | 165.0 | | | $ | 248.8 | |
| | | | | | | | | | | | | | |
Non-cash Transactions
Significant non-cash investing activities included the capitalization of fixed assets and recognition of related obligations in the net amount of $22.5 million for Fiscal 2010 and $13.0 million for Fiscal 2009 and $39.8 million for Fiscal 2008.2009. Significant non-cash investing activities also included the non-cash allocation of the fair value of the net assets acquired in connection with the Asia-Pacific Licensed Operations Acquisition in Fiscal 2010, the Japanese Childrenswear and Golf Acquisition in Fiscal 2009, and the Japanese Business Acquisitions and the Small Leathergoods Business Acquisition in Fiscal 2008, and the RL Media Minority Interest Acquisition in Fiscal 2007.2008. See Note 5 for further discussion of the Company’s acquisitions.
SignificantIn Fiscal 2010, significant non-cash financing activities included the conversion of 1.2 million shares of Class B common stock into an equal number of shares of Class A common stock, as described further in Note 18. In Fiscal 2008, significant non-cash financing activities included the repurchase of 0.4 million shares of Class A common stock at a cost of $24.0 million that was traded prior to the end of Fiscal 2008the fiscal year for which settlement occurred in April 2008. In addition, as a result of the adoption of FIN 48, the Company recognized a non-cash reduction in retained earnings of $62.5 million as the cumulative effect to adjust its net liability for unrecognized tax benefits as of April 1, 2007.
There were no other significant non-cash investing or financing activities for the three fiscal years presented.
Licensing-related Transactions
Eyewear Licensing Agreement
In February 2006, the Company announced that it had entered into a ten-year exclusive licensing agreement with Luxottica Group, S.p.A. and affiliates for the design, production, sale and distribution of prescription frames and sunglasses under thePolo Ralph Lauren brand (the “Eyewear Licensing Agreement”).
The Eyewear Licensing Agreement took effect on January 1, 2007 after the Company’s pre-existing licensing agreement with another licensee expired. In early January, the Company received a prepayment of approximately $180 million, net of certain tax withholdings, in consideration of the annual minimum royalty and design-services fees to be earned over the life of the contract. The prepayment is non-refundable, except with respect to certain breaches of the agreement by the Company, in which case only the unearned portion of the prepayment as determined based on the specific terms of the agreement would be required to be repaid. The prepayment was recorded by the Company as deferred income and is being recognized in earnings as earned in accordance with the terms of the agreement based upon the higher of (a) contractually guaranteed minimum royalty levels or (b) estimates of sales and royalty data received from the licensee.
Underwear Licensing Agreement
The Company licensed the right to manufacture and sell Chaps-branded underwear under a long-term license agreement, which was scheduled to expire in December 2009. During Fiscal 2007, the Company and the licensee agreed to terminate the licensing and related design-services agreements. In connection with this agreement, the Company received a portion of the minimum royalty and design-service fees due to it under the underlying agreements on an accelerated basis. The approximate $8 million of proceeds received by the Company has been recognized as licensing revenue in the consolidated financial statements for Fiscal 2007.
F-51F-49
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Polo 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 2010 and Fiscal 2009 and by Deloitte & Touche LLP in Fiscal 2008, and Fiscal 2007, both of which are independent registered public accounting firms. 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 26, 2009June 2, 2010
| | |
/S/ RALPH LAUREN | | /S/ TRACEY T. TRAVIS |
| | |
Ralph Lauren | | Tracey T. Travis |
Chairman and Chief Executive Officer | | Senior Vice President and Chief Financial Officer |
F-52F-50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Polo Ralph Lauren Corporation
We have audited the accompanying consolidated balance sheetsheets of Polo Ralph Lauren Corporation and subsidiaries (the “Company”) as of April 3, 2010 and March 28, 2009, and the related consolidated statementstatements of operations, stockholders’ equity, and cash flows for the fiscal yearyears then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at April 3, 2010 and March 28, 2009, and the consolidated results of its operations and its cash flows for the fiscal years then ended, 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), the Company’s internal control over financial reporting as of April 3, 2010, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 2, 2010 expressed an unqualified opinion thereon.
