See accompanying notes.
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
| | (millions) (unaudited) |
Net income (loss) | | $ | (81.8 | ) | | $ | 81.3 |
| | $ | 121.5 |
| | $ | 104.7 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | |
Foreign currency translation gains (losses) | | 3.0 |
| | (88.8 | ) | | 90.7 |
| | (86.7 | ) |
Net gains (losses) on cash flow hedges | | 2.3 |
| | 45.0 |
| | (22.0 | ) | | 43.2 |
|
Net gains (losses) on defined benefit plans | | (0.5 | ) | | 1.1 |
| | (0.9 | ) | | 2.0 |
|
Other comprehensive income (loss), net of tax | | 4.8 |
| | (42.7 | ) | | 67.8 |
| | (41.5 | ) |
Total comprehensive income (loss) | | $ | (77.0 | ) | | $ | 38.6 |
| | $ | 189.3 |
| | $ | 63.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | (millions) |
Net income | | $ | 150.5 | | | $ | 193.3 | | | $ | 273.9 | | | $ | 358.0 | |
Other comprehensive income (loss), net of tax: | | | | | | | | |
Foreign currency translation gains (losses) | | (56.5) | | | (9.8) | | | (95.8) | | | 0.8 | |
Net gains on cash flow hedges | | 7.3 | | | 1.1 | | | 18.9 | | | 0.1 | |
Net losses on defined benefit plans | | — | | | — | | | (0.1) | | | (0.1) | |
Other comprehensive income (loss), net of tax | | (49.2) | | | (8.7) | | | (77.0) | | | 0.8 | |
Total comprehensive income | | $ | 101.3 | | | $ | 184.6 | | | $ | 196.9 | | | $ | 358.8 | |
See accompanying notes.
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Nine Months Ended | | | Six Months Ended |
| | December 30, 2017 | | December 31, 2016 | | | October 1, 2022 | | September 25, 2021 |
| | (millions) (unaudited) | | (millions) |
Cash flows from operating activities: | | | | | Cash flows from operating activities: | |
Net income | | $ | 121.5 |
| | $ | 104.7 |
| Net income | | $ | 273.9 | | | $ | 358.0 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization expense | | 219.4 |
| | 231.9 |
| Depreciation and amortization expense | | 108.1 | | | 113.1 | |
Deferred income tax expense (benefit) | | (8.0 | ) | | 9.8 |
| |
Equity in losses of equity-method investees | | 3.6 |
| | 5.2 |
| |
Deferred income tax expense (benefits) | | Deferred income tax expense (benefits) | | 36.1 | | | (0.1) | |
| Non-cash stock-based compensation expense | | 56.3 |
| | 46.4 |
| Non-cash stock-based compensation expense | | 40.7 | | | 40.6 | |
Non-cash impairment of assets | | 24.8 |
| | 56.7 |
| Non-cash impairment of assets | | 0.2 | | | 19.3 | |
Non-cash restructuring-related inventory charges | | 1.3 |
| | 149.4 |
| |
| Bad debt expense (reversals) | | Bad debt expense (reversals) | | 0.6 | | | (0.9) | |
Other non-cash charges | | 6.7 |
| | 18.1 |
| Other non-cash charges | | 13.1 | | | 1.8 | |
Changes in operating assets and liabilities: | | | | | Changes in operating assets and liabilities: | |
Accounts receivable | | 158.9 |
| | 214.9 |
| Accounts receivable | | (113.8) | | | 26.6 | |
Inventories | | (11.6 | ) | | (36.5 | ) | Inventories | | (345.8) | | | (199.0) | |
Prepaid expenses and other current assets | | (4.2 | ) | | (72.8 | ) | Prepaid expenses and other current assets | | (59.6) | | | (17.7) | |
Accounts payable and accrued liabilities | | 105.0 |
| | 98.4 |
| Accounts payable and accrued liabilities | | 31.8 | | | 145.7 | |
Income tax receivables and payables | | 279.7 |
| | (2.6 | ) | Income tax receivables and payables | | 28.9 | | | 6.2 | |
Deferred income | | 3.8 |
| | (15.5 | ) | |
| Operating lease right-of-use assets and liabilities, net | | Operating lease right-of-use assets and liabilities, net | | (12.3) | | | (20.2) | |
Other balance sheet changes | | (6.1 | ) | | 42.6 |
| Other balance sheet changes | | — | | | (9.2) | |
Net cash provided by operating activities | | 951.1 |
| | 850.7 |
| Net cash provided by operating activities | | 1.9 | | | 464.2 | |
Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Capital expenditures | | (123.0 | ) | | (225.5 | ) | Capital expenditures | | (83.9) | | | (63.4) | |
Purchases of investments | | (985.5 | ) | | (460.5 | ) | Purchases of investments | | (431.2) | | | (756.4) | |
Proceeds from sales and maturities of investments | | 795.3 |
| | 704.8 |
| Proceeds from sales and maturities of investments | | 849.2 | | | 279.5 | |
Acquisitions and ventures | | (4.6 | ) | | (2.5 | ) | |
| Other investing activities | | Other investing activities | | (6.0) | | | (2.1) | |
Net cash provided by (used in) investing activities | | (317.8 | ) | | 16.3 |
| Net cash provided by (used in) investing activities | | 328.1 | | | (542.4) | |
Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Proceeds from issuance of short-term debt | | — |
| | 3,735.2 |
| |
Repayments of short-term debt | | — |
| | (3,851.3 | ) | |
Payments of capital lease obligations | | (21.2 | ) | | (19.4 | ) | |
| Repayments of long-term debt | | Repayments of long-term debt | | (500.0) | | | — | |
Payments of finance lease obligations | | Payments of finance lease obligations | | (10.8) | | | (11.7) | |
Payments of dividends | | (121.7 | ) | | (123.7 | ) | Payments of dividends | | (99.1) | | | (50.5) | |
Repurchases of common stock, including shares surrendered for tax withholdings | | (15.9 | ) | | (115.0 | ) | Repurchases of common stock, including shares surrendered for tax withholdings | | (417.3) | | | (39.9) | |
Proceeds from exercise of stock options | | 0.1 |
| | 4.7 |
| |
| Net cash used in financing activities | | (158.7 | ) | | (369.5 | ) | Net cash used in financing activities | | (1,027.2) | | | (102.1) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | 36.8 |
| | (29.0 | ) | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (60.6) | | | (11.0) | |
Net increase in cash, cash equivalents, and restricted cash | | 511.4 |
| | 468.5 |
| |
Net decrease in cash, cash equivalents, and restricted cash | | Net decrease in cash, cash equivalents, and restricted cash | | (757.8) | | | (191.3) | |
Cash, cash equivalents, and restricted cash at beginning of period | | 711.8 |
| | 502.1 |
| Cash, cash equivalents, and restricted cash at beginning of period | | 1,872.0 | | | 2,588.0 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 1,223.2 |
| | $ | 970.6 |
| Cash, cash equivalents, and restricted cash at end of period | | $ | 1,114.2 | | | $ | 2,396.7 | |
See accompanying notes.
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended October 1, 2022 |
| | Common Stock(a) | | Additional Paid-in Capital | | | | Treasury Stock at Cost | | | | |
| | | | Retained Earnings | | | | | Total Equity |
| | Shares | | Amount | | | | Shares | | Amount | | AOCI(b) | |
| | (millions) |
Balance at July 2, 2022 | | 132.3 | | | $ | 1.3 | | | $ | 2,767.0 | | | $ | 6,347.3 | | | 64.3 | | | $ | (6,543.4) | | | $ | (208.1) | | | $ | 2,364.1 | |
Comprehensive income: | | | | | | | | | | | | | | | | |
Net income | | | | | | | | 150.5 | | | | | | | | | |
Other comprehensive loss | | | | | | | | | | | | | | (49.2) | | | |
Total comprehensive income | | | | | | | | | | | | | | | | 101.3 | |
Dividends declared | | | | | | | | (49.7) | | | | | | | | | (49.7) | |
Repurchases of common stock | | | | | | | | | | 2.0 | | | (182.6) | | | | | (182.6) | |
Stock-based compensation | | | | | | 22.5 | | | | | | | | | | | 22.5 | |
Shares issued pursuant to stock-based compensation plans | | 0.3 | | | — | | | — | | | | | | | | | | | — | |
Balance at October 1, 2022 | | 132.6 | | | $ | 1.3 | | | $ | 2,789.5 | | | $ | 6,448.1 | | | 66.3 | | | $ | (6,726.0) | | | $ | (257.3) | | | $ | 2,255.6 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 25, 2021 |
| | Common Stock(a) | | Additional Paid-in Capital | | | | Treasury Stock at Cost | | | | |
| | | | Retained Earnings | | | | | Total Equity |
| | Shares | | Amount | | | | Shares | | Amount | | AOCI(b) | |
| | (millions) |
Balance at June 26, 2021 | | 131.6 | | | $ | 1.3 | | | $ | 2,685.5 | | | $ | 5,987.1 | | | 58.0 | | | $ | (5,844.9) | | | $ | (111.3) | | | $ | 2,717.7 | |
Comprehensive income: | | | | | | | | | | | | | | | | |
Net income | | | | | | | | 193.3 | | | | | | | | | |
Other comprehensive loss | | | | | | | | | | | | | | (8.7) | | | |
Total comprehensive income | | | | | | | | | | | | | | | | 184.6 | |
Dividends declared | | | | | | | | (50.6) | | | | | | | | | (50.6) | |
Repurchases of common stock | | | | | | | | | | 0.1 | | | (11.1) | | | | | (11.1) | |
Stock-based compensation | | | | | | 22.2 | | | | | | | | | | | 22.2 | |
Shares issued pursuant to stock-based compensation plans | | 0.2 | | | — | | | — | | | | | | | | | | | — | |
Balance at September 25, 2021 | | 131.8 | | | $ | 1.3 | | | $ | 2,707.7 | | | $ | 6,129.8 | | | 58.1 | | | $ | (5,856.0) | | | $ | (120.0) | | | $ | 2,862.8 | |
(a)Includes Class A and Class B common stock.
(b)Accumulated other comprehensive income (loss).
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Continued) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended October 1, 2022 |
| | Common Stock(a) | | Additional Paid-in Capital | | | | Treasury Stock at Cost | | | | |
| | | | Retained Earnings | | | | | Total Equity |
| | Shares | | Amount | | | | Shares | | Amount | | AOCI(b) | |
| | (millions) |
Balance at April 2, 2022 | | 131.8 | | | $ | 1.3 | | | $ | 2,748.8 | | | $ | 6,274.9 | | | 61.9 | | | $ | (6,308.7) | | | $ | (180.3) | | | $ | 2,536.0 | |
Comprehensive income: | | | | | | | | | | | | | | | | |
Net income | | | | | | | | 273.9 | | | | | | | | | |
Other comprehensive loss | | | | | | | | | | | | | | (77.0) | | | |
Total comprehensive income | | | | | | | | | | | | | | | | 196.9 | |
Dividends declared | | | | | | | | (100.7) | | | | | | | | | (100.7) | |
Repurchases of common stock | | | | | | | | | | 4.4 | | | (417.3) | | | | | (417.3) | |
Stock-based compensation | | | | | | 40.7 | | | | | | | | | | | 40.7 | |
Shares issued pursuant to stock-based compensation plans | | 0.8 | | | — | | | — | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | | |
Balance at October 1, 2022 | | 132.6 | | | $ | 1.3 | | | $ | 2,789.5 | | | $ | 6,448.1 | | | 66.3 | | | $ | (6,726.0) | | | $ | (257.3) | | | $ | 2,255.6 | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended September 25, 2021 |
| | Common Stock(a) | | Additional Paid-in Capital | | | | Treasury Stock at Cost | | | | |
| | | | Retained Earnings | | | | | Total Equity |
| | Shares | | Amount | | | | Shares | | Amount | | AOCI(b) | |
| | (millions) |
Balance at March 27, 2021 | | 131.0 | | | $ | 1.3 | | | $ | 2,667.1 | | | $ | 5,872.9 | | | 57.8 | | | $ | (5,816.1) | | | $ | (120.8) | | | $ | 2,604.4 | |
Comprehensive income: | | | | | | | | | | | | | | | | |
Net income | | | | | | | | 358.0 | | | | | | | | | |
Other comprehensive income | | | | | | | | | | | | | | 0.8 | | | |
Total comprehensive income | | | | | | | | | | | | | | | | 358.8 | |
Dividends declared | | | | | | | | (101.1) | | | | | | | | | (101.1) | |
Repurchases of common stock | | | | | | | | | | 0.3 | | | (39.9) | | | | | (39.9) | |
Stock-based compensation | | | | | | 40.6 | | | | | | | | | | | 40.6 | |
Shares issued pursuant to stock-based compensation plans | | 0.8 | | | — | | | — | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | | |
Balance at September 25, 2021 | | 131.8 | | | $ | 1.3 | | | $ | 2,707.7 | | | $ | 6,129.8 | | | 58.1 | | | $ | (5,856.0) | | | $ | (120.0) | | | $ | 2,862.8 | |
(a)Includes Class A and Class B common stock.
(b)Accumulated other comprehensive income (loss).
See accompanying notes.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and where otherwise indicated)
(Unaudited)
| |
1. | Description of Business |
1. Description of Business
Ralph Lauren Corporation ("RLC") is a global leader in the design, marketing, and distribution of premiumluxury lifestyle products, including apparel, footwear & accessories, home, furnishings,fragrances, and other licensed product categories.hospitality. RLC's long-standing reputation and distinctive image have been developed across an expanding numbera wide range of products, brands, salesdistribution channels, and international markets. RLC's brand names include Ralph Lauren, Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Ralph Lauren Children, Chaps, and Club Monaco,Chaps, among others. RLC and its subsidiaries are collectively referred to herein as the "Company," "we," "us," "our," and "ourselves," unless the context indicates otherwise.
The Company diversifies its business by geography (North America, Europe, and Asia, among other regions) and channelschannel of distribution (wholesale, retail,(retail, wholesale, and licensing). This allows the Company to maintain a dynamic balance as its operating results do not depend solely on the performance of any single geographic area or channel of distribution. The Company's wholesale sales are made principally to major department stores and specialty stores around the world. The Company also sells directly to consumers through its integrated retail channel, which includes its retail stores, concession-based shop-within-shops, and e-commercedigital commerce operations around the world. The Company's wholesale sales are made principally to major department stores, specialty stores, and third-party digital partners around the world, as well as to certain third-party-owned stores to which the Company has licensed the right to operate in defined geographic territories using its trademarks. In addition, the Company licenses to unrelated third parties for specified periods the right to operate retail stores and/or to useaccess its various trademarks in connection with the licensees' manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.home.
The Company organizes its business into the following three reportable segments: North America, Europe, and Asia. In addition to these reportable segments, the Company also has other non-reportable segments. See Note 17 for further discussion of the Company's segment reporting structure.
2. Basis of Presentation
Interim Financial Statements
These interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and are unaudited. In the opinion of management, these consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company for the interim periods presented. In addition, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") and the notes thereto have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
This report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended April 1, 20172, 2022 (the "Fiscal 20172022 10-K").
Basis of Consolidation
These unaudited interim consolidated financial statements present the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Additionally, as discussed in Note 8, the Company completed the sale of its Club Monaco business at the end of its first quarter of Fiscal 2022 (as defined below) on June 26, 2021. As a result, assets and liabilities related to the Club Monaco business were deconsolidated from the consolidated statement of financial position effective June 26, 2021, with Club Monaco's operating results included in the consolidated statements of income (loss), comprehensive income (loss), and cash flows through the end of the first quarter of Fiscal 2022. Financial statements issued prior to this transaction were not affected.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest toimmediately before or after March 31. As such, fiscal year 20182023 will end on March 31, 2018April 1, 2023 and will be a 52-week period ("Fiscal 2018"2023"). Fiscal year 20172022 ended on April 1, 20172, 2022 and was also a 52-week53-week period ("Fiscal 2017"2022"). The thirdsecond quarter of Fiscal 20182023 ended on December 30, 2017October 1, 2022 and was a 13-week period. The thirdsecond quarter of Fiscal 20172022 ended on December 31, 2016September 25, 2021 and was also a 13-week period.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include reserves for bad debt, customer returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; fair value measurements; accounting for income taxes and related uncertain tax positions; valuation of stock-based compensation awards and related estimated forfeiture rates; and reserves for restructuring activity; and accounting for business combinations,activity, among others.
Reclassifications
Certain reclassifications have been made to the prior period'speriods' financial information in order to conform to the current period's presentation, including the realignment of the Company's segment reporting structure, as further described in Note 17.presentation.
Seasonality of Business
The Company's business is typically affected by seasonal trends, with higher levels of retail sales in its second and third fiscal quarters and higher wholesale sales in its second and fourth fiscal quarters and higher retail sales in its second and third fiscal quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods impacting ourits retail business.business and the timing of seasonal wholesale shipments. As a result of changes in its business, consumer spending patterns, and the macroeconomic environment, including those resulting from pandemic diseases and other catastrophic events, historical quarterly operating trends and working capital requirements may not be indicative of the Company's future performance. In addition, fluctuations in sales, operating income (loss), and cash flows in any fiscal quarter may be affected by other events affecting retail sales, such as changes in weather patterns. Accordingly, the Company's operating results and cash flows for the three-month and nine-monthsix-month periods ended December 30, 2017October 1, 2022 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2018.2023.
Beginning in the fourth quarter of the Company's fiscal year ended March 28, 2020 ("Fiscal 2020"), a novel strain of coronavirus commonly referred to as COVID-19 emerged and spread rapidly across the globe, including throughout all major geographies in which the Company operates, resulting in adverse economic conditions and widespread business disruptions. Since then, governments worldwide have periodically imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus.
As a result of the COVID-19 pandemic, the Company has experienced varying degrees of business disruptions since its beginning, including periods of closure of its stores and corporate-related facilities, as have the Company's wholesale customers, licensing partners, and suppliers. Such disruptions continued throughout Fiscal 2022 in certain regions, although to a lesser extent than the widespread significant disruptions experienced during the Company's fiscal year ended March 27, 2021 ("Fiscal 2021"), and have since extended into Fiscal 2023, most notably in Asia where approximately 50% of the Company's stores in China experienced closures for a significant portion of the first quarter, followed by sporadic closures during the second quarter impacting approximately 35% of the Company’s mainland stores. Further, throughout the course of the pandemic, the majority of the Company's stores that were able to remain open have periodically been subject to limited operating hours and/or customer capacity levels in accordance with local health guidelines, with traffic remaining challenged. However, the Company's digital commerce operations have grown significantly from pre-pandemic levels, due in part to its investments and enhanced capabilities, as well as changes in consumer shopping preferences.
| | | | | | | | |
3. | Summary of Significant Accounting Policies9 | |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The COVID-19 pandemic also continues to adversely impact the Company's distribution, logistic, and sourcing partners, including temporary factory closures, labor shortages, vessel, container and other transportation shortages, and port congestion. Such disruptions have reduced the availability of inventory, delayed timing of inventory receipts, and resulted in increased costs for both the purchase and transportation of such inventory.
Despite the development of COVID-19 vaccines, the pandemic remains volatile and continues to evolve, with resurgences and outbreaks occurring in various parts of the world, including those resulting from variants of the virus. Accordingly, the Company cannot predict for how long and to what extent the pandemic will continue to impact its business operations or the overall global economy. The Company will continue to assess its operations location-by-location, considering the guidance of local governments and global health organizations.
3. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognizedThe Company recognizes revenue across all segmentschannels of the business when thereit satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services, and is persuasive evidence ofsubject to an arrangement, delivery has occurred, the price has been fixed or is determinable,overall constraint that a significant revenue reversal will not occur in future periods. Sales and collectability is reasonably assured.other related taxes collected from customers and remitted to government authorities are excluded from revenue.
Revenue withinfrom the Company's retail business is recognized when the customer takes physical possession of the products, which occurs either at the point of sale for merchandise purchased at the Company's own retail stores and shop-within-shop locations, or upon receipt of shipment for merchandise ordered through direct-to-consumer digital commerce sites. Such revenues are recorded net of estimated returns based on historical trends. Payment is due at the point of sale.
Gift cards purchased by customers are recorded as a liability until they are redeemed for products sold by the Company's retail business, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed (referred to as "breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's wholesale business is generally recognized upon shipment of products, at the timewhich point title passes and risk of loss is transferred to customers.the customer. In certain arrangements where the Company retains the risk of loss during shipment, revenue is recognized upon receipt of products by the customer. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates for end-of-season markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these costsamounts have not differed materially from actual results.
Retail store and concession-based shop-within-shop revenueRevenue from the Company's licensing arrangements is recognized netover time during the period that licensees are provided access to the Company's trademarks (i.e., symbolic intellectual property) and benefit from such access through their own sales of estimated returns at thelicensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements, may be subject to a contractually-guaranteed minimum royalty amount. Payments are generally due quarterly and, depending on time of sale to consumers. E-commerce revenue from sales of products ordered through the Company's e-commerce sites and third-party digital partner e-commerce sites is recognized upon delivery of the shipment to its customers. Such revenue is also reduced by an estimate of returns.
Gift cards issued by the Company arereceipt, may be recorded as a liability until they are redeemed, at which point revenue is recognized.recognized as revenue. The Company recognizes incomerevenue for unredeemed gift cards whensales-based royalty arrangements (including those for which the likelihoodroyalty exceeds any contractually-guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually-guaranteed minimum royalty amount, the minimum is generally recognized as revenue ratably over the respective contractual period. This sales-based output measure of redemption by a customer is remoteprogress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company determines that it does not have a legal obligationis entitled to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property.
receive
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in exchange for providing access to its trademarks. As of October 1, 2022, contractually-guaranteed minimum royalty amounts expected to be recognized as revenue during future periods were as follows:
Revenue from licensing arrangements is recognized when | | | | | | | | |
| | Contractually-Guaranteed Minimum Royalties(a) |
| | (millions) |
Remainder of Fiscal 2023 | | $ | 42.4 | |
Fiscal 2024 | | 98.7 | |
Fiscal 2025 | | 62.5 | |
Fiscal 2026 | | 43.8 | |
Fiscal 2027 | | 40.4 | |
Fiscal 2028 and thereafter | | 11.3 | |
Total | | $ | 299.1 | |
(a)Amounts presented do not contemplate potential contract renewals or royalties earned in accordance with the termsexcess of the underlying agreements, generally based uponcontractually-guaranteed minimums.
Disaggregated Net Revenues
The following tables disaggregate the higherCompany's net revenues into categories that depict how the nature, amount, timing, and uncertainty of (i) contractually guaranteed minimum royalty levels or (ii) actual salesrevenues and royalty data, or estimates thereof, receivedcash flows are affected by economic factors for the fiscal periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 1, 2022 | | September 25, 2021 |
| | North America | | Europe | | Asia | | Other | | Total | | North America | | Europe | | Asia | | Other | | Total |
| | (millions) |
Sales Channel(a): | | | | | | | | | | | | | | | | | | | | |
Retail | | $ | 424.0 | | | $ | 204.8 | | | $ | 288.2 | | | $ | — | | | $ | 917.0 | | | $ | 421.9 | | | $ | 229.5 | | | $ | 248.4 | | | $ | 0.4 | | | $ | 900.2 | |
Wholesale | | 302.6 | | | 288.7 | | | 28.2 | | | — | | | 619.5 | | | 281.2 | | | 266.0 | | | 21.5 | | | 0.3 | | | 569.0 | |
Licensing | | — | | | — | | | — | | | 43.4 | | | 43.4 | | | — | | | — | | | — | | | 34.9 | | | 34.9 | |
Total | | $ | 726.6 | | | $ | 493.5 | | | $ | 316.4 | | | $ | 43.4 | | | $ | 1,579.9 | | | $ | 703.1 | | | $ | 495.5 | | | $ | 269.9 | | | $ | 35.6 | | | $ | 1,504.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 |
| | North America | | Europe | | Asia | | Other | | Total | | North America | | Europe | | Asia | | Other | | Total |
| | (millions) |
Sales Channel(a): | | | | | | | | | | | | | | | | | | | | |
Retail | | $ | 861.8 | | | $ | 420.7 | | | $ | 602.1 | | | $ | — | | | $ | 1,884.6 | | | $ | 834.1 | | | $ | 400.3 | | | $ | 521.2 | | | $ | 27.2 | | | $ | 1,782.8 | |
Wholesale | | 565.5 | | | 488.4 | | | 48.4 | | | — | | | 1,102.3 | | | 531.1 | | | 450.1 | | | 36.9 | | | 5.3 | | | 1,023.4 | |
Licensing | | — | | | — | | | — | | | 83.6 | | | 83.6 | | | — | | | — | | | — | | | 74.2 | | | 74.2 | |
Total | | $ | 1,427.3 | | | $ | 909.1 | | | $ | 650.5 | | | $ | 83.6 | | | $ | 3,070.5 | | | $ | 1,365.2 | | | $ | 850.4 | | | $ | 558.1 | | | $ | 106.7 | | | $ | 2,880.4 | |
(a)Net revenues from the Company's licensees.retail and wholesale businesses are recognized at a point in time. Net revenues from the Company's licensing business are recognized over time.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Income
Deferred income represents cash payments received in advance of the Company's transfer of control of products or services to its customers and generally consists of unredeemed gift cards (net of breakage) and advance royalty payments from licensees. The Company accounts for sales taxesCompany's deferred income balances were $17.3 million and $16.6 million as of October 1, 2022 and April 2, 2022, respectively, and were primarily recorded within accrued expenses and other related taxes on a net basis, excluding such taxes from revenue.current liabilities within the consolidated balance sheets. The majority of the deferred income balance as of October 1, 2022 is expected to be recognized as revenue within the next twelve months.
Shipping and Handling Costs
The costsCosts associated with shipping goods to customers are accounted for as fulfillment activities and reflected as a component of selling, general, and administrative ("SG&A") expenses in the consolidated statements of operations. The costsCosts of preparing merchandise for sale, such as picking, packing, warehousing, and order charges ("handling costs"), are also included in SG&A expenses. Shipping and handling costs billed to customers are included in revenue.
A summary of shipping and handling costs recognized duringfor the three-month and nine-monthfiscal periods ended December 30, 2017 and December 31, 2016presented is as follows:
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | | | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | (millions) | | | (millions) |
Shipping costs | | $ | 11.7 |
| | $ | 12.8 |
| | $ | 28.4 |
| | $ | 32.2 |
| Shipping costs | | $ | 17.7 | | | $ | 14.0 | | | $ | 35.0 | | | $ | 28.8 | |
Handling costs | | 39.7 |
| | 44.1 |
| | 115.3 |
| | 127.8 |
| Handling costs | | 39.7 | | | 35.8 | | | 76.7 | | | 70.2 | |
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company's Class A and Class B common stock. Diluted net income (loss) per common share adjusts basic net income (loss) per common share for the dilutive effects of outstanding stock options, restricted stock units ("RSUs"), stock options, and any other potentially dilutive instruments, only infor the periods in which such effects are dilutive.
The weighted-average number of common shares outstanding used to calculate basic net income (loss) per common share is reconciled to shares used to calculate diluted net income (loss) per common share as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | (millions) |
Basic shares | | 68.0 | | | 74.0 | | | 69.0 | | | 73.9 | |
Dilutive effect of RSUs and stock options | | 1.0 | | | 1.3 | | | 1.3 | | | 1.4 | |
Diluted shares | | 69.0 | | | 75.3 | | | 70.3 | | | 75.3 | |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
| | (millions) |
Basic shares | | 81.7 |
| | 82.6 |
| | 81.7 |
| | 82.9 |
|
Dilutive effect of stock options and RSUs | | — |
| (a) | 0.7 |
| | 0.8 |
| | 0.7 |
|
Diluted shares | | 81.7 |
| | 83.3 |
| | 82.5 |
| | 83.6 |
|
| |
(a)
| Incremental shares of 0.9 million attributable to outstanding stock options and RSUs were excluded from the computation of diluted shares for the three months ended December 30, 2017, as such shares would not be dilutive as a result of the net loss incurred during the period. |
All earnings per share amounts have been calculated using unrounded numbers. Options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income (loss) per common share. In addition, theThe Company has outstanding performance-based RSUs, which are included in the computation of diluted shares only to the extent that the underlying performance conditions (and applicable market condition modifiers, if any) (i) have been satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive. In addition, options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of such common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. As of December 30, 2017both October 1, 2022 and December 31, 2016,September 25, 2021, there were 2.00.4 million and
of additional shares issuable contingent upon vesting of performance-based RSUs and/or upon exercise of anti-dilutive stock options that were excluded from the diluted shares calculations.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.2 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs that were excluded from the diluted shares calculations.
Accounts Receivable
In the normal course of business, the Company extends credit to wholesale customers that satisfy certain defined credit criteria. Payment is generally due within 30 to 120 days and does not involve a significant financing component. Accounts receivable isare recorded at carrying value,amortized cost, which approximates fair value, and isare presented in the Company's consolidated balance sheets net of certain reserves and allowances. These reserves and allowances consist of (i) reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances (see the "Revenue Recognition" section above for further discussion of related accounting policies) and (ii) allowances for doubtful accounts.
A rollforward of the activity in the Company's reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances is presented below:as follows:
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | | | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | (millions) | | | (millions) |
Beginning reserve balance | | $ | 231.5 |
| | $ | 228.9 |
| | $ | 202.8 |
| | $ | 239.7 |
| Beginning reserve balance | | $ | 157.4 | | | $ | 178.9 | | | $ | 180.7 | | | $ | 173.7 | |
Amount charged against revenue to increase reserve | | 125.3 |
| | 151.8 |
| | 418.6 |
| | 479.6 |
| Amount charged against revenue to increase reserve | | 115.5 | | | 101.6 | | | 202.2 | | | 188.7 | |
Amount credited against customer accounts to decrease reserve | | (155.6 | ) | | (171.8 | ) | | (427.8 | ) | | (511.1 | ) | Amount credited against customer accounts to decrease reserve | | (99.4) | | | (94.0) | | | (202.7) | | | (177.2) | |
Foreign currency translation | | 0.4 |
| | (7.8 | ) | | 8.0 |
| | (7.1 | ) | Foreign currency translation | | (6.7) | | | (1.7) | | | (13.4) | | | (0.4) | |
Ending reserve balance | | $ | 201.6 |
| | $ | 201.1 |
| | $ | 201.6 |
| | $ | 201.1 |
| Ending reserve balance | | $ | 166.8 | | | $ | 184.8 | | | $ | 166.8 | | | $ | 184.8 | |
An allowance for doubtful accounts is determined through an analysis of accounts receivable aging, assessments of collectability based on an evaluation of historical and anticipated trends, the financial condition of the Company's customers and antheir ability to withstand prolonged periods of adverse economic conditions, and evaluation of the impact of current and forecasted economic and market conditions over the related asset's contractual life, among other factors.
A rollforward of the activity in the Company's allowance for doubtful accounts is presented below:as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
| | (millions) |
Beginning reserve balance | | $ | 17.3 |
| | $ | 15.8 |
| | $ | 11.6 |
| | $ | 14.5 |
|
Amount recorded to expense to increase reserve(a) | | 0.1 |
| | 0.1 |
| | 6.4 |
| | 6.1 |
|
Amount written-off against customer accounts to decrease reserve | | (0.4 | ) | | (3.3 | ) | | (1.8 | ) | | (7.9 | ) |
Foreign currency translation | | — |
| | (0.7 | ) | | 0.8 |
| | (0.8 | ) |
Ending reserve balance | | $ | 17.0 |
| | $ | 11.9 |
| | $ | 17.0 |
| | $ | 11.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | (millions) |
Beginning reserve balance | | $ | 27.7 | | | $ | 38.6 | | | $ | 34.0 | | | $ | 40.1 | |
Amount recorded to expense to increase (decrease) reserve(a) | | 2.5 | | | 0.1 | | | 0.6 | | | (0.9) | |
Amount written-off against customer accounts to decrease reserve | | (1.6) | | | (0.6) | | | (4.9) | | | (1.3) | |
Foreign currency translation | | (0.9) | | | (0.2) | | | (2.0) | | | — | |
Ending reserve balance | | $ | 27.7 | | | $ | 37.9 | | | $ | 27.7 | | | $ | 37.9 | |
| |
(a)
| Amounts recorded to bad debt expense are included within SG&A expenses in the consolidated statements of operations. |
(a)Amounts recorded to bad debt expense are included within SG&A expenses in the consolidated statements of operations.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department andstores, specialty stores, and third-party digital partners around the world, and extends credit based on an evaluation of each customer's financial capacity and condition, usually without requiring collateral. In the Company's wholesale business, concentration of credit risk is relatively limited due to the large number of customers and their dispersion across many geographic areas. However, the Company has three key wholesale customers that generate significant sales volume. During Fiscal 2017,2022, the Company's sales to its three largest wholesale customer, Macy's, Inc. ("Macy's"),customers accounted for approximately 10% of total net revenues, and the Company's sales to its three largest wholesale customers (including Macy's) accounted for approximately 21%16% of total net revenues. Substantially all of the Company's sales to its three largest wholesale customers related to its North America segment. As of December 30, 2017,October 1, 2022, these three key wholesale customers constitutedaccounted for approximately 27%34% of the Company's total gross accounts receivable.