New York, New York
June 2, 2010
F-51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Polo Ralph Lauren Corporation
New York, New York
We have audited the accompanying consolidated statements of operations, equity, and cash flows of Polo Ralph Lauren Corporation and subsidiaries (the “Company”) for the fiscal year ended March 29, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at March 28, 2009, and the consolidated results of its operations and its cash flows for the fiscal year then ended, 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), the Company’s internal control over financial reporting as of March 28, 2009, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 26, 2009 expressed an unqualified opinion thereon.
New York, New York
May 26, 2009
F-53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Polo Ralph Lauren Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of Polo Ralph Lauren Corporation and subsidiaries (the “Company”) as of March 29,such Fiscal 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two fiscal years in the period ended March 29, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial positionresults of the Company as of March 29, 2008, and the results of itsCompany’s operations, and its cash flows and its equity for each of the two fiscal years in the periodyear ended March 29, 2008, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 34 to the notes to consolidated financial statements, the Company adopted ASC 740-10 (formerly referred to as Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”), effective April 1, 2007. Also, as
As discussed in Note 4 to the notes to consolidated financial statements, the Company elected application of Staff Accounting Bulletin No. 108, “Consideringchanged the Effects of Prior Year Misstatements when Quantifying Misstatementsmanner in Current Year Financial Statements”, effective April 2, 2006.which noncontrolling interests are identified, presented and disclosed.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 28, 2008
(June 2, 2010 as to the effect of the noncontrolling interests as discussed in Note 4)
F-54F-52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Polo Ralph Lauren Corporation
We have audited Polo Ralph Lauren Corporation and subsidiaries’ (the “Company’s”) internal control over financial reporting as of March 28, 2009,April 3, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). 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 of 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
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 the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 28, 2009,April 3, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsheets of the Company as of April 3, 2010 and March 28, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal yearyears then ended and our report dated May 26, 2009June 2, 2010 expressed an unqualified opinion thereon.
New York, New York
May 26, 2009June 2, 2010
F-55F-53
POLO RALPH LAUREN CORPORATION
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, 2009April 3, 2010 as well as the consolidated balance sheet data as of April 3, 2010 and March 28, 2009 and March 29, 2008 have been derived from, and should be read in conjunction with, the audited financial statements and other financial information presented elsewhere herein. The consolidated statement of operations data for each of the two fiscal years in the period ended April 1, 2006March 31, 2007 and the consolidated balance sheet data at March 29, 2008, March 31, 2007 and April 1, 2006 and April 2, 2005 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.