Inventories
The Company holds inventory that is sold in its retail stores and digital commerce sites directly to consumers. The Company also holds inventory that is to be sold through wholesale distribution channels to major department stores, and specialty retail stores. The Company also holds retail inventory that is sold in its own stores, and e-commerce sites directly to consumers.third-party digital partners. Substantially all of the Company's inventories are comprisedconsist of finished goods, which are stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average cost basis. Inventory held by the Company totaled $825.4 million, $791.5$1.261 billion, $977.3 million, and $984.1$928.2 million as of December 30, 2017,October 1, 2022, April 1, 2017,2, 2022, and December 31, 2016,September 25, 2021, respectively.
Derivative Financial Instruments
The Company records all derivative financial instruments on its consolidated balance sheets at fair value. ForChanges in the fair value of derivative instruments that are designated and qualify for hedge accounting the effective portion of changes in their fair value isare either (i) offset through earnings against the changes in fair value of the related hedged assets, liabilities, or firm commitments through earnings or (ii) recognized in equity as a component of accumulated other comprehensive income (loss) ("AOCI") until the hedged item is recognized in earnings, depending on whether the derivativeinstrument is being used to hedgehedging against changes in fair value or cash flows and net investments, respectively.
Each derivative instrument that qualifies for hedge accounting is expected to be highly effective at reducingin offsetting the risk associated with the exposure being hedged.related exposure. For each derivative instrument that is designated as a hedge, the Company formally documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item, and the risk exposure, as well as how hedge effectiveness will be assessed prospectively and retrospectively over the instrument's term. To assess hedge effectiveness at the inception of a hedging relationship, the Company generally uses regression analysis, a statistical method, to compare the changeevaluate how changes in the fair value of the derivative instrument are expected to offset changes in the change in fair value or cash flows of the related hedged item. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.
As a result ofGiven its use of derivative instruments, the Company is exposed to the risk that counterparties to such contracts will fail to meet their contractual obligations. To mitigate thissuch counterparty credit risk, the Company has aCompany's policy ofis to only enteringenter into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. The Company's established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of its counterparties' creditworthiness. The Company also enters into master netting arrangements with counterparties, when possible, to further mitigate credit risk associated with its derivative instruments.risk. In the event of default or termination, (as such terms are defined within the respective master netting arrangement), these arrangements allow the Company to net-settle amounts payable and receivable related to multiple derivative transactions with the same counterparty. The master netting arrangements specify a number of events of default and termination, including among others, the failure to make timely payments.
The fair values of the Company's derivative instruments are recorded on its consolidated balance sheets on a gross basis. For cash flow reporting purposes, proceeds received or amounts paid upon the settlement of a derivative instrument are classified in the same manner as the related item being hedged, primarily within cash flows from operating activities.
activities for its forward foreign exchange contracts and within cash flows from investing activities for its cross-currency swap contracts, both as discussed below.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Flow Hedges
The Company uses forward foreign currency exchange contracts to reducemitigate its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, and the settlement of foreign currency-denominated operational balances.currency. To the extent forward foreign currency exchange contracts are designated as cash flow hedges, and are highly effective in offsetting changes in the value of the hedged items, the related gains or losses on such instruments are initially deferred in equity as a component of AOCI and are subsequently recognized within cost of goods sold in the consolidated statements of operations as follows:
Forecasted Inventory Transactions — recognized as part of the cost of the inventory being hedged within cost of goods sold when the related inventory is sold to a third party.
sold.Intercompany Royalties/Settlement of Foreign Currency Balances — recognized within foreign currency gains (losses) during the period that the hedged balance is remeasured through earnings, generally through its settlement when the related payment occurs.
To the extent thatIf a derivative instrument designated as a cash flowis dedesignated or if hedge accounting is discontinued because the instrument is not considered effective, any change in its fair value relating to such ineffectiveness is immediately recognized in earnings within foreign currency gains (losses). If it is determined that a derivative instrument has not been highly effective, and will continue notexpected to be highly effective in hedging the designated exposure, hedge accounting is discontinued andany further gains (losses) are immediately recognized in earnings each period within foreign currency gains (losses).other income (expense), net. Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the originally-documented hedging strategy, unless the related forecasted transaction is no longer probable of not occurring, in which case the accumulated amount is immediately recognized within other income (expense), net.
Hedges of Net Investments in earnings within foreign currency gains (losses).
Hedge of a Net Investment in a Foreign OperationOperations
The Company periodically uses cross-currency swap contracts to reduce risk associated with exchange rate fluctuations on certain of its net investments in foreign subsidiaries. Changes in the fair values of such derivative instruments that are designated as hedges of net investments in foreign operations are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments, toadjustments. In assessing the extent they are effective as a hedge. To assess effectiveness of such hedges, the Company uses a method based on changes in spot rates to measure the impact of foreign currency exchange rate fluctuations on both its foreign subsidiary net investment and the related derivative hedging instrument. Accordingly,Under this method, changes in the fair value of the hedging instrument other than those due to changes in the spot rate are excluded from the assessment of hedge effectivenessinitially recorded in AOCI as a translation adjustment and are recorded in the consolidated statement of operations with any other ineffectivenessamortized into earnings as interest expense. Amountsexpense using a systematic and rational method over the instrument's term. Changes in fair value associated with the effective portion of net investment hedges(i.e., those due to changes in the spot rate) are recorded in AOCI as a translation adjustment and are released from AOCI and recognized in earnings only upon the sale or liquidation of the hedged net investment.
Fair Value Hedges
Changes in the fair value of a derivative instrument that is designated as a fair value hedge, along with offsetting changes in the fair value of the related hedged item attributable to the hedged risk, are recorded in earnings. Hedge ineffectiveness is recorded in earnings to the extent that the change in the fair value of the hedged item does not offset the change in the fair value of the hedging instrument.
Undesignated Hedges
All of the Company'sThe Company uses undesignated hedges are entered intoprimarily to hedge specific economic risks, particularly foreign currency exchange rate risk related to foreign currency-denominated balances.third-party and intercompany balances and exposures. Changes in the fair valuevalues of undesignated derivativesuch instruments are immediately recognized in earnings each period within foreign currency gains (losses).other income (expense), net.
See Note 12 for further discussion of the Company's derivative financial instruments.
Refer to Note 3 of the Fiscal 20172022 10-K for a summary of all of the Company's significant accounting policies.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
4. | 4. Recently Issued Accounting Standards |
Targeted Improvements to Accounting for Hedging ActivitiesStandards
Disclosure of Supplier Finance Program Obligations
In August 2017,September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities"2022-04, "Disclosure of Supplier Finance Program Obligations" ("ASU 2017-12"2022-04"). ASU 2017-12 amends existing hedge accounting guidance by better aligning2022-04 requires entities to disclose the key terms of supplier finance programs they use in connection with the purchase of goods and services, along with the amount of obligations outstanding at the end of each period and an entity's financial reporting with its risk management activities and by simplifying its application. Among its provisions, ASU 2017-12 eliminates the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting, and generally requires that the entire change in fair valueannual rollforward of such instruments ultimately be presented inobligations. This standard does not affect the same incomerecognition, measurement, or financial statement line as the respective hedged item. Additionally, the updated guidance reduces complexity in the accounting for certain hedging relationships, eases documentation and effectiveness assessment requirements, broadens the scopepresentation of risk components eligible to qualify for hedge accounting, and modifies certain disclosure requirements.supplier finance program obligations. ASU 2017-122022-04 is effective for the Company beginning in its fiscal year ending March 28, 202030, 2024 ("Fiscal 2020"2024"), with early adoption permitted, and is to be applied usingretrospectively to all periods in which a modified retrospective transition approach, except for the amended presentationbalance sheet is presented. The annual rollforward disclosure is not required to be made until its fiscal year ending March 29, 2025 ("Fiscal 2025") and disclosure requirements, which areis to be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on disclosures related to its supplier finance program obligations.
Reference Rate Reform
In March 2020 and January 2021, the FASB issued ASU 2017-12No. 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04") and ASU No. 2021-01, "Reference Rate Reform: Scope" ("ASU 2021-01"), respectively. Together, ASU 2020-04 and ASU 2021-01 provide temporary optional expedients and exceptions for the application of U.S. GAAP, if certain criteria are met, to contract modifications, hedging relationships, and other arrangements that are expected to be impacted by the global transition away from certain reference rates, such as the London Interbank Offered Rate ("LIBOR") and other interbank offered rates, towards new reference rates, such as the Secured Overnight Financing Rate ("SOFR"). The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company is evaluating the impact that the guidance will have on its consolidated financial statements and related disclosures.disclosures, if adopted, and currently does not expect that it would be material.
Restricted Cash
In November 2016,5. Property and Equipment
Property and equipment, net consists of the FASB issued ASU No. 2016-18, "Restricted Cash"following:
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
Land and improvements | | $ | 15.3 | | | $ | 15.3 | |
Buildings and improvements | | 462.8 | | | 480.4 | |
Furniture and fixtures | | 566.2 | | | 589.6 | |
Machinery and equipment | | 368.3 | | | 375.7 | |
Capitalized software | | 534.1 | | | 532.1 | |
Leasehold improvements | | 1,135.7 | | | 1,170.1 | |
Construction in progress | | 53.9 | | | 55.4 | |
| | 3,136.3 | | | 3,218.6 | |
Less: accumulated depreciation | | (2,237.2) | | | (2,249.1) | |
Property and equipment, net | | $ | 899.1 | | | $ | 969.5 | |
Property and equipment, net includes finance lease right-of-use ("ASU 2016-18"ROU"). ASU 2016-18 requires that assets, which are reflected in the statement of cash flows explain the changetable above based on their nature.
Depreciation expense was $49.6 million and $101.0 million during the period in the total of cash, cash equivalents,three-month and restricted cash. Accordingly, restricted cash will be included with cashsix-month periods ended October 1, 2022, respectively, and cash equivalents when reconciling the beginning-of-period$51.5 million and end-of-period total amounts presented on the statement of cash flows. The Company early-adopted ASU 2016-18$104.2 million during the first quarter of Fiscal 2018three-month and applied its provisions retrospectively. Other than the changesix-month periods ended September 25, 2021, respectively, and was recorded primarily within SG&A expenses in presentation within the statement of cash flows, the adoption of ASU 2016-18 did not have an impact on the Company's consolidated financial statements. See Note 18 for a reconciliation of cash, cash equivalents, and restricted cash from the consolidated balance sheets to the consolidated statements of cash flows.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for and financial statement presentation of share-based payments, including the accounting for income taxes upon award settlement and forfeitures, and the classification of excess tax benefits and shares surrendered for tax withholdings in the statement of cash flows.
The Company adopted ASU 2016-09 during the first quarter of Fiscal 2018. Among its various provisions, ASU 2016-09 impacts the accounting for income taxes upon award settlement by requiring that all excess tax benefits and shortfalls be reflected in the income tax benefit (provision) in the statement of operations in the period that they are realized. This reflects a change from previous practice, which generally required that such activity be recorded in equity as additional paid-in-capital. This change, which was applied prospectively in the Company's consolidated financial statements, increased the Company's income tax provision by $0.5 million and $16.0 million for the three-month and nine-month periods ended December 30, 2017, respectively. Future impacts of this guidance on the Company's income tax benefit (provision) will depend largely on unpredictable events and other factors, including the timing of both employee stock option exercises and cancellations, if any, and the value realized upon vesting or exercise of shares compared to the grant date fair value of those shares, and will likely result in increased volatility. This increase in volatility is expected to be more pronounced during the first half of the Company's fiscal year due to the timing of annual stock-based compensation award vestings and stock option expirations.
Additionally, ASU 2016-09 changes the classification of excess tax benefits presented in the Company's consolidated statements of cash flows from a financing activity to an operating activity. The Company applied this change in classification on a retrospective basis by reclassifying $0.3 million of excess tax benefits from cash flows from financing activities to cash flows from operating activities for the nine months ended December 31, 2016.
Lastly, as permitted, the Company has elected to continue to estimate the impact of expected forfeitures when determining the amount of compensation cost to be recognized each period, as opposed to reflecting the impact of forfeitures only as they occur.
operations.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Other Assets and Liabilities
The remaining provisions of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02 requires that a lessee's rightsPrepaid expenses and fixed payment obligations under most leases be recognized as right-of-useother current assets and lease liabilities on the consolidated balance sheet. ASU 2016-02 retains a dual model for classifying leases as either financing or operating, which governs the pattern of expense recognition to be reflected in the consolidated statement of operations. Variable lease payments based on performance, such as percentage-of-sales-based payments, will not be included in the measurement of right-of-use assets and lease liabilities. Rather, consistent with current practice, such amounts will be recognized as an expense in the period incurred. ASU 2016-02 is effective for the Company beginning in Fiscal 2020, with early adoption permitted, and is to be adopted using a modified retrospective transition approach, which requires applicationconsist of the guidance at the beginningfollowing:
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
| | | | |
Other taxes receivable | | $ | 39.9 | | | $ | 26.2 | |
Non-trade receivables | | 36.2 | | | 41.4 | |
Derivative financial instruments | | 22.7 | | | 8.7 | |
Prepaid software maintenance | | 20.2 | | | 16.4 | |
Prepaid advertising and marketing | | 16.7 | | | 7.9 | |
Prepaid occupancy expense | | 9.1 | | | 6.0 | |
Inventory return asset | | 8.1 | | | 8.3 | |
Tenant allowances receivable | | 6.7 | | | 6.1 | |
Prepaid insurance | | 6.1 | | | 3.0 | |
Prepaid logistic services | | 6.1 | | | 6.6 | |
Cloud computing arrangement implementation costs | | 5.6 | | | 4.0 | |
| | | | |
Other prepaid expenses and current assets | | 41.4 | | | 37.9 | |
Total prepaid expenses and other current assets | | $ | 218.8 | | | $ | 172.5 | |
Other non-current assets consist of the earliest comparative period presented. However, the FASB recently proposed an optional transition alternative, currently subject to approval, which would allow for application of the guidance at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period presented.following:
The Company is currently in the process of evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures. The Company's assessment efforts to date have included reviewing the standard's provisions and beginning to gather information to evaluate the landscape of its real estate, personal property, and other arrangements that may meet the definition of a lease. Based on these efforts, the Company currently anticipates that the adoption of ASU 2016-02 will result in a significant increase to its long-term assets and liabilities as, at a minimum, most of its current operating lease commitments will be subject to balance sheet recognition. The standard is also expected to result in enhanced quantitative and qualitative lease-related disclosures. Recognition of lease expense in the consolidated statement of operations is not anticipated to significantly change.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that will supersede most existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue, representing the amount to which an entity expects to be entitled in exchange for providing promised goods or services (i.e., performance obligations), is recognized upon control of promised goods or services transferring to a customer. ASU 2014-09 also requires enhanced qualitative and quantitative revenue-related disclosures. Since its original issuance, the FASB has issued several additional related ASUs to address implementation concerns and further amend and clarify certain guidance within ASU 2014-09. ASU 2014-09 may be adopted on a full retrospective basis and applied to all prior periods presented, or on a modified retrospective basis through a cumulative adjustment recorded to opening retained earnings in the year of initial application.
The Company is currently in the process of evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company's assessment efforts to date have included reviewing current accounting policies, processes, and arrangements to identify potential differences that could arise from the application of ASU 2014-09. Based on these efforts, the Company currently anticipates that the performance obligations underlying its core revenue streams (i.e., its retail and wholesale businesses), and the timing of recognition thereof, will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continue to be recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated returns, end-of-season markdowns, and other allowances that are variable in nature. For its licensing business, which has historically comprised approximately 2% of total revenues, the Company will continue to recognize the related revenue, including any contractually guaranteed minimum royalty amounts, over time consistent with current practice.
The Company will adopt ASU 2014-09 in its fiscal year ending March 30, 2019 ("Fiscal 2019") and anticipates doing so using the modified retrospective method through a cumulative adjustment recorded to the opening Fiscal 2019 retained earnings balance.
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
Derivative financial instruments | | $ | 93.1 | | | $ | 23.7 | |
Security deposits | | 28.8 | | | 30.6 | |
Equity method and other investments | | 12.0 | | | 12.0 | |
Cloud computing arrangement implementation costs | | 8.6 | | | 9.7 | |
Deferred rent assets | | 6.1 | | | 5.2 | |
Restricted cash | | 5.6 | | | 6.6 | |
| | | | |
Other non-current assets | | 18.9 | | | 23.4 | |
Total other non-current assets | | $ | 173.1 | | | $ | 111.2 | |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and equipment, net consists of the following:
|
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
Land and improvements | | $ | 16.8 |
| | $ | 16.8 |
|
Buildings and improvements | | 458.6 |
| | 457.2 |
|
Furniture and fixtures | | 662.3 |
| | 687.2 |
|
Machinery and equipment | | 429.9 |
| | 414.0 |
|
Capitalized software | | 568.6 |
| | 549.0 |
|
Leasehold improvements | | 1,201.0 |
| | 1,179.1 |
|
Construction in progress | | 28.9 |
| | 33.4 |
|
| | 3,366.1 |
| | 3,336.7 |
|
Less: accumulated depreciation | | (2,150.2 | ) | | (2,020.7 | ) |
Property and equipment, net | | $ | 1,215.9 |
| | $ | 1,316.0 |
|
| |
6. | Other Assets and Liabilities |
PrepaidAccrued expenses and other current assetsliabilities consist of the following:
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
Accrued inventory | | $ | 305.6 | | | $ | 250.2 | |
Accrued operating expenses | | 206.2 | | | 223.4 | |
Accrued payroll and benefits | | 160.8 | | | 278.0 | |
Other taxes payable | | 58.5 | | | 60.9 | |
Dividends payable | | 49.7 | | | 48.1 | |
Accrued capital expenditures | | 31.2 | | | 49.6 | |
Finance lease obligations | | 19.2 | | | 19.8 | |
Deferred income | | 17.2 | | | 16.5 | |
Restructuring reserve | | 15.9 | | | 30.8 | |
| | | | |
Other accrued expenses and current liabilities | | 12.8 | | | 14.1 | |
Total accrued expenses and other current liabilities | | $ | 877.1 | | | $ | 991.4 | |
Other non-current liabilities consist of the following:
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
Deferred lease incentives and obligations | | $ | 47.2 | | | $ | 52.7 | |
Accrued benefits and deferred compensation | | 14.0 | | | 12.0 | |
Deferred tax liabilities | | 12.8 | | | 12.5 | |
| | | | |
Derivative financial instruments | | — | | | 18.1 | |
Other non-current liabilities | | 36.2 | | | 36.6 | |
Total other non-current liabilities | | $ | 110.2 | | | $ | 131.9 | |
7. Impairment of Assets
|
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
Other taxes receivable | | $ | 147.9 |
| | $ | 127.8 |
|
Prepaid rent expense | | 44.5 |
| | 37.4 |
|
Prepaid samples | | 14.0 |
| | 5.9 |
|
Restricted cash | | 13.4 |
| | 9.8 |
|
Prepaid advertising and marketing | | 10.4 |
| | 4.1 |
|
Prepaid software maintenance | | 7.4 |
| | 6.5 |
|
Tenant allowances receivable | | 6.9 |
| | 16.4 |
|
Derivative financial instruments | | 6.7 |
| | 23.0 |
|
Other prepaid expenses and current assets | | 53.6 |
| | 49.5 |
|
Total prepaid expenses and other current assets | | $ | 304.8 |
| | $ | 280.4 |
|
The Company recorded non-cash impairment charges of $0.2 million during both the three-month and six-month periods ended October 1, 2022, and $0.7 million and $19.3 million during the three-month and six-month periods ended September 25, 2021, respectively, to write-down certain long-lived assets in connection with its restructuring plans (see Note 8).
See Note 11 for further discussion of these impairment charges.
8. Restructuring and Other Charges, Net
A description of significant restructuring and other activities and their related costs is provided below.
Fiscal 2021 Strategic Realignment Plan
The Company has undertaken efforts to realign its resources to support future growth and profitability, and to create a sustainable, enhanced cost structure. The key areas of the Company's initiatives underlying these efforts involve evaluation of its: (i) team organizational structures and ways of working; (ii) real estate footprint and related costs across its corporate offices, distribution centers, and direct-to-consumer retail and wholesale doors; and (iii) brand portfolio.
In connection with the first initiative, on September 17, 2020, the Company's Board of Directors approved a restructuring plan (the "Fiscal 2021 Strategic Realignment Plan") to reduce its global workforce. Additionally, during a preliminary review of its store portfolio during the second quarter of Fiscal 2021, the Company made the decision to close its Polo store on Regent Street in London.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other non-current assets consistShortly thereafter, on October 29, 2020, the Company announced the planned transition of its Chaps brand to a fully licensed business model, consistent with its long-term brand elevation strategy and in connection with its third initiative. Specifically, the Company entered into a multi-year licensing partnership, which took effect on August 1, 2021 following a transition period, with an affiliate of 5 Star Apparel LLC, a division of the following:OVED Group, to manufacture, market, and distribute Chaps menswear and womenswear. This agreement is expected to create incremental value for the Company by enabling an even greater focus on elevating its core brands in the marketplace, reducing its direct exposure to the North America department store channel, and setting up Chaps to deliver on its potential with an experienced partner that is focused on nurturing the brand.
Later, on February 3, 2021, the Company's Board of Directors approved additional actions related to its real estate initiative. Specifically, the Company is in the process of further rightsizing and consolidating its global corporate offices to better align with its organizational profile and new ways of working. The Company also has closed, and may continue to close, certain of its stores to improve overall profitability. Additionally, the Company further consolidated its North America distribution centers in order to drive greater efficiencies, improve sustainability, and deliver a better consumer experience. |
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
Non-current investments | | $ | 83.3 |
| | $ | 21.4 |
|
Restricted cash | | 34.1 |
| | 33.7 |
|
Security deposits | | 28.9 |
| | 26.5 |
|
Derivative financial instruments | | 0.2 |
| | 9.6 |
|
Other non-current assets | | 33.8 |
| | 40.0 |
|
Total other non-current assets | | $ | 180.3 |
| | $ | 131.2 |
|
Finally, on June 26, 2021, in connection with its brand portfolio initiative, the Company sold its former Club Monaco business to Regent, L.P. ("Regent"), a global private equity firm, with no resulting gain or loss on sale realized during the first quarter of Fiscal 2022. Regent acquired Club Monaco's assets and liabilities in exchange for potential future cash consideration payable to the Company, including earn-out payments based on Club Monaco meeting certain defined revenue thresholds over a five-year period. Accordingly, the Company may realize amounts in the future related to the receipt of such contingent consideration (as discussed further below). Additionally, in connection with this divestiture, the Company provided Regent with certain operational support for a transitional period of approximately one year, varying by functional area.Accrued expensesActions associated with the Fiscal 2021 Strategic Realignment Plan were substantially completed by the end Fiscal 2022, with certain remaining actions expected to be completed during Fiscal 2023. The Company now expects total charges of up to $300 million to be incurred in connection with this plan, consisting of cash-related charges of approximately $180 million and non-cash charges of approximately $120 million.
A summary of the charges recorded in connection with the Fiscal 2021 Strategic Realignment Plan during the fiscal periods presented, as well as the cumulative charges recorded since its inception (inclusive of immaterial other restructuring-related charges previously recorded during the first quarter of Fiscal 2021), is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | | | |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 | | Cumulative Charges | | |
| | (millions) | | |
Cash-related restructuring charges: | | | | | | | | | | | | |
Severance and benefit costs (reversals) | | $ | — | | | $ | 0.1 | | | $ | — | | | $ | (3.9) | | | $ | 138.5 | | | |
| | | | | | | | | | | | |
Other cash charges | | 1.4 | | | 2.5 | | | 2.1 | | | 4.4 | | | 24.7 | | | |
Total cash-related restructuring charges | | 1.4 | | | 2.6 | | | 2.1 | | | 0.5 | | | 163.2 | | | |
Non-cash charges: | | | | | | | | | | | | |
Impairment of assets (see Note 7) | | 0.2 | | | 0.7 | | | 0.2 | | | 19.3 | | | 90.9 | | | |
Inventory-related charges(a) | | — | | | — | | | — | | | — | | | 8.3 | | | |
Accelerated stock-based compensation expense(b) | | — | | | — | | | — | | | 2.0 | | | 2.0 | | | |
Other non-cash charges | | 3.3 | | | — | | | 3.3 | | | — | | | 3.3 | | | |
Total non-cash charges | | 3.5 | | | 0.7 | | | 3.5 | | | 21.3 | | | 104.5 | | | |
Total charges | | $ | 4.9 | | | $ | 3.3 | | | $ | 5.6 | | | $ | 21.8 | | | $ | 267.7 | | | |
(a)Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
(b)Accelerated stock-based compensation expense, which was recorded within restructuring and other current liabilities consistcharges, net in the consolidated statements of the following:
|
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
Accrued operating expenses | | $ | 223.9 |
| | $ | 188.0 |
|
Accrued payroll and benefits | | 215.6 |
| | 173.5 |
|
Other taxes payable | | 202.4 |
| | 172.2 |
|
Accrued inventory | | 179.9 |
| | 154.9 |
|
Restructuring reserve | | 84.0 |
| | 140.8 |
|
Derivative financial instruments | | 46.5 |
| | 12.3 |
|
Dividends payable | | 40.6 |
| | 40.5 |
|
Accrued capital expenditures | | 33.9 |
| | 45.7 |
|
Deferred income | | 33.9 |
| | 29.7 |
|
Capital lease obligations | | 22.1 |
| | 22.6 |
|
Other accrued expenses and current liabilities | | 6.3 |
| | 2.5 |
|
Total accrued expenses and other current liabilities | | $ | 1,089.1 |
| | $ | 982.7 |
|
Other non-current liabilities consist of the following:
|
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
Capital lease obligations | | $ | 238.3 |
| | $ | 250.9 |
|
Deferred rent obligations | | 203.7 |
| | 211.1 |
|
Derivative financial instruments | | 37.8 |
| | 9.4 |
|
Deferred tax liabilities | | 7.5 |
| | 11.8 |
|
Deferred compensation | | 6.9 |
| | 7.8 |
|
Other non-current liabilities | | 69.6 |
| | 50.6 |
|
Total other non-current liabilities | | $ | 563.8 |
| | $ | 541.6 |
|
operations, related to vesting provisions associated with certain separation agreements.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TheIn addition to the charges summarized in the table above, the Company recorded non-cash impairment charges of $2.2recognized $3.1 million and $14.0$0.9 million during the three-month and nine-month periods ended December 30, 2017, respectively, and $10.3 million and $56.7 million during the three-month and nine-month periods ended December 31, 2016, respectively, to write off certain fixed assets related to its domestic and international stores, shop-within-shops, and corporate offices in connection with the Way Forward Plan (see Note 8).
Additionally, during the three-month and nine-month periods ended December 30, 2017, the Company recorded non-cash impairment charges of $1.7 million and $10.8 million, respectively, to write off certain fixed assets related to underperforming stores and shop-within-shops as a result of its on-going store portfolio evaluation.
See Note 11 for further discussion of the non-cash impairment charges recorded by the Company during the fiscal periods presented.
| |
8. | Restructuring and Other Charges |
A description of significantincome within restructuring and other activitiescharges, net in the consolidated statements of operations during the third and fourth quarters of Fiscal 2022, respectively, primarily related costs is included below.
Way Forward Plan
On June 2, 2016,to a certain revenue share clause in its agreement with Regent that entitled it to receive a portion of the Company's Board of Directors approvedsales generated by the Club Monaco business during a restructuring plan with the objective of delivering sustainable, profitable sales growth and long-term value creation for shareholders (the "Way Forward Plan").four-month business transition period. The Company is refocusing on its core brands and evolving its product, marketing, and shopping experiencedonated this income to increase desirability and relevance. It is also evolving its operating model to enable sustainable, profitable sales growth by significantly improving quality of sales, reducing supply chain lead times, improving its sourcing, and executing a disciplined multi-channel distribution and expansion strategy. As part of the Way Forward Plan, the Company is rightsizing its cost structure and implementing a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Way Forward Plan includes strengthening the Company's leadership team and creating a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan also includes the discontinuance of the Company's Denim & Supply brand and the integration of its denim product offerings into its Polo Ralph Lauren brand. Collectively, these actions,Corporate Foundation, a non-profit, charitable foundation, which were substantially completed during Fiscal 2017, resulted in a reduction in workforcerelated offsetting $4.0 million donation expense recorded within restructuring and the closure of certain stores and shop-within-shops.
On March 30, 2017, the Company's Board of Directors approved the following additional restructuring-related activities associated with the Way Forward Plan: (i) the restructuring of its in-house global e-commerce platform which was in development and shifting to a more cost-effective, flexible e-commerce platform through a new agreement with Salesforce's Commerce Cloud, formerly known as Demandware; (ii) the closure of its Polo store at 711 Fifth Avenue in New York City; and (iii) the further streamlining of the organization and the execution of other key corporate actions in line with the Company's Way Forward Plan. Together, these actions are an important part of the Company's efforts to achieve its stated objective to return to sustainable, profitable growth and investcharges, net in the future. These additional restructuring-related activities will result in a further reduction in workforce and the closureconsolidated statements of certain corporate office and store locations, and are expected to be largely completed by the end of Fiscal 2018. The remaining activities, which are primarily lease-related, are expected to shift into Fiscal 2019.
In connection with the Way Forward Plan, the Company currently expects to incur total estimated charges of approximately $770 million, comprised of cash-related restructuring charges of approximately $450 million and non-cash charges of approximately $320 million. Cumulative cash and non-cash charges incurred since inception were $352.1 million and $293.3 million, respectively. Of the remaining charges yet to be incurred, the Company expects approximately $50 million will be recordedoperations during the fourth quarter of Fiscal 2018 and approximately $75 million to $85 million will be recorded2022. Subsequently, during the second quarter of Fiscal 2019. In addition to these charges,2023, the Company also incurredrecognized an additional non-cash charge$3.5 million of $155.2 million during Fiscal 2017 associated withincome within restructuring and other charges, net in the destructionconsolidated statements of inventory out of current liquidation channels in line with its Way Forward Plan.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summaryoperations related to consideration received from Regent as a result of the charges recorded in connection with the Way Forward Plan during the three-month and nine-month periods ended December 30, 2017 and December 31, 2016, as well as the cumulative charges recorded since its inception, is as follows:Club Monaco business exceeding certain previously defined revenue thresholds over a specified time period.
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | | Cumulative Charges |
| | (millions) |
Cash-related restructuring charges: | | | | | | | | | | |
Severance and benefit costs | | $ | 7.4 |
| | $ | 14.1 |
| | $ | 25.3 |
| | $ | 115.7 |
| | $ | 208.0 |
|
Lease termination and store closure costs | | 10.9 |
| | 49.5 |
| | 28.5 |
| | 64.2 |
| | 115.8 |
|
Other cash charges | | 0.8 |
| | 3.1 |
| | 9.2 |
| | 9.1 |
| | 28.3 |
|
Total cash-related restructuring charges | | 19.1 |
| | 66.7 |
| | 63.0 |
| | 189.0 |
| | 352.1 |
|
Non-cash charges: | | | | | | | | | | |
Impairment of assets (see Note 7) | | 2.2 |
| | 10.3 |
| | 14.0 |
| | 56.7 |
| | 248.6 |
|
Inventory-related charges(a) | | — |
| | 14.4 |
| | 1.3 |
| | 149.4 |
| | 199.2 |
|
Accelerated stock-based compensation expense(b) | | 0.7 |
| | — |
| | 0.7 |
| | — |
| | 0.7 |
|
Total non-cash charges | | 2.9 |
| | 24.7 |
| | 16.0 |
| | 206.1 |
| | 448.5 |
|
Total charges | | $ | 22.0 |
| | $ | 91.4 |
| | $ | 79.0 |
| | $ | 395.1 |
| | $ | 800.6 |
|
| |
(a)
| Cumulative inventory-related charges include $155.2 million associated with the destruction of inventory out of current liquidation channels, of which $10.9 million and $124.7 million was recorded during the three-month and nine-month periods ended December 31, 2016, respectively. Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations. |
| |
(b)
| Accelerated stock-based compensation expense, which is recorded within restructuring and other charges in the consolidated statements of operations, was recorded in connection with vesting provisions associated with certain separation agreements. |
A summary of current period activity in the restructuring reserve related to the Way ForwardFiscal 2021 Strategic Realignment Plan is as follows:
|
| | | | | | | | | | | | | | | | |
| | Severance and Benefit Costs | | Lease Termination and Store Closure Costs | | Other Cash Charges | | Total |
| | (millions) |
Balance at April 1, 2017 | | $ | 94.3 |
| | $ | 34.3 |
| | $ | 6.6 |
| | $ | 135.2 |
|
Additions charged to expense | | 25.3 |
| | 28.5 |
| | 9.2 |
| | 63.0 |
|
Cash payments charged against reserve | | (74.7 | ) | | (18.0 | ) | | (9.0 | ) | | (101.7 | ) |
Non-cash adjustments | | 0.6 |
| | 7.8 |
| | — |
| | 8.4 |
|
Balance at December 30, 2017 | | $ | 45.5 |
| | $ | 52.6 |
| | $ | 6.8 |
| | $ | 104.9 |
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Global Reorganization Plan
On May 12, 2015, the Company's Board of Directors approved a reorganization and restructuring plan comprised of the following major actions: (i) the reorganization of the Company's operating structure in order to streamline the Company's business processes to better align its cost structure with its long-term growth strategy; (ii) a strategic store and shop-within-shop performance review conducted by region and brand; (iii) a targeted corporate functional area review; and (iv) the consolidation of certain of the Company's luxury lines (collectively, the "Global Reorganization Plan"). The Global Reorganization Plan resulted in a reduction in workforce and the closure of certain stores and shop-within-shops.