The selected financial information for the fiscal year ended April 3, 2010 reflects the Asia-Pacific Licensed Operations Acquisition effective in January 2010. The selected financial information for the fiscal year ended March 28, 2009 reflects the Japanese Childrenswear and Golf Acquisition effective in August 2008. The selected financial information for the fiscal year ended March 29, 2008 reflects the acquisition of the Small Leathergoods Business effective in April 2007, the Japanese Business Acquisitions effective in May 2007, and the adoption of FIN 48. The selected financial information for the fiscal year ended March 31, 2007 reflects the acquisition of the remaining 50% equity interest of RLRalph Lauren Media, LLC effective in March 2007 and the adoption of FAS 123R.No. 123R, “Share-Based Payment.” The selected financial information for the fiscal year ended April 1, 2006 reflects the acquisition of the formerly-licensed Polo Jeans business effective in February 2006 and the acquisition of the formerly-licensed footwear business effective in July 2005. The selected financial information for the fiscal year ended April 2, 2005 reflects the acquisition of the formerly-licensed childrenswear business effective in July 2004.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended(a) |
| | March 28,
| | March 29,
| | March 31,
| | April 1,
| | April 2,
| | | April 3,
| | March 28,
| | March 29,
| | March 31,
| | April 1,
|
| | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 |
| | (millions, except per share data) | | | | | (millions, except per share data) | | |
|
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 4,823.7 | | | $ | 4,670.7 | | | $ | 4,059.1 | | | $ | 3,501.1 | | | $ | 3,060.7 | | | $ | 4,795.5 | | | $ | 4,823.7 | | | $ | 4,670.7 | | | $ | 4,059.1 | | | $ | 3,501.1 | |
Licensing revenues | | | 195.2 | | | | 209.4 | | | | 236.3 | | | | 245.2 | | | | 244.7 | | | | 183.4 | | | | 195.2 | | | | 209.4 | | | | 236.3 | | | | 245.2 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net revenues | | | 5,018.9 | | | | 4,880.1 | | | | 4,295.4 | | | | 3,746.3 | | | | 3,305.4 | | | | 4,978.9 | | | | 5,018.9 | | | | 4,880.1 | | | | 4,295.4 | | | | 3,746.3 | |
Gross profit | | | 2,730.7 | | | | 2,638.1 | | | | 2,336.2 | | | | 2,022.4 | | | | 1,684.5 | | | | 2,899.1 | | | | 2,730.7 | | | | 2,638.1 | | | | 2,336.2 | | | | 2,022.4 | |
Depreciation and amortization expense | | | (184.4 | ) | | | (201.3 | ) | | | (144.7 | ) | | | (127.0 | ) | | | (102.1 | ) | | | (181.2 | ) | | | (184.4 | ) | | | (201.3 | ) | | | (144.7 | ) | | | (127.0 | ) |
Impairments of assets | | | (55.4 | ) | | | (5.0 | ) | | | — | | | | (10.8 | ) | | | (1.5 | ) | | | (6.6 | ) | | | (55.4 | ) | | | (5.0 | ) | | | — | | | | (10.8 | ) |
Restructuring charges | | | (23.6 | ) | | | — | | | | (4.6 | ) | | | (9.0 | ) | | | (2.3 | ) | | | (6.9 | ) | | | (23.6 | ) | | | — | | | | (4.6 | ) | | | (9.0 | ) |
Operating income(a)(b) | | | 595.5 | | | | 653.4 | | | | 652.6 | | | | 516.6 | | | | 299.7 | | | | 706.9 | | | | 595.5 | | | | 653.4 | | | | 652.6 | | | | 516.6 | |
Interest income/(expense), net | | | (4.6 | ) | | | (1.0 | ) | | | 4.5 | | | | 1.2 | | | | (6.4 | ) | | | (9.8 | ) | | | (4.6 | ) | | | (1.0 | ) | | | 4.5 | | | | 1.2 | |
Net income | | $ | 406.0 | | | $ | 419.8 | | | $ | 400.9 | | | $ | 308.0 | | | $ | 190.4 | | |
Net income per common share: | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to PRLC | | | $ | 479.5 | | | $ | 406.0 | | | $ | 419.8 | | | $ | 400.9 | | | $ | 308.0 | |