Actions associated with the Global Reorganization Plan were completed by the end of the first quarter of Fiscal 2017 and no additional charges are expected to be incurred in relation to this plan. A summary of the charges recorded in connection with the Global Reorganization Plan during the three-month and nine-month periods ended December 31, 2016, as well as the cumulative charges recorded since its inception, is as follows:
|
| | | | | | | | | | | | |
| | December 31, 2016 | | |
| | Three Months Ended | | Nine Months Ended | | Cumulative Charges |
| | (millions) |
Cash-related restructuring charges: | | | | | | |
Severance and benefit costs | | $ | — |
| | $ | 4.7 |
| | $ | 69.1 |
|
Lease termination and store closure costs | | — |
| | 0.2 |
| | 8.0 |
|
Other cash charges | | — |
| | — |
| | 13.8 |
|
Total cash-related restructuring charges | | — |
| | 4.9 |
| | 90.9 |
|
Non-cash charges: | | | | | | |
Impairment of assets | | — |
| | — |
| | 27.2 |
|
Inventory-related charges(a) | | — |
| | — |
| | 20.4 |
|
Accelerated stock-based compensation expense(b) | | — |
| | — |
| | 8.9 |
|
Total non-cash charges | | — |
| | — |
| | 56.5 |
|
Total charges | | $ | — |
| | $ | 4.9 |
| | $ | 147.4 |
|
| |
(a)
| Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations. |
| |
(b)
| Accelerated stock-based compensation expense, which is recorded within restructuring and other charges in the consolidated statements of operations, was recorded in connection with vesting provisions associated with certain separation agreements. |
A summary of current period activity in the restructuring reserve related to the Global Reorganization Plan is as follows:
|
| | | | | | | | | | | | | | | | |
| | Severance and Benefit Costs | | Lease Termination and Store Closure Costs | | Other Cash Charges | | Total |
| | (millions) |
Balance at April 1, 2017 | | $ | 8.6 |
| | $ | 3.4 |
| | $ | 0.2 |
| | $ | 12.2 |
|
Cash payments charged against reserve | | (4.6 | ) | | (1.9 | ) | | — |
| | (6.5 | ) |
Balance at December 30, 2017 | | $ | 4.0 |
| | $ | 1.5 |
| | $ | 0.2 |
| | $ | 5.7 |
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | |
| | Severance and Benefit Costs | | | | Other Cash Charges | | Total |
| | (millions) |
Balance at April 2, 2022 | | $ | 30.6 | | | | | $ | 0.1 | | | $ | 30.7 | |
Additions charged to expense | | — | | | | | 2.1 | | | 2.1 | |
Cash payments applied against reserve | | (12.8) | | | | | (2.2) | | | (15.0) | |
Non-cash adjustments | | (0.7) | | | | | — | | | (0.7) | |
Balance at October 1, 2022 | | $ | 17.1 | | | | | $ | — | | | $ | 17.1 | |
Other Charges
During the three-month and nine-month periods ended December 30, 2017, theThe Company recorded other charges of $3.5$5.7 million and $10.5$10.6 million respectively, related to depreciation expense associated with the Company's former Polo store at 711 Fifth Avenue in New York City, recorded after the store closed during the first quarter of Fiscal 2018 in connection with the Way Forward Plan. Although the Company is no longer generating revenue or has any other economic activity associated with its former Polo store, it continues to incur depreciation expense due to its involvement at the time of construction.
Additionally, during the first quarter of Fiscal 2018, the Company recorded other charges of $6.7 million (inclusive of accelerated stock-based compensation expense of $2.1 million), primarily related to the departure of Mr. Stefan Larsson as the Company's President and Chief Executive Officer and as a member of its Board of Directors, effective as of May 1, 2017. Refer to Note 10 of the Fiscal 2017 10-K for additional discussion regarding Mr. Larsson's departure.
These other charges were partially offset by the favorable impact of $2.2 million related to the reversal of reserves associated with the settlement of certain non-income tax issues during the second quarter of Fiscal 2018.
U.S. Tax Reform
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effective January 1, 2018. The TCJA significantly revises U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21%, creating a territorial tax system that includes a mandatory one-time transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.
ASC Topic 740, "Income Taxes," requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.
During the third quarter of Fiscal 2018, the Company recorded one-time charges of $231.3 million within its income tax provision in connection with the TCJA, of which $215.5 million related to the mandatory transition tax, which it expects to pay over an eight-year period (see Note 13). The remaining charge of $15.8 million related to the revaluation of the Company's deferred tax assets and liabilities. Collectively, these one-time charges, which were recorded on a provisional basis, negatively impacted the Company's effective tax rate by 12,410 basis points and 4,980 basis points during the three-month and nine-monthsix-month periods ended December 30, 2017,October 1, 2022, respectively, and lowered$5.1 million and $5.9 million during the three-month and six-month periods ended September 25, 2021, respectively, primarily related to rent and occupancy costs associated with certain previously exited real estate locations for which the related lease agreements have not yet expired.
9. Income Taxes
Inflation Reduction Act of 2022
On August 16, 2022, President Biden signed the Inflation Reduction Act ("IRA") into law. The IRA enacted a 15% corporate minimum tax effective (subject to certain thresholds being met) that will be applicable to the Company beginning in its diluted earnings perFiscal 2024, a 1% excise tax on share by $2.80 during each of these periods.repurchases made after December 31, 2022, and created and extended certain tax-related energy incentives. The provisional amounts were based onCompany does not currently expect that the Company's present interpretationstax-related provisions of the TCJA and current available information, including assumptions and expectations about future events, such asIRA will have a material impact on its projectedconsolidated financial performance, and are subject to further refinement as additional information becomes available (including the Company's actual full Fiscal 2018 results of operations and financial condition, as well as potential new or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies) and further analyses are completed.statements.
Effective Tax Rate
The Company's effective tax rate, which is calculated by dividing each fiscal period's income tax provisionbenefit (provision) by pretax income (loss), was 143.9%24.8% and 73.8%24.4% during the three-month and nine-monthsix-month periods ended December 30, 2017,October 1, 2022, respectively, and 34.0%18.8% and 36.0%20.1% during the three-month and nine-monthsix-month periods ended December 31, 2016,September 25, 2021, respectively.
The effective tax ratesrate for the three-month and nine-monthsix-month periods ended December 30, 2017October 1, 2022 were higher than the U.S. federal statutory income tax rate of 35%21% primarily as a resultdue to state taxes and the unfavorable impact of the one-time charges recorded in connection with the TCJA, as previously discussed,certain audit related adjustments, partially offset by the favorable tax impact of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S. and foreign income tax reserve releases. Additionally, theThe effective tax rate for the ninethree months ended
September 25, 2021 was lower than the U.S. federal statutory income tax rate of 21% primarily due to the favorable impact of certain permanent adjustments. The effective tax rate for the six months ended September 25, 2021 was slightly lower than the U.S. federal statutory income tax rate of 21% primarily due to the favorable tax impact of earnings generated in lower taxed foreign jurisdictions versus the U.S.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 30, 2017 reflected the negative impact of the adoption of ASU 2016-09 (see Note 4), as well as the unfavorable impact of additional income tax reserves associated with certain income tax audits.
The effective tax rates for the three-month and nine-month periods ended December 31, 2016 reflected the favorable impact of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S., partially offset by valuation allowances and adjustments recorded on deferred tax assets, certain nondeductible expenses, and unrecognized tax benefits recorded on current year tax positions. The effective tax rate for the nine months ended December 31, 2016 was also unfavorably impacted by additional tax reserves associated with an income tax settlement and certain income tax audits.
Uncertain Income Tax Benefits
The Company classifies interest and penalties related to unrecognized tax benefits as part of its income tax provision.benefit (provision). The total amount of unrecognized tax benefits, including interest and penalties, was $76.4$86.6 million and $62.7$91.9 million as of December 30, 2017October 1, 2022 and April 1, 2017,2, 2022, respectively, and iswas included within the non-current liability for unrecognized tax benefits in the consolidated balance sheets. The net addition of $13.7 million in unrecognized tax benefits, including interest and penalties, primarily related to additional unrecognized tax benefits recorded.
The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was $60.5$57.2 million and $46.7$60.1 million as of December 30, 2017October 1, 2022 and April 1, 2017,2, 2022, respectively.
Future Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to incomeexaminations by the relevant tax examinationsauthorities for years prior to its fiscal year ended April 3, 2010.March 30, 2013.
10. Debt
Debt consists of the following:
|
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
$300 million 2.125% Senior Notes(a) | | $ | 298.3 |
| | $ | 298.1 |
|
$300 million 2.625% Senior Notes(b) | | 290.3 |
| | 290.1 |
|
Total debt | | 588.6 |
| | 588.2 |
|
Less: current portion of long-term debt | | 298.3 |
| | — |
|
Long-term debt | | $ | 290.3 |
| | $ | 588.2 |
|
| |
(a)
| During its fiscal year ended April 2, 2016 ("Fiscal 2016"), the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.125% Senior Notes, as defined below (see Note 12). Accordingly, the carrying value of the 2.125% Senior Notes as of December 30, 2017 and April 1, 2017 reflects adjustments of $1.3 million and $1.2 million, respectively, for the change in fair value attributable to the benchmark interest rate. The carrying value of the 2.125% Senior Notes is also net of unamortized debt issuance costs and discount of $0.4 million and $0.7 million as of December 30, 2017 and April 1, 2017, respectively. |
| |
(b)
| During Fiscal 2016, the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.625% Senior Notes, as defined below (see Note 12). Accordingly, the carrying |
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
$400 million 3.750% Senior Notes(a) | | $ | 398.0 | | | $ | 397.7 | |
$500 million 1.700% Senior Notes(b) | | — | | | 499.8 | |
$750 million 2.950% Senior Notes(c) | | 739.5 | | | 738.8 | |
Total debt | | 1,137.5 | | | 1,636.3 | |
Less: current portion of long-term debt | | — | | | 499.8 | |
Total long-term debt | | $ | 1,137.5 | | | $ | 1,136.5 | |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value of the 2.625% Senior Notes as of December 30, 2017 and April 1, 2017 reflects adjustments of $8.4 million and $8.2 million, respectively, for the change in fair value attributable to the benchmark interest rate. (a)The carrying value of the 2.625%3.750% Senior Notes is alsopresented net of unamortized debt issuance costs and original issue discount of $1.3$2.0 million and $1.7$2.3 million as of December 30, 2017October 1, 2022 and April 2, 2022, respectively.
(b)The carrying value of the 1.700% Senior Notes is presented net of unamortized debt issuance costs and original issue discount of $0.2 million as of April 2, 2022.
(c)The carrying value of the 2.950% Senior Notes is presented net of unamortized debt issuance costs and original issue discount of $10.5 million and $11.2 million as of October 1, 2017,2022 and April 2, 2022, respectively.
Senior Notes
In September 2013,August 2018, the Company completed a registered public debt offering and issued $300$400 million aggregate principal amount of unsecured senior notes due September 26, 2018,15, 2025, which bear interest at a fixed rate of 2.125%3.750%, payable semi-annually (the "2.125%"3.750% Senior Notes"). The 2.125%3.750% Senior Notes were issued at a price equal to 99.896%99.521% of their principal amount. The proceeds from this offering were used for general corporate purposes, including repayment of the Company's previously outstanding €209$300 million principal amount of 4.5% Euro-denominated2.125% unsecured senior notes whichthat matured on October 4, 2013.September 26, 2018.
In August 2015,June 2020, the Company completed a secondanother registered public debt offering and issued an additional $300$500 million aggregate principal amount of unsecured senior notes that were due August 18, 2020,and repaid on June 15, 2022 with cash on hand, which bore interest at a fixed rate of 1.700%, payable semi-annually (the "1.700% Senior Notes"), and $750 million aggregate principal
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount of unsecured senior notes due June 15, 2030, which bear interest at a fixed rate of 2.625%2.950%, payable semi-annually (the "2.625%"2.950% Senior Notes"). The 2.625%1.700% Senior Notes and 2.950% Senior Notes were issued at a priceprices equal to 99.795%99.880% and 98.995% of their principal amount.amounts, respectively. The proceeds from this offeringthese offerings were used for general corporate purposes.purposes, which included the repayment of $475 million previously outstanding under the Company's Global Credit Facility (as defined below) on June 3, 2020 and repayment of its previously outstanding $300 million principal amount of 2.625% unsecured senior notes that matured August 18, 2020.
The Company has the option to redeem the 2.125%3.750% Senior Notes and 2.625%2.950% Senior Notes (collectively, the "Senior Notes"), in whole or in part, at any time at a price equal to accrued and unpaid interest on the redemption date plus the greater of (i) 100% of the principal amount of the series of Senior Notes to be redeemed or (ii) the sum of the present value of Remaining Scheduled Payments, as defined in the supplemental indentures governing such Senior Notes (together with the indenture governing the Senior Notes, the "Indenture"). The Indenture contains certain covenants that restrict the Company's ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of the Company's property or assets to another party. However, the Indenture does not contain any financial covenants.
Commercial Paper
In May 2014, theThe Company initiatedhas a commercial paper borrowing program (the "Commercial Paper Program") that allowedallows it to issue up to $300$500 million of unsecured commercial paper notes through private placement using third-party broker-dealers. In May 2015, the Company expanded its Commercialbroker-dealers (the "Commercial Paper Program to allow for a total issuance of up to $500 million of unsecured commercial paper notes.Program").
Borrowings under the Commercial Paper Program are supported by the Global Credit Facility as(as defined below.below). Accordingly, the Company does not expect combined borrowings outstanding under the Commercial Paper Program and Global Credit Facility to exceed $500 million. Commercial Paper Program borrowings may be used to support the Company's general working capital and corporate needs. Maturities of commercial paper notes vary, but cannot exceed 397 days from the date of issuance. Commercial paper notes issued under the Commercial Paper Program rank equally in seniority with the Company's other forms of unsecured indebtedness. As of December 30, 2017,both October 1, 2022 and April 2, 2022, there were no borrowings outstanding under the Commercial Paper Program.
Revolving Credit Facilities
Global Credit Facility
In February 2015,August 2019, the Company replaced its then existing credit facility and entered into an amended and restateda new credit facility (which was further amended in March 2016) that provides for a $500$500 million senior unsecured revolving line of credit through February 11, 2020August 12, 2024 (the "Global Credit Facility") under terms and conditions substantially similar to those previously in effect.of the previous facility. The Global Credit Facility is also used to support the issuance of letters of credit and the maintenance of the Commercial Paper Program. Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and certain other currencies, including Euros, Hong Kong Dollars, and Japanese Yen. TheYen, and are guaranteed by all of the Company's domestic significant subsidiaries. In accordance with the terms of the agreement governing the Global Credit Facility, the Company has the ability to expand its borrowing availability under the Global Credit Facility to $750 million,$1 billion, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility. Since August 2019, the Company entered into several amendments of its Global Credit Facility, including one amendment that temporarily eased certain preexisting requirements and imposed certain new restrictions in response to the COVID-19 pandemic (all of which have since been lifted), and other amendments related to the cessation of LIBOR. Refer to Note 11 of the Fiscal 2022 10-K for additional discussion regarding such amendments.As of December 30, 2017,both October 1, 2022 and April 2, 2022, there were no borrowings outstanding under the Global Credit Facility andFacility. However, the Company was contingently liable for $9.3$9.4 million and $9.5 million of outstanding letters of credit.credit as of October 1, 2022 and April 2, 2022, respectively.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Global Credit Facility contains a number of covenants that, among other things, restrict the Company's ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve itself; engage in businesses that are not in a related line of business; make loans, advances, or guarantees; engage in transactions with affiliates; and make certain investments. The Global Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the "leverage ratio") of no greater than 3.754.25 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding, including finance lease obligations, plus four times consolidated rent expense for the four most recent consecutive fiscal quarters.all operating lease obligations. Consolidated EBITDAR
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense, (iv) consolidated rent expense,operating lease cost, (v) restructuring and other non-recurring expenses, and (vi) acquisition-related costs. As of December 30, 2017, October 1, 2022, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company's Global Credit Facility.Facility.