Net income per common share attributable to PRLC: | | | | | | | | | | | | | | | | |
Basic | | $ | 4.09 | | | $ | 4.10 | | | $ | 3.84 | | | $ | 2.96 | | | $ | 1.88 | | | $ | 4.85 | | | $ | 4.09 | | | $ | 4.10 | | | $ | 3.84 | | | $ | 2.96 | |
Diluted | | $ | 4.01 | | | $ | 3.99 | | | $ | 3.73 | | | $ | 2.87 | | | $ | 1.83 | | | $ | 4.73 | | | $ | 4.01 | | | $ | 3.99 | | | $ | 3.73 | | | $ | 2.87 | |
Average common shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 99.2 | | | | 102.3 | | | | 104.4 | | | | 104.2 | | | | 101.5 | | | | 98.9 | | | | 99.2 | | | | 102.3 | | | | 104.4 | | | | 104.2 | |
Diluted | | | 101.3 | | | | 105.2 | | | | 107.6 | | | | 107.2 | | | | 104.1 | | | | 101.3 | | | | 101.3 | | | | 105.2 | | | | 107.6 | | | | 107.2 | |
Dividends declared per common share | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.30 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | |
| | |
(a) | | Fiscal 2010 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks. |
|
(b) | | Operating income included legal-related charges, net of approximately $3 million in Fiscal 2010; reversals of excess legal reserves related to credit card matters in the amounts of $0.5 million in Fiscal 2009 and approximately $4 million in Fiscal 2008; and litigation and credit card contingency-related charges of approximately $3 million in Fiscal 2007 and $7 million in Fiscal 2006 and $106 million in Fiscal 2005.2006. |
F-56F-54
POLO RALPH LAUREN CORPORATION SELECTED FINANCIAL INFORMATION — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | Fiscal Years Ended |
| | March 28,
| | March 29,
| | March 31,
| | April 1,
| | April 2,
| | | April 3,
| | March 28,
| | March 29,
| | March 31,
| | April 1,
|
| | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 |
| | (millions) | | | | | | | (millions) | | | | |
|
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 481.2 | | | $ | 551.5 | | | $ | 563.9 | | | $ | 285.7 | | | $ | 350.5 | | | $ | 563.1 | | | $ | 481.2 | | | $ | 551.5 | | | $ | 563.9 | | | $ | 285.7 | |
Short-term investments | | | 338.7 | | | | 74.3 | | | | — | | | | — | | | | — | | | | 584.1 | | | | 338.7 | | | | 74.3 | | | | — | | | | — | |
Non-current investments | | | | 75.5 | | | | 29.7 | | | | 28.7 | | | | — | | | | — | |
Working capital | | | 1,382.6 | | | | 984.9 | | | | 1,045.6 | | | | 535.0 | | | | 791.4 | | | | 1,528.5 | | | | 1,382.6 | | | | 984.9 | | | | 1,045.6 | | | | 535.0 | |
Total assets | | | 4,356.5 | | | | 4,365.5 | | | | 3,758.0 | | | | 3,088.7 | | | | 2,726.7 | | | | 4,648.9 | | | | 4,356.5 | | | | 4,365.5 | | | | 3,758.0 | | | | 3,088.7 | |
Total debt (including current maturities of debt) | | | 406.4 | | | | 679.2 | | | | 398.8 | | | | 280.4 | | | | 291.0 | | | | 282.1 | | | | 406.4 | | | | 679.2 | | | | 398.8 | | | | 280.4 | |
Stockholders’ equity | | | 2,735.1 | | | | 2,389.7 | | | | 2,334.9 | | | | 2,049.6 | | | | 1,675.7 | | |
Equity attributable to PRLC | | | | 3,116.6 | | | | 2,735.1 | | | | 2,389.7 | | | | 2,334.9 | | | | 2,049.6 | |
F-57F-55
POLO RALPH LAUREN CORPORATION
The following table sets forth the quarterly financial information of the Company:
| | | | | | | | | | | | | | | | |
| | Quarterly Periods Ended | |
| | June 28,
| | | September 27,
| | | December 27,
| | | March 28,
| |
Fiscal 2009 | | 2008 | | | 2008 | | | 2008 | | | 2009(a) | |
| | (millions, except per share data) | |
|