Pan-Asia CreditBorrowing Facilities
Certain of the Company's subsidiaries in Asia have uncommitted credit facilities with regional branches of JPMorgan Chase (the "Banks") in China and South Korea (the "Pan-Asia Credit Facilities"). These creditAdditionally, the Company's Japan and China subsidiaries have uncommitted overdraft facilities with Sumitomo Mitsui Banking Corporation and HSBC Bank Company Limited, respectively, (the "Pan-Asia Overdraft Facilities"). The Pan-Asia Credit Facilities and the Pan-Asia Overdraft Facilities (collectively, the "Pan-Asia Borrowing Facilities") are subject to annual renewal and may be used to fund general working capital and corporate needs of the Company's operations in the respective countries. Borrowings under the Pan-Asia CreditBorrowing Facilities are guaranteed by the parent company and are granted at the sole discretion of the Banks,respective banks, subject to availability of the Banks'banks' funds and satisfaction of certain regulatory requirements. The Pan-Asia CreditBorrowing Facilities do not contain any financial covenants. TheA summary of the Company's Pan-Asia CreditBorrowing Facilities by country areis as follows:
•China Credit Facility — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to 50100 million Chinese Renminbi (approximately $7 million)$14 million) through April 5, 2018, and may3, 2023, which is also able to be used to support bank guarantees.
•South Korea Credit Facility — provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to 4730 billion South Korean Won (approximately $44$21 million) through October 31, 2018.
27, 2023.•Japan Overdraft Facility — provides Ralph Lauren Corporation Japan with an overdraft amount of up to 5 billion Japanese Yen (approximately $35 million) through April 28, 2023.
•China Overdraft Facility — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with an overdraft amount of up to 100 million Chinese Renminbi (approximately $14 million) through June 17, 2023.
As of December 30, 2017,both October 1, 2022 and April 2, 2022, there were no borrowings outstanding under the Pan-Asia CreditBorrowing Facilities.
Refer to Note 1211 of the Fiscal 20172022 10-K for additional discussion of the terms and conditions of the Company's debt and credit facilities.
| |
11. | Fair Value Measurements |
11. Fair Value Measurements
U.S. GAAP establishesprescribes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
•Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.
•Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the Company's financial assets and liabilities that are measured and recorded at fair value on a recurring basis, excluding accrued interest components:
|
| | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | (millions) |
Investments in commercial paper(a)(b) | | $ | 154.4 |
| | $ | — |
|
Derivative assets(a) | | 6.9 |
| | 32.6 |
|
Derivative liabilities(a) | | 84.3 |
| | 21.7 |
|
| | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | (millions) |
Derivative assets(a) | | $ | 115.8 | | | $ | 32.4 | |
Derivative liabilities(a) | | 3.0 | | | 18.3 | |
| |
(a)
| (a)Based on Level 2 measurements. |
| |
(b)
| $25.0 million included within cash and cash equivalents and $129.4 million included within short-term investments in the consolidated balance sheets. |
The Company's investments in commercial paper are classified as available-for-sale and recorded at fair value in its consolidated balance sheets using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's investments. To the extent the Company invests in bonds, such investments are also classified as available-for-sale and recorded at fair value in its consolidated balance sheets based on quoted prices in active markets.Level 2 measurements.
The Company's derivative financial instruments are recorded at fair value in its consolidated balance sheets and are valued using pricing models that are primarily based on market observable external inputs, including spot and forward currency exchange rates, benchmark interest rates, and discount rates consistent with the instrument's tenor, and consider the impact of the Company's own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments.
To the extent the Company invests in commercial paper, such investments are classified as available-for-sale and recorded at fair value in its consolidated balance sheets using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's investments. To the extent the Company invests in bonds, such investments are also classified as available-for-sale and recorded at fair value in its consolidated balance sheets based on quoted prices in active markets.
The Company's cash and cash equivalents, restricted cash, and time deposits are recorded at carrying value, which generally approximates fair value based on Level 1 measurements.
The Company's debt instruments are recorded at their carrying valuesamortized cost in its consolidated balance sheets, which may differ from their respective fair values. The fair values of the Senior NotesCompany's senior notes are estimated based on external pricing data, including available quoted market prices, and with reference to comparable debt instruments with similar interest rates, credit ratings, and trading frequency, among other factors. The fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities, if any, are estimated using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's outstanding borrowings. Due to their short-term nature, the fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities, if any, generally approximate their amortized cost carrying values.
The following table summarizes the carrying values and the estimated fair values of the Company's debt instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | Carrying Value(a) | | Fair Value(b) | | Carrying Value(a) | | Fair Value(b) |
| | (millions) |
$400 million 3.750% Senior Notes | | $ | 398.0 | | | $ | 390.0 | | | $ | 397.7 | | | $ | 407.9 | |
$500 million 1.700% Senior Notes | | — | | | N/A | | 499.8 | | | 500.5 | |
$750 million 2.950% Senior Notes | | 739.5 | | | 629.8 | | | 738.8 | | | 721.0 | |
|
| | | | | | | | | | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | Carrying Value(a) | | Fair Value(b) | | Carrying Value(a) | | Fair Value(b) |
| | (millions) |
$300 million 2.125% Senior Notes | | $ | 298.3 |
| | $ | 300.2 |
| | $ | 298.1 |
| | $ | 302.2 |
|
$300 million 2.625% Senior Notes | | 290.3 |
| | 302.2 |
| | 290.1 |
| | 302.8 |
|
(a)See Note 10 for discussion of the carrying values of the Company's senior notes.
| |
(a)(b)Based on Level 2 measurements. | See Note 10 for discussion of the carrying values of the Company's Senior Notes. |
| |
(b)
| Based on Level 2 measurements. |
Unrealized gains or losses resulting from changes in the fair value of the Company's debt instruments do not result in the realization or expenditure of cash unless the debt is retired prior to its maturity.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-financial Assets and Liabilities
The Company's non-financial assets, which primarily consist of goodwill, other intangible assets, and property and equipment, and lease-related ROU assets, are not required to be measured at fair value on a recurring basis, and instead are reported at carrying value.their amortized or depreciated cost in its consolidated balance sheet. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying valuethey may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), the respective carrying value of non-financial instrumentsassets are assessed for impairment and, if applicable,ultimately considered impaired, are adjusted and written down to and recorded attheir fair value, consideringas estimated based on consideration of external market participant assumptions.assumptions and discounted cash flows.
During the nine-monththree-month and six-month periods ended December 30, 2017October 1, 2022 and December 31, 2016,September 25, 2021, the Company recorded non-cash impairment charges of $24.8 million and $56.7 million, respectively, to fully write offreduce the carrying values of certain long-lived assets based uponto their assumedestimated fair values of zero.values. The fair values of these assets were determined based on Level 3 measurements. Inputs to these fair value measurements, the related inputs of which included estimates of the amount and timing of the assets' net future discounted cash flows (including any potential sublease income for lease-related ROU assets), based on historical experience and consideration of current trends, market conditions, and market conditions. See Note 7 for further discussion of thecomparable sales, as applicable.
The following tables summarize non-cash impairment charges recorded by the Company during the fiscal periods presented to reduce the carrying values of certain long-lived assets to their estimated fair values as of the assessment date:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 1, 2022 | | September 25, 2021 |
Long-Lived Asset Category | | Total Impairments | | Fair Value as of Impairment Date | | Total Impairments | | Fair Value as of Impairment Date |
| | (millions) |
Property and equipment, net | | $ | 0.2 | | | $ | — | | | $ | 0.6 | | | $ | — | |
Operating lease right-of-use assets | | — | | | N/A | | 0.1 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 |
Long-Lived Asset Category | | Total Impairments | | Fair Value as of Impairment Date | | Total Impairments | | Fair Value as of Impairment Date |
| | (millions) |
Property and equipment, net | | $ | 0.2 | | | $ | — | | | $ | 1.0 | | | $ | — | |
Operating lease right-of-use assets | | — | | | N/A | | 18.3 | | | 16.8 | |
See Note 7 for additional discussion regarding non-cash impairment charges recorded by the Company within the consolidated statements of operations during the fiscal periods presented.
No goodwill impairment charges associated with goodwill or other intangible assets were recorded during either of the nine-monthsix-month periods ended December 30, 2017October 1, 2022 or December 31, 2016. TheSeptember 25, 2021. In Fiscal 2023, the Company performed its annual goodwill impairment assessment using a qualitative approach as of the beginning of the second quarter of Fiscal 2018.2023. In performing the assessment, the Company identified and considered the significance of relevant key factors, events, and circumstances that affected the fair values and/or carrying amounts of its reporting units with allocated goodwill. These factors included external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as the Company's actual and expected financial performance. Additionally, the Company also considered the results of the Company'sits most recent quantitative goodwill impairment test, which was performed as of the end of Fiscal 2020 and incorporated assumptions related to COVID-19 business disruptions, the results of which indicated that the fair values of these reporting units significantly exceeded their respective carrying values. Based on the results of its qualitative goodwill impairment assessment, the Company concluded that it is not more likely than not that the fair values of its reporting units are less than their respective carrying values and there were no reporting units at risk of impairment.
| | | | | | | | |
12. | Financial Instruments25 | |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Financial Instruments
Derivative Financial Instruments
The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows and the value of the reported net assets of its international operations, as well as changes in the fair value of its fixed-rate debt obligations attributed to changes in the benchmark interest rate. Consequently,rates. Accordingly, based on its assessment thereof, the Company usesmay use derivative financial instruments to manage and mitigate such risks. The Company does not enter into derivative transactionsuse derivatives for speculative or trading purposes.
The following table summarizes the Company's outstanding derivative instruments on a gross basis as recorded inon its consolidated balance sheets as of December 30, 2017October 1, 2022 and April 1, 2017:2, 2022:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amounts | | Derivative Assets | | Derivative Liabilities |
Derivative Instrument(a) | | December 30, 2017 | | April 1, 2017 | | December 30, 2017 | | April 1, 2017 | | December 30, 2017 | | April 1, 2017 |
| | | | | | Balance Sheet Line(b) | | Fair Value | | Balance Sheet Line(b) | | Fair Value | | Balance Sheet Line(b) | | Fair Value | | Balance Sheet Line(b) | | Fair Value |
| | (millions) |
Designated Hedges: | | | | | | | | | | | | | | | | | | | | |
FC — Cash flow hedges | | $ | 509.2 |
| | $ | 533.2 |
| | (d) | | $ | 3.0 |
| | PP | | $ | 17.7 |
| | (e) | | $ | 8.5 |
| | AE | | $ | 3.7 |
|
IRS — Fixed-rate debt | | 600.0 |
| | 600.0 |
| | | | — |
| | | | — |
| | (f) | | 9.8 |
| | ONCL | | 9.4 |
|
CCS — NI | | 658.4 |
| | 591.2 |
| | | | — |
| | ONCA | | 9.6 |
| | (g) | | 65.2 |
| | | | — |
|
Total Designated Hedges | | 1,767.6 |
| | 1,724.4 |
| | | | 3.0 |
| | | | 27.3 |
| | | | 83.5 |
| | | | 13.1 |
|
Undesignated Hedges: | | | | | | | | | | | | | | | | | | | | |
FC — Undesignated hedges(c) | | 455.8 |
| | 375.1 |
| | PP | | 3.9 |
| | PP | | 5.3 |
| | AE | | 0.8 |
| | AE | | 8.6 |
|
Total Hedges | | $ | 2,223.4 |
| | $ | 2,099.5 |
| | | | $ | 6.9 |
| | | | $ | 32.6 |
| | | | $ | 84.3 |
| | | | $ | 21.7 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amounts | | Derivative Assets | | Derivative Liabilities |
Derivative Instrument(a) | | October 1, 2022 | | April 2, 2022 | | October 1, 2022 | | April 2, 2022 | | October 1, 2022 | | April 2, 2022 |
| | | | | | Balance Sheet Line(b) | | Fair Value | | Balance Sheet Line(b) | | Fair Value | | Balance Sheet Line(b) | | Fair Value | | Balance Sheet Line(b) | | Fair Value |
| | (millions) |
Designated Hedges: | | | | | | | | | | | | | | | | | | | | |
FC — Cash flow hedges | | $ | 178.5 | | | $ | 236.5 | | | (e) | | $ | 22.4 | | | PP | | $ | 6.6 | | | | | $ | — | | | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Net investment hedges(c) | | 700.0 | | | 700.0 | | | ONCA | | 92.7 | | | ONCA | | 23.7 | | | | | — | | | ONCL | | 18.1 | |
Total Designated Hedges | | 878.5 | | | 936.5 | | | | | 115.1 | | | | | 30.3 | | | | | — | | | | | 18.1 | |
Undesignated Hedges: | | | | | | | | | | | | | | | | | | | | |
FC — Undesignated hedges(d) | | 208.0 | | | 225.0 | | | PP | | 0.7 | | | PP | | 2.1 | | | AE | | 3.0 | | | AE | | 0.2 | |
Total Hedges | | $ | 1,086.5 | | | $ | 1,161.5 | | | | | $ | 115.8 | | | | | $ | 32.4 | | | | | $ | 3.0 | | | | | $ | 18.3 | |
(a)FC = Forward foreign currency exchange contracts.
RALPH LAUREN CORPORATION(b)PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCA = Other non-current assets; ONCL = Other non-current liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c)Includes cross-currency swaps designated as hedges of the Company's net investment in certain foreign operations.
(d)Relates to third-party and intercompany foreign currency-denominated exposures and balances.