Net revenues | | $ | 1,113.6 | | | $ | 1,428.9 | | | $ | 1,252.0 | | | $ | 1,224.4 | |
Gross profit | | | 638.4 | | | | 788.2 | | | | 669.7 | | | | 634.4 | |
Net income | | | 95.2 | | | | 161.0 | | | | 105.3 | | | | 44.5 | |
Net income per common share:(b) | | | | | | | | | | | | | | | | |
Basic | | $ | 0.96 | | | $ | 1.62 | | | $ | 1.07 | | | $ | 0.45 | |
Diluted | | $ | 0.93 | | | $ | 1.58 | | | $ | 1.05 | | | $ | 0.44 | |
Dividends declared per common share | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarterly Periods Ended | | | Quarterly Periods Ended(a) |
| | June 30,
| | September 29,
| | December 29,
| | March 29,
| | | June 27,
| | September 26,
| | December 26,
| | April 3,
|
Fiscal 2008 | | 2007 | | 2007 | | 2007 | | 2008 | | |
Fiscal 2010 | | | 2009 | | 2009 | | 2009 | | 2010(c) |
| | (millions, except per share data) | | | (millions, except per share data) |
|
Net revenues | | $ | 1,070.3 | | | $ | 1,299.1 | | | $ | 1,269.8 | | | $ | 1,240.9 | | | $ | 1,023.7 | | | $ | 1,374.2 | | | $ | 1,243.9 | | | $ | 1,337.1 | |
Gross profit | | | 592.0 | | | | 695.2 | | | | 676.5 | | | | 674.4 | | | | 601.2 | | | | 784.8 | | | | 723.7 | | | | 789.4 | |
Net income | | | 88.3 | | | | 115.3 | | | | 112.7 | | | | 103.5 | | |
Net income per common share:(b) | | | | | | | | | | | | | | | | | |
Net income attributable to PRLC | | | | 76.8 | | | | 177.5 | | | | 111.1 | | | | 114.1 | |
Net income per common share attributable to PRLC:(b) | | | | | | | | | | | | | |
Basic | | $ | 0.85 | | | $ | 1.12 | | | $ | 1.11 | | | $ | 1.03 | | | $ | 0.77 | | | $ | 1.79 | | | $ | 1.12 | | | $ | 1.16 | |
Diluted | | $ | 0.82 | | | $ | 1.09 | | | $ | 1.08 | | | $ | 1.00 | | | $ | 0.76 | | | $ | 1.75 | | | $ | 1.10 | | | $ | 1.13 | |
Dividends declared per common share | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.10 | | | $ | 0.10 | |
| | | | | | | | | | | | | |
| | | Quarterly Periods Ended(a) |
| | | June 28,
| | September 27,
| | December 27,
| | March 28,
|
Fiscal 2009 | | | 2008 | | 2008 | | 2008 | | 2009(d) |
| | | (millions, except per share data) |
| |
Net revenues | | | $ | 1,113.6 | | | $ | 1,428.9 | | | $ | 1,252.0 | | | $ | 1,224.4 | |
Gross profit | | | | 638.4 | | | | 788.2 | | | | 669.7 | | | | 634.4 | |
Net income attributable to PRLC | | | | 95.2 | | | | 161.0 | | | | 105.3 | | | | 44.5 | |
Net income per common share attributable to PRLC:(b) | | | | | | | | | | | | | |
Basic | | | $ | 0.96 | | | $ | 1.62 | | | $ | 1.07 | | | $ | 0.45 | |
Diluted | | | $ | 0.93 | | | $ | 1.58 | | | $ | 1.05 | | | $ | 0.44 | |
Dividends declared per common share | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | |
| | |
(a) | | Net income and net income per common share for the fourthFourth quarter of Fiscal 2009 have been affected by approximately $69 million2010 consisted of pretax charges related to asset impairments and restructurings.14 weeks. All other fiscal quarters presented consisted of 13 weeks. |
|
(b) | | 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 common shares outstanding during each period. |
|
(c) | | The inclusion of the 14th week in the fourth quarter of Fiscal 2010 resulted in incremental revenues of approximately $70 million and increased net income of approximately $13 million. |
|
(d) | | Net income and net income per common share for the fourth quarter of Fiscal 2009 have been affected by approximately $69 million of pretax charges related to asset impairments and restructurings. |
F-58F-56