(e)$22.0 million included within prepaid expenses and other current assets and $0.4 million included within other non-current assets. | |
(a)
| FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contracts; CCS = Cross-currency swap contracts; NI = Net investment hedges. |
| |
(b)
| PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCA = Other non-current assets; ONCL = Other non-current liabilities. |
| |
(c)
| Primarily includes undesignated hedges of foreign currency-denominated intercompany loans and other intercompany balances. |
| |
(d)
| $2.8 million included within prepaid expenses and other current assets and $0.2 million included within other non-current assets. |
| |
(e)
| $8.2 million included within accrued expenses and other current liabilities and $0.3 million included within other non-current liabilities. |
| |
(f)
| $1.4 million included within accrued expenses and other current liabilities and $8.4 million included within other non-current liabilities. |
| |
(g)
| $36.1 million included within accrued expenses and other current liabilities and $29.1 million included within other non-current liabilities. |
The Company records and presents the fair values of all of its derivative assets and liabilities inrecorded on its consolidated balance sheets on a gross basis, even when they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its derivative instruments on a net basis in accordance with the terms of each of its master netting arrangements, spread across eightnine separate counterparties, the amounts presented in the consolidated balance sheets as of December 30, 2017October 1, 2022 and April 1, 20172, 2022 would be adjusted from the current gross presentation as detailed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2022 | | April 2, 2022 |
| | Gross Amounts Presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements | | Net Amount | | Gross Amounts Presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements | | Net Amount |
| | (millions) |
Derivative assets | | $ | 115.8 | | | $ | (1.9) | | | $ | 113.9 | | | $ | 32.4 | | | $ | (0.2) | | | $ | 32.2 | |
Derivative liabilities | | 3.0 | | | (1.9) | | | 1.1 | | | 18.3 | | | (0.2) | | | 18.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 30, 2017 | | April 1, 2017 |
| | Gross Amounts Presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements | | Net Amount | | Gross Amounts Presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements | | Net Amount |
| | (millions) |
Derivative assets | | $ | 6.9 |
| | $ | (3.1 | ) | | $ | 3.8 |
| | $ | 32.6 |
| | $ | (18.3 | ) | | $ | 14.3 |
|
Derivative liabilities | | 84.3 |
| | (3.1 | ) | | 81.2 |
| | 21.7 |
| | (18.3 | ) | | 3.4 |
|
The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. See Note 3 for further discussion of the Company's master netting arrangements.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the pretax impact of the effective portion of gains and losses from the Company's designated derivative instruments on its consolidated financial statements for the three-month and nine-monthsix-month periods endedDecember 30, 2017 October 1, 2022 and December 31, 2016:September 25, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in OCI |
| | Three Months Ended | | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | (millions) |
Designated Hedges: | | | | | | | | |
FC — Cash flow hedges | | $ | 12.2 | | | $ | 1.6 | | | $ | 28.5 | | | $ | 0.2 | |
Net investment hedges — effective portion | | 36.0 | | | 14.4 | | | 75.7 | | | 5.2 | |
Net investment hedges — portion excluded from assessment of hedge effectiveness | | (0.4) | | | 1.2 | | | 11.4 | | | 11.8 | |
Total Designated Hedges | | $ | 47.8 | | | $ | 17.2 | | | $ | 115.6 | | | $ | 17.2 | |
|
| | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in OCI | | |
| | Three Months Ended | | Nine Months Ended | | |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | | |
| | (millions) | | |
Designated Hedges: | | | | | | | | | | |
FC — Cash flow hedges | | $ | (2.9 | ) | | $ | 58.2 |
| | $ | (28.8 | ) | | $ | 46.7 |
| | |
CCS — NI(a) | | (10.4 | ) | | 38.1 |
| | (73.1 | ) | | 45.2 |
| | |
Total Designated Hedges | | $ | (13.3 | ) | | $ | 96.3 |
| | $ | (101.9 | ) | | $ | 91.9 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gains (Losses) from Cash Flow Hedges Reclassified from AOCI to Earnings |
| | Three Months Ended | | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 |
| | Cost of goods sold | | Cost of goods sold | | Cost of goods sold | | Cost of goods sold |
| | (millions) |
Total amounts presented in the consolidated statements of operations in which the effects of related cash flow hedges are recorded | | $ | (556.8) | | | $ | (488.9) | | | $ | (1,046.0) | | | $ | (897.1) | |
Effects of cash flow hedging: | | | | | | | | |
FC — Cash flow hedges | | 3.7 | | | 0.2 | | | 6.5 | | | 0.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) from Net Investment Hedges Recognized in Earnings | | Location of Gains (Losses) Recognized in Earnings |
| | Three Months Ended | | Six Months Ended | |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 | |
| | (millions) | | |
Net Investment Hedges | | | | | | | | | | |
Net investment hedges — portion excluded from assessment of hedge effectiveness(a) | | $ | 3.3 | | | $ | 2.9 | | | $ | 6.5 | | | $ | 5.7 | | | Interest expense |
Total Net Investment Hedges | | $ | 3.3 | | | $ | 2.9 | | | $ | 6.5 | | | $ | 5.7 | | | |
(a)Amounts recognized in other comprehensive income (loss) ("OCI") relating to the effective portion of the Company's net investment hedges would be recognized in earnings only upon the sale or liquidation of the hedged net investment.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Reclassified from AOCI to Earnings | | Location of Gains (Losses) Reclassified from AOCI to Earnings |
| | Three Months Ended | | Nine Months Ended | |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | |
| | (millions) | | |
Designated Hedges: | | | | | | | | | | |
FC — Cash flow hedges | | $ | (5.9 | ) | | $ | (2.7 | ) | | $ | (4.3 | ) | | $ | (4.2 | ) | | Cost of goods sold |
FC — Cash flow hedges | | 0.6 |
| | 9.3 |
| | (0.4 | ) | | 3.3 |
| | Foreign currency gains (losses) |
Total Designated Hedges | | $ | (5.3 | ) | | $ | 6.6 |
| | $ | (4.7 | ) | | $ | (0.9 | ) | | |
| |
(a)
| Amounts recognized in other comprehensive income (loss) ("OCI") would be recognized in earnings only upon the sale or liquidation of the hedged net investment. |
As of December 30, 2017,October 1, 2022, it is expectedestimated that $8.0$31.4 million of pretax net lossesgains on both outstanding and matured derivative instruments designated and qualifying as cash flow hedges deferred in AOCI will be recognized in earnings over the next twelve months. The amountsAmounts ultimately recognized in earnings will depend on exchange rates in effect when outstanding derivative instruments are settled. No material gains or losses relating to ineffective cash flow hedges were recognized during any of the fiscal periods presented.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the pretax impact of gains and losses from the Company's undesignated derivative instruments on its consolidated financial statements for the three-month and nine-monthsix-month periods endedDecember 30, 2017 October 1, 2022 and December 31, 2016:September 25, 2021:
| | | | Gains (Losses) Recognized in Earnings | | Location of Gains (Losses) Recognized in Earnings | | | Gains (Losses) Recognized in Earnings | | Location of Gains (Losses) Recognized in Earnings |
| | Three Months Ended | | Nine Months Ended | | | | Three Months Ended | | Six Months Ended | |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | | | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 | |
| | (millions) | | | | | (millions) | | |
Undesignated Hedges: | | | | | | | | | | Undesignated Hedges: | |
FC — Undesignated hedges | | $ | (1.9 | ) | | $ | 14.2 |
| | $ | 0.2 |
| | $ | 2.9 |
| | Foreign currency gains (losses) | FC — Undesignated hedges | | $ | 13.1 | | | $ | 1.5 | | | $ | 24.6 | | | $ | 0.5 | | | Other income (expense), net |
Total Undesignated Hedges | | $ | (1.9 | ) | | $ | 14.2 |
| | $ | 0.2 |
| | $ | 2.9 |
| | Total Undesignated Hedges | | $ | 13.1 | | | $ | 1.5 | | | $ | 24.6 | | | $ | 0.5 | | |
Risk Management Strategies
Forward Foreign Currency Exchange Contracts
The Company uses forward foreign currency exchange contracts to reducemitigate its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, and the settlement of foreign currency-denominated balances.balances, and the translation of certain foreign operations' net assets into U.S. Dollars. As part of its overall strategy to managefor managing the level of exposure to the risk of foreign currencysuch exchange rate fluctuations,risk, relating primarily to changes in the value of the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, the Swiss Franc, the Swedish Krona,and the Chinese Yuan,Renminbi, the New Taiwan Dollar, and the Hong Kong Dollar, the Company generally hedges a portion of its foreign currencyrelated exposures anticipated over a two-year period. In doing so, the Company usesnext twelve months using forward foreign currency exchange contracts that generally havewith maturities of two months to two yearsone year to provide continuing coverage throughoutover the hedging period of the respective exposure.
Interest Rate Swap Contracts
During Fiscal 2016, the Company entered into two pay-floating rate, receive-fixed rate interest rate swap contracts which it designated as hedges against changes in the respective fair values of its fixed-rate 2.125% Senior Notes and its fixed-rate 2.625% Senior Notes attributed to changes in the benchmark interest rate (the "Interest Rate Swaps"). The Interest Rate Swaps, which mature on September 26, 2018 and August 18, 2020, respectively, both have notional amounts of $300 million and swap the fixed interest rates on the Company's 2.125% Senior Notes and 2.625% Senior Notes for variable interest rates based on the 3-month London Interbank Offered Rate ("LIBOR") plus a fixed spread. Changes in the fair values of the Interest Rate Swaps were offset
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by changes in the fair values of the 2.125% Senior Notes and 2.625% Senior Notes attributed to changes in the benchmark interest rate, with no resulting ineffectiveness recognized in earnings during any of the fiscal periods presented.
Cross-Currency Swap Contracts
During Fiscal 2016, theThe Company entered into two pay-floatingperiodically designates pay-fixed rate, receive-floating ratereceive fixed-rate cross-currency swap contracts with notional amounts of €280 million and €274 million, which it designated as hedges of its net investment in certain of its European subsidiaries (the "Cross-Currency Swaps"). subsidiaries.
The Cross-Currency Swaps, which mature on September 26, 2018 and August 18, 2020, respectively,Company's pay-fixed rate, receive-fixed rate cross-currency swap thecontracts swap U.S. Dollar-denominated variable interest rate payments based on 3-month LIBOR plus a fixed spread (as paid under the Interest Rate Swaps described above) for Euro-denominated variable interest rate payments based on the 3-month Euro Interbank Offered Rate plus acontract's notional amount and the fixed spread. As a result, the Cross-Currency Swaps, in conjunction with the Interest Rate Swaps, economically convertrate of interest payable on certain of the Company's $300 millionsenior notes for Euro-denominated fixed interest rate payments, thereby economically converting a portion of its fixed-rate 2.125% and $300 million fixed-rate 2.625%U.S. Dollar-denominated senior note obligations to €280 million and €274 million floating-ratefixed-rate Euro-denominated liabilities, respectively. No material gains or losses related to the ineffective portion, or the amount excluded from effectiveness testing, were recognized in interest expense within the consolidated statements of operations during any of the fiscal periods presented.obligations.
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.
Investments
As of December 30, 2017, theThe Company's short-term investments consistedas of $732.9 million of time depositsOctober 1, 2022 and $129.4 million of commercial paper, and its non-current investments consisted of $83.3 million of time deposits. As of April 1, 2017, the Company held short-term investments of $684.72, 2022 were $309.6 million and non-current investments of $21.4$734.6 million, both consistingrespectively, and consisted of time deposits.
No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded during any of the fiscal periods presented.
Refer to Note 3 of the Fiscal 20172022 10-K for further discussion of the Company's accounting policies relating to its investments.
| |
13. | Commitments and Contingencies |
U.S. Tax Reform
In connection with the TCJA's provision that subjects previously deferred foreign earnings to a one-time mandatory transition tax (as described in Note 9), the Company recorded a charge of $215.5 million within its income tax provision during the third quarter of Fiscal 2018, together with a corresponding current and non-current income tax payable obligation within its consolidated balance sheets based upon the estimated timing of payments. This obligation, which was recorded on a provisional basis and is subject to change, is expected to be paid over an eight-year period as follows:
|
| | | | |
| | Mandatory Transition Tax Payments(a) |
| | (millions) |
Fiscal 2019 | | $ | 27.3 |
|
Fiscal 2020 | | 14.0 |
|
Fiscal 2021 | | 14.0 |
|
Fiscal 2022 | | 14.0 |
|
Fiscal 2023 | | 23.2 |
|
Fiscal 2024 and thereafter | | 85.5 |
|
Total mandatory transition tax payments | | $ | 178.0 |
|
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
(a)
| The expected mandatory transition tax payments have been presented net of previously available foreign tax credit carryovers of $37.5 million, which the Company expects to utilize to partially reduce this tax obligation. |
See Note 9 for further discussion of the TCJA13. Commitments and its enactment-related impacts on the Company's consolidated financial statements.
Customs Audit
In September 2014, one of the Company's international subsidiaries received a pre-assessment notice from the relevant customs officials concerning the method used to determine the dutiable value of imported inventory. The notice communicated the customs officials' assertion that the Company should have applied an alternative duty method, which could result in up to $46 million in incremental duty and non-creditable value-added tax, including $11 million in interest and penalties. The Company believes that the alternative duty method claimed by the customs officials is not applicable to the Company's facts and circumstances and is vigorously contesting their asserted methodology.
In October 2014, the Company filed an appeal of the pre-assessment notice in accordance with the standard procedures established by the relevant customs authorities. In response to the filing of the Company's appeal of the pre-assessment notice, the review committee instructed the customs officials to reconsider their assertion of the alternative duty method and conduct a re-audit to evaluate the facts and circumstances noted in the pre-assessment notice. In December 2015, the Company received the results of the re-audit conducted and a customs audit assessment notice in the amount of $34.1 million, which the Company recorded within restructuring and other charges in its consolidated statements of operations during the third quarter of Fiscal 2016. Although the Company disagrees with the assessment notice, in order to secure the Company's rights, the Company was required to pay the assessment amount and then subsequently file an appeal with the customs authorities. In October 2017, the tax tribunal presiding over the Company's appeal instructed the customs officials to reconsider their assertions under the alternative duty method and conduct a second re-audit to evaluate the facts and circumstances noted in the pre-assessment notice.
The Company continues to maintain its original filing position and will vigorously contest any other proposed methodology asserted by the customs officials. Should the Company be successful in its merits, a full refund for the amounts paid plus interest will be required to be paid by the customs authorities. If the Company is unsuccessful in its current appeal with the customs authorities, it may further appeal this decision within the courts. At this time, while the Company believes that the customs officials' claims are not meritorious and that the Company should prevail, the outcome of the appeals process is subject to risk and uncertainty.
Other MattersContingencies
The Company is involved, from time to time, in litigation, other legal claims, and proceedings involving matters associated with or incidental to its business, including, among other things, matters involving credit card fraud, trademark and other intellectual property, licensing, importation and exportation of its products, taxation, unclaimed property, leases, and employee relations. The Company believes at present that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on its consolidated financial statements. However, the Company's assessment of any current litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims.
In the normal course of business, the Company entersmay enter into certain guarantees or other agreements that provide general indemnifications. The Company has not made any significant indemnification payments under such agreements in the past and does not currently anticipate incurring any material indemnification payments.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Changes in Equity
A reconciliation of the beginning and ending amounts of equity is presented below:
|
| | | | | | | | |
| | Nine Months Ended |
| | December 30, 2017 | | December 31, 2016 |
| | (millions) |
Balance at beginning of period | | $ | 3,299.6 |
| | $ | 3,743.5 |
|
Comprehensive income | | 189.3 |
| | 63.2 |
|
Dividends declared | | (121.9 | ) | | (123.2 | ) |
Repurchases of common stock, including shares surrendered for tax withholdings | | (15.9 | ) | | (115.0 | ) |
Stock-based compensation | | 56.3 |
| | 46.4 |
|
Shares issued and tax benefits (shortfalls) recognized pursuant to stock-based compensation arrangements | | 0.1 |
| | (4.3 | ) |
Balance at end of period | | $ | 3,407.5 |
| | $ | 3,610.6 |
|
Common Stock Repurchase Program
In June 2016, as partRepurchases of its common stock repurchase program, the Company entered into an accelerated share repurchase program with a third-party financial institution under which it made an upfront payment of $100 million in exchange for an initial delivery of 0.9 million shares of its Class A common stock, representing 90% of the total shares that were ultimately expected to be delivered over the program's term (the "ASR Program"). The initial shares received, which had an aggregate cost of $90 million based on the June 20, 2016 closing share price, were immediately retired and recorded as an increase to treasury stock.
In September 2016, at the ASR Program's conclusion, the Company received 0.1 million additional shares and accordingly recorded a related $10 million increase to treasury stock. The number of additional shares delivered was based on the volume-weighted average price per share of the Company's Class A common stock overare subject to overall business and market conditions, as well as other potential factors such as the termtemporary restrictions previously in place under the Company's Global Credit Facility. Accordingly, in response to business disruptions related to the COVID-19 pandemic, effective beginning in the first quarter of Fiscal 2021, the Company temporarily suspended its common stock repurchase program as a preemptive action to preserve cash and strengthen its liquidity position. However, the Company resumed activities under its Class A common stock repurchase program during the third quarter of Fiscal 2022 as restrictions under its Global Credit Facility were lifted (see Note 11 of the ASR Program, less an agreed upon discount. The average price per share paid for all ofFiscal 2022 10-K) and overall business and market conditions have improved since the shares delivered under the ASR Program was $98.48.COVID-19 pandemic first emerged.
A summary of the Company's repurchases of Class A common stock under its common stock repurchase program including the ASR Program, is as follows:
| | | | | | | | | | | | | | |
| | Six Months Ended |
| | October 1, 2022 | | September 25, 2021 |
| | (millions) |
Cost of shares repurchased | | $ | 383.9 | | | $ | — | |
Number of shares repurchased | | 4.1 | | | — | |
|
| | | | | | | | |
| | Nine Months Ended |
| | December 30, 2017 | | December 31, 2016 |
| | (millions) |
Cost of shares repurchased | | $ | — |
| | $ | 100.0 |
|
Number of shares repurchased | | — |
| | 1.0 |
|
On February 2, 2022, the Company's Board of Directors approved an expansion of the Company's existing common stock repurchase program that allows it to repurchase up to an additional $1.500 billion of its Class A common stock. As of December 30, 2017,October 1, 2022, the remaining availability under the Company's Class A common stock repurchase program was approximately $100 million. Repurchases$1.245 billion.
As discussed in Note 9, as a result of shares of Class A common stock arethe IRA's enactment into law, the Company will be subject to overall business and market conditions.a 1% excise tax on share repurchases made after December 31, 2022.
In addition, during each of the nine-monthsix-month periods ended December 30, 2017October 1, 2022 and December 31, 2016, 0.2September 25, 2021, 0.3 million shares of the Company's Class A common stock, at a cost of $15.9$33.4 million and $15.0$39.9 million,, respectively, were surrendered to or withheld by the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company's 1997 Long-Term Stock Incentive Plan, as amended (the "1997 Incentive Plan"), and its Amended and Restated 2010 Long-Term Stock Incentive Plan (the "2010 Incentive Plan").long-term stock incentive plans.
Repurchased and surrendered shares are accounted for as treasury stock at cost and held in treasury for future use.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends
Since 2003,Except as discussed below, the Company has maintained a regular quarterly cash dividend program on its common stock.stock since 2003.
In response to business disruptions related to the COVID-19 pandemic, effective beginning in the first quarter of Fiscal 2021 the Company temporarily suspended its quarterly cash dividend program as a preemptive action to preserve cash and strengthen its liquidity position. On May 19, 2021, the Company's Board of Directors approved the reinstatement of its quarterly cash dividend program at the pre-pandemic amount of $0.6875 per share.
On May 18, 2022, the Company's Board of Directors approved an increase to the Company's quarterly cash dividend on its common stock from $0.6875 to $0.75 per share. The thirdsecond quarter Fiscal 20182023 dividend of $0.50$0.75 per share was declared on December 14, 2017,September 16, 2022, was payable to stockholdersshareholders of record at the close of business on December 29, 2017,September 30, 2022, and was paid on January 12, 2018. Dividends paid amountedOctober 14, 2022.
The Company intends to $121.7 millioncontinue to pay regular dividends on outstanding shares of its common stock. However, any decision to declare and $123.7 million duringpay dividends in the nine-month periods ended December 30, 2017future will ultimately be made at the discretion of the Company's Board of Directors and December 31, 2016, respectively.will depend on the Company's results of operations, cash requirements, financial condition, and other factors that the Board of Directors may deem relevant, including economic and market conditions.
| |
15. | Accumulated Other Comprehensive Income (Loss) |
15. Accumulated Other Comprehensive Income (Loss)
The following table presents OCI activity, net of tax, accumulated in equity:
|
| | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Gains (Losses)(a) | | Net Unrealized Gains (Losses) on Cash Flow Hedges(b) | | Net Unrealized Gains (Losses) on Defined Benefit Plans(c) | | Total Accumulated Other Comprehensive Income (Loss) |
| | (millions) |
Balance at April 2, 2016 | | $ | (157.6 | ) | | $ | (12.0 | ) | | $ | (11.9 | ) | | $ | (181.5 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | | |
OCI before reclassifications | | (86.7 | ) | | 42.1 |
| | 1.0 |
| | (43.6 | ) |
Amounts reclassified from AOCI to earnings | | — |
| | 1.1 |
| | 1.0 |
| | 2.1 |
|
Other comprehensive income (loss), net of tax | | (86.7 | ) | | 43.2 |
| | 2.0 |
| | (41.5 | ) |
Balance at December 31, 2016 | | $ | (244.3 | ) | | $ | 31.2 |
| | $ | (9.9 | ) | | $ | (223.0 | ) |
| | | | | | | | |
Balance at April 1, 2017 | | $ | (206.2 | ) | | $ | 14.6 |
| | $ | (6.8 | ) | | $ | (198.4 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | | |
OCI before reclassifications | | 90.7 |
| | (26.4 | ) | | (1.0 | ) | | 63.3 |
|
Amounts reclassified from AOCI to earnings | | — |
| | 4.4 |
| | 0.1 |
| | 4.5 |
|
Other comprehensive income (loss), net of tax | | 90.7 |
| | (22.0 | ) | | (0.9 | ) | | 67.8 |
|
Balance at December 30, 2017 | | $ | (115.5 | ) | | $ | (7.4 | ) | | $ | (7.7 | ) | | $ | (130.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Gains (Losses)(a) | | Net Unrealized Gains (Losses) on Cash Flow Hedges(b) | | Net Unrealized Gains (Losses) on Defined Benefit Plans(c) | | Total Accumulated Other Comprehensive Income (Loss) |
| | (millions) |
Balance at April 2, 2022 | | $ | (189.7) | | | $ | 9.0 | | | $ | 0.4 | | | $ | (180.3) | |
Other comprehensive income (loss), net of tax: | | | | | | | | |
OCI before reclassifications | | (95.8) | | | 24.6 | | | — | | | (71.2) | |
Amounts reclassified from AOCI to earnings | | — | | | (5.7) | | | (0.1) | | | (5.8) | |
Other comprehensive income (loss), net of tax | | (95.8) | | | 18.9 | | | (0.1) | | | (77.0) | |
Balance at October 1, 2022 | | $ | (285.5) | | | $ | 27.9 | | | $ | 0.3 | | | $ | (257.3) | |
| | | | | | | | |
Balance at March 27, 2021 | | $ | (123.2) | | | $ | 4.6 | | | $ | (2.2) | | | $ | (120.8) | |
Other comprehensive income (loss), net of tax: | | | | | | | | |
OCI before reclassifications | | 0.8 | | | 0.2 | | | — | | | 1.0 | |
Amounts reclassified from AOCI to earnings | | — | | | (0.1) | | | (0.1) | | | (0.2) | |
Other comprehensive income (loss), net of tax | | 0.8 | | | 0.1 | | | (0.1) | | | 0.8 | |
Balance at September 25, 2021 | | $ | (122.4) | | | $ | 4.7 | | | $ | (2.3) | | | $ | (120.0) | |
| |
(a)
| OCI before reclassifications to earnings related to foreign currency translation gains (losses) includes an income tax benefit of $23.4 million for the nine months ended December 30, 2017, and is presented net of an income tax provision of $19.1 million for the nine months ended December 31, 2016. OCI before reclassifications to earnings for the nine-month periods ended December 30, 2017 and December 31, 2016 include a loss of $45.5 million (net of a $27.6 million income tax benefit) and a gain of $27.8 million (net of a $17.4 million income tax provision), respectively, related to the effective portion of changes in the fair values of the Cross-Currency Swaps designated as hedges of the Company's net investment in certain of its European subsidiaries (see Note 12). |
| |
(b)
| OCI before reclassifications to earnings related to net unrealized gains (losses) on cash flow hedges are presented net of an income tax benefit of $2.4 million and an income tax provision of $4.6 million for the nine-month periods ended December 30, 2017 and December 31, 2016, respectively. The tax effects on amounts reclassified from AOCI to earnings are presented in a table below. |
| |
(c)
| Activity is presented net of taxes, which were immaterial for both periods presented. |
(a)OCI before reclassifications to earnings related to foreign currency translation gains (losses) includes income tax provisions of $30.1 million and $4.0 million for the six-month periods ended October 1, 2022 and September 25, 2021, respectively. OCI before reclassifications to earnings for the six-month periods ended October 1, 2022 and September 25, 2021 includes gains of $66.0 million (net of a $21.1 million income tax provision) and $13.0 million (net of a $4.0 million income tax provision), respectively, related to changes in the fair values of instruments designated as hedges of the Company's net investment in certain foreign operations (see Note 12).
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b)OCI before reclassifications to earnings related to net unrealized gains (losses) on cash flow hedges are presented net of an income tax provision of $3.9 million for the six-month periods ended October 1, 2022 and an immaterial tax effect for the six-month periods ended September 25, 2021. The tax effects on amounts reclassified from AOCI to earnings are presented in a table below.
(c)Activity is presented net of taxes, which were immaterial for both periods presented.
The following table presents reclassifications from AOCI to earnings for cash flow hedges, by component:
| | | | Three Months Ended | | Nine Months Ended | | Location of Gains (Losses) Reclassified from AOCI to Earnings | | Three Months Ended | | Six Months Ended | | Location of Gains (Losses) Reclassified from AOCI to Earnings |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 | | | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 | |
| | (millions) | | | (millions) | | |
Gains (losses) on cash flow hedges(a): | | | | | | | | | | Gains (losses) on cash flow hedges(a): | |
FC — Cash flow hedges | | $ | (5.9 | ) | | $ | (2.7 | ) | | $ | (4.3 | ) | | $ | (4.2 | ) | | Cost of goods sold | FC — Cash flow hedges | | $ | 3.7 | | | $ | 0.2 | | | $ | 6.5 | | | $ | 0.1 | | | Cost of goods sold |
FC — Cash flow hedges | | 0.6 |
| | 9.3 |
| | (0.4 | ) | | 3.3 |
| | Foreign currency gains (losses) | |
| Tax effect | | 0.5 |
| | (1.4 | ) | | 0.3 |
| | (0.2 | ) | | Income tax benefit (provision) | Tax effect | | (0.4) | | | — | | | (0.8) | | | — | | | Income tax provision |
Net of tax | | $ | (4.8 | ) | | $ | 5.2 |
| | $ | (4.4 | ) | | $ | (1.1 | ) | | Net of tax | | $ | 3.3 | | | $ | 0.2 | | | $ | 5.7 | | | $ | 0.1 | | |
(a)FC = Forward foreign currency exchange contracts.
| |
(a)16. Stock-based Compensation | FC = Forward foreign currency exchange contracts. |
| |
16. | Stock-based Compensation |
The Company's stock-based compensation awards are currently issued under the 20102019 Incentive Plan, which was approved by its stockholders on August 5, 2010.1, 2019. However, any prior awards granted under either the Company's 2010 Incentive Plan or 1997 Incentive Plan remain subject to the terms of that plan.those plans, as applicable. Any awards that expire, are forfeited, or are surrendered to the Company in satisfaction of taxes are available for issuance under the 20102019 Incentive Plan.
Refer to Note 18 of the Fiscal 20172022 10-K for a detailed description of the Company's stock-based compensation awards, including information related to vesting terms, service, performance, and performancemarket conditions and payout percentages.
Impact on Results
A summary of total stock-based compensation expense and the related income tax benefits recognized during the three-month and nine-monthsix-month periods ended December 30, 2017October 1, 2022 and December 31, 2016September 25, 2021 is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
| | (millions) |
Compensation expense | | $ | 16.9 |
| (a) | $ | 14.5 |
| | $ | 56.3 |
| (a) | $ | 46.4 |
|
Income tax benefit | | (6.3 | ) | | (5.3 | ) | | (20.9 | ) | | (17.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | |
| | October 1, 2022 | | September 25, 2021 | | October 1, 2022 | | September 25, 2021 | |
| | (millions) | |
Compensation expense | | $ | 22.5 | | | $ | 22.2 | | | $ | 40.7 | | | $ | 40.6 | | (a) |
Income tax benefit | | (3.8) | | | (3.6) | | | (6.6) | | | (6.6) | | |
| |
(a)(a)Includes $2.0 million of accelerated stock-based compensation expense recorded within restructuring and other charges, net in the consolidated statements of operations (see Note 8). All other stock-based compensation expense was recorded within SG&A expenses. | The three-month and nine-month periods ended December 30, 2017 include $0.7 million and $2.8 million, respectively, of accelerated stock-based compensation expense recorded within restructuring and other charges in the consolidated statements of operations (see Note 8). All other stock-based compensation expense was recorded within SG&A expenses. |
The Company issues its annual grants of stock-based compensation awards in the first half of each fiscal year. Due to the timing of the annual grants and other factors, including the timing and magnitude of forfeiture and performance goal achievement adjustments, as well as changes to the size and composition of the eligible employee population, stock-based compensation expense recognized during any given fiscal period is not indicative of the level of compensation expense expected to be incurred in future periods.
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options
A summary of stock option activity under all plans during the nine months endedDecember 30, 2017 is as follows:
|
| | | |
| | Number of Options |
| | (thousands) |
Options outstanding at April 1, 2017 | | 1,720 |
|
Granted | | — |
|
Exercised | | — |
|
Cancelled/Forfeited | | (537 | ) |
Options outstanding at December 30, 2017 | | 1,183 |
|
Restricted Stock Awards and Service-based RSUs
The fair values of restricted stock awardsservice-based RSUs granted to certain of the Company's senior executives and other employees, as well as non-employee directors, are determined based on the fair value of the Company's Class A common stock on the date of grant. No suchgrant, adjusted to reflect the absence of dividends for any awards for which dividend equivalent amounts do not accrue to the holder while outstanding and unvested. The weighted-average grant date fair values of service-based RSU awards granted were granted$92.07 and $117.97 per share during the nine-monthsix-month periods ended December 30, 2017October 1, 2022 and December 31, 2016.September 25, 2021, respectively.
A summary of service-based RSU activity during the six months ended October 1, 2022 is as follows:
| | | | | | | | |
| | Number of Service-based RSUs |
| | (thousands) |
Unvested at April 2, 2022 | | 1,566 | |
Granted | | 668 | |
Vested | | (553) | |
Forfeited | | (34) | |
Unvested at October 1, 2022 | | 1,647 | |
Performance-based RSUs
The fair values of service-basedthe Company's performance-based RSUs granted to certain of the Company'sits senior executives as well as to certain of itsand other key employees are based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for any awards for which dividend equivalent amounts do not entitledaccrue to accrue dividend equivalentsthe holder while outstanding. The weighted-average grant date fair values of service-based RSU awards granted were $73.32outstanding and $83.92 per share during the nine-month periods ended December 30, 2017 and December 31, 2016, respectively.
A summary of restricted stock and service-based RSU activity during the nine months ended December 30, 2017 is as follows:
|
| | | | | | |
| | Number of Shares |
| | Restricted Stock | | Service-based RSUs |
| | (thousands) |
Nonvested at April 1, 2017 | | 19 |
| | 922 |
|
Granted | | — |
| | 695 |
|
Vested | | — |
| | (325 | ) |
Forfeited | | — |
| | (140 | ) |
Nonvested at December 30, 2017 | | 19 |
| | 1,152 |
|
Performance-based RSUs
The fair values of the Company's performance-based RSUs that are not subject to a market condition in the form of a total shareholder return ("TSR") modifier are based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for any awards not entitled to accrue dividend equivalents while outstanding.unvested. The weighted-average grant date fair values of performance-based RSUs that do not contain a TSR modifierRSU awards granted were $92.45 and $117.79 per share during the nine-monthsix-month periods ended December 30, 2017October 1, 2022 and December 31, 2016 were $69.40 and $86.15 per share,September 25, 2021, respectively.
Market-based RSUs
The Company grants market-based RSUs, which are based on total shareholder return ("TSR") performance, to its senior executives and other key employees. The Company estimates the fair valuesvalue of the Company's performance-based RSUs with aits TSR modifier are determinedawards on the date of grant using a Monte Carlo simulation, valuation model. This pricing model useswhich models multiple simulationsstock price paths of the Company's Class A common stock and that of its peer group to evaluate the probability of the Company achieving various stock price levels toand determine its ultimate expected relative TSR performance ranking. No suchCompensation expense, net of estimated forfeitures, is recorded regardless of whether, and the extent to which, the market condition is ultimately satisfied. The weighted-average grant date fair values of market-based RSUs granted were $124.62 and $146.46 per share during the six-month periods ended October 1, 2022 and September 25, 2021, respectively. The assumptions used to estimate the fair value of TSR awards were granted during the nine-monthsix-month periods ended December 30, 2017October 1, 2022 and December 31, 2016.September 25, 2021 were as follows:
| | | | | | | | | | | | | | | | |
| | Six Months Ended | | |
| | October 1, 2022 | | September 25, 2021 | | |
Expected volatility | | 49.9 | % | | 46.8 | % | | |
Expected dividend yield | | 3.0 | % | | 2.2 | % | | |
Risk-free interest rate | | 3.1 | % | | 0.4 | % | | |
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of performance-based RSU activity including TSR awards during the ninesix months ended December 30, 2017October 1, 2022 is as follows:
|
| | | | | | |
| | Number of Shares |
| | Performance-based RSUs — without TSR Modifier | | Performance-based RSUs — with TSR Modifier |
| | (thousands) |
Nonvested at April 1, 2017 | | 788 |
| | 61 |
|
Granted | | 585 |
| | — |
|
Change due to performance/market condition achievement | | (12 | ) | | (21 | ) |
Vested | | (149 | ) | | (40 | ) |
Forfeited | | (28 | ) | | — |
|
Nonvested at December 30, 2017 | | 1,184 |
| | — |
|
| | | | | | | | |
17. | Segment Information | Number of Performance-based RSUs |
| | (thousands) |
Unvested at April 2, 2022 | | 542 | |
Granted | | 261 | |
Change due to performance and/or market condition achievement | | (58) | |
Vested | | (269) | |
Forfeited | | (3) | |
Unvested at October 1, 2022 | | 473 | |
The Company has three reportable segments based on its business activities and organization:
No operating segments were aggregated to form the Company's reportable segments. In addition to these reportable segments, the Company also has other non-reportable segments, which primarily consist of (i)Ralph Lauren and Chaps branded royalty revenues earned through its global licensing alliances. In addition, prior to its disposition at the end of the Company's first quarter of Fiscal 2022, other non-reportable segments also included sales of Club Monaco branded products made through itsthe Company's retail and wholesale businesses in the U.S., Canada, and Europe, and its licensing alliances in Europe and Asia, (ii) salesAsia. Refer to Note 8 for additional discussion regarding the disposition of Ralph Lauren branded products made throughthe Company's former Club Monaco business, as well as the transition of its wholesaleChaps business in Latin America, and (iii) royalty revenues earned through its global licensing alliances, excluding Club Monaco.to a fully licensed business model.
The Company's segment reporting structure is consistent with how it establishes its overall business strategy, allocates resources, and assesses performance of its business. The accounting policies of the Company's segments are consistent with those described in Notes 2 and 3 of the Fiscal 20172022 10-K. Sales and transfers between segments are generally recorded at cost and treated as transfers of inventory. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment's performance is evaluated based upon net revenues and operating income before restructuringrestructuring-related charges, impairment of assets, and certain other one-time items, such as legal charges, if any. Certain corporate overhead expenses related to global functions, most notably the Company's executive office, information technology, finance and accounting, human resources, and legal departments, largely remain at corporate. Additionally, other costs that cannot be
allocated to the segments based on specific usage are also maintained at corporate, including corporate advertising and marketing expenses, depreciation and amortization of corporate assets, and other general and administrative expenses resulting from corporate-level activities and projects.