RL-2012.12.29-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 29, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-13057
Ralph Lauren Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
13-2622036
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
650 Madison Avenue,
New York, New York
 
10022
(Zip Code)
(Address of principal executive offices)
 
 
(212) 318-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                Yes  þ     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
At February 1, 2013, 60,834,980 shares of the registrant’s Class A common stock, $.01 par value, and 29,881,276 shares of the registrant’s Class B common stock, $.01 par value, were outstanding.


RALPH LAUREN CORPORATION
INDEX
 
 
Page
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1.
Financial Statements:
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
Item 1.
Item 1A.    
Item 2.
Item 6.
EX-10.1
 
 
EX-10.2
 
 
EX-31.1
 
 
EX-31.2
 
 
EX-32.1
 
 
EX-32.2
 
 
 
INSTANCE DOCUMENT
 
EX-101
SCHEMA DOCUMENT
 
EX-101
CALCULATION LINKBASE DOCUMENT
 
EX-101
LABELS LINKBASE DOCUMENT
 
EX-101
PRESENTATION LINKBASE DOCUMENT
 
EX-101
DEFINITION LINKBASE DOCUMENT
 


2
Table of Contents

RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
 
 
 
December 29,
2012
 
March 31,
2012
 
 
(millions)
(unaudited)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
999.1

 
$
671.6

Short-term investments
 
313.2

 
515.7

Accounts receivable, net of allowances of $263.6 million and $262.7 million
 
383.9

 
547.2

Inventories
 
981.1

 
841.6

Income tax receivable
 
18.9

 
17.2

Deferred tax assets
 
125.9

 
125.6

Prepaid expenses and other
 
179.9

 
181.0

Total current assets
 
3,002.0

 
2,899.9

Non-current investments
 
89.0

 
99.9

Property and equipment, net
 
926.4

 
884.1

Deferred tax assets
 
16.2

 
39.8

Goodwill
 
993.1

 
1,004.0

Intangible assets, net
 
339.8

 
359.0

Other assets
 
122.7

 
129.7

Total assets
 
$
5,489.2

 
$
5,416.4

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
274.1

 
$
—

Accounts payable
 
146.2

 
180.6

Income tax payable
 
89.3

 
71.9

Accrued expenses and other
 
682.0

 
693.7

Total current liabilities
 
1,191.6

 
946.2

Long-term debt
 
—

 
274.4

Non-current liability for unrecognized tax benefits
 
155.6

 
168.0

Other non-current liabilities
 
372.3

 
375.3

Commitments and contingencies (Note 14)
 

 

Total liabilities
 
1,719.5

 
1,763.9

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 93.4 million and 91.1 million shares issued; 60.8 million and 61.9 million shares outstanding
 
0.9

 
0.9

Class B common stock, par value $.01 per share; 29.9 million and 30.8 million shares issued and outstanding
 
0.3

 
0.3

Additional paid-in-capital
 
1,760.2

 
1,624.0

Retained earnings
 
4,555.9

 
4,042.4

Treasury stock, Class A, at cost (32.6 million and 29.2 million shares)
 
(2,708.4
)
 
(2,211.7
)
Accumulated other comprehensive income
 
160.8

 
196.6

Total equity
 
3,769.7

 
3,652.5

Total liabilities and equity
 
$
5,489.2

 
$
5,416.4



See accompanying notes.
3
Table of Contents

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions, except per share data)
(unaudited)
Net sales
 
$
1,795.9

 
$
1,756.0

 
$
5,162.7

 
$
5,099.3

Licensing revenue
 
50.2

 
49.6

 
138.8

 
137.3

Net revenues
 
1,846.1

 
1,805.6

 
5,301.5

 
5,236.6

Cost of goods sold(a) 
 
(752.0
)
 
(774.0
)
 
(2,120.0
)
 
(2,164.9
)
Gross profit
 
1,094.1

 
1,031.6

 
3,181.5

 
3,071.7

Other costs and expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative expenses(a) 
 
(768.9
)
 
(750.7
)
 
(2,200.7
)
 
(2,142.4
)
Amortization of intangible assets
 
(6.8
)
 
(7.2
)
 
(20.3
)
 
(21.8
)
Impairment of assets
 
(11.4
)
 
(2.0
)
 
(12.4
)
 
(2.2
)
Restructuring charges
 
(2.6
)
 
(1.6
)
 
(3.4
)
 
(2.3
)
Total other costs and expenses
 
(789.7
)
 
(761.5
)
 
(2,236.8
)
 
(2,168.7
)
Operating income
 
304.4

 
270.1

 
944.7

 
903.0

Foreign currency gains (losses)
 
(3.9
)
 
(2.2
)
 
(7.0
)
 
(4.2
)
Interest expense
 
(5.6
)
 
(6.3
)
 
(16.5
)
 
(18.8
)
Interest and other income, net
 
1.5

 
2.7

 
4.1

 
9.3

Equity in income (loss) of equity-method investees
 
(1.8
)
 
(2.2
)
 
(4.6
)
 
(5.2
)
Income before provision for income taxes
 
294.6

 
262.1

 
920.7

 
884.1

Provision for income taxes
 
(78.9
)
 
(93.1
)
 
(297.9
)
 
(297.5
)
Net income attributable to RLC
 
$
215.7

 
$
169.0

 
$
622.8

 
$
586.6

Net income per common share attributable to RLC:
 
 
 
 
 
 
 
 
Basic
 
$
2.37

 
$
1.83

 
$
6.80

 
$
6.32

Diluted
 
$
2.31

 
$
1.78

 
$
6.63

 
$
6.14

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
91.1

 
92.2

 
91.6

 
92.8

Diluted
 
93.3

 
94.9

 
93.9

 
95.6

Dividends declared per share
 
$
0.40

 
$
0.20

 
$
1.20

 
$
0.60

(a) Includes total depreciation expense of:
 
$
(53.8
)
 
$
(49.6
)
 
$
(153.7
)
 
$
(146.4
)


See accompanying notes.
4
Table of Contents

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
(unaudited)
Net income attributable to RLC
 
$
215.7

 
$
169.0

 
$
622.8

 
$
586.6

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(25.0
)
 
(52.1
)
 
(24.1
)
 
(45.4
)
Net realized and unrealized gains (losses) on derivatives
 
(11.2
)
 
11.8

 
(14.5
)
 
37.2

Net realized and unrealized gains (losses) on available-for-sale investments
 
—

 
—

 
3.6

 
(0.1
)
Net realized and unrealized gains (losses) on defined benefit plans
 
(0.5
)
 
(0.4
)
 
(0.8
)
 
(0.8
)
Other comprehensive income, net of tax
 
(36.7
)
 
(40.7
)
 
(35.8
)
 
(9.1
)
Total comprehensive income attributable to RLC
 
$
179.0

 
$
128.3

 
$
587.0

 
$
577.5



See accompanying notes.
5
Table of Contents

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
(unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
622.8

 
$
586.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
174.0

 
168.2

Deferred income tax expense (benefit)
 
(23.2
)
 
(21.5
)
Equity in loss of equity-method investees, net of dividends received
 
4.6

 
5.2

Non-cash stock-based compensation expense
 
65.1

 
55.2

Excess tax benefits from stock-based compensation arrangements
 
(32.9
)
 
(25.5
)
Other non-cash charges (benefits), net
 
11.7

 
5.9

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
166.1

 
(8.6
)
Inventories
 
(138.0
)
 
(203.1
)
Accounts payable and accrued liabilities
 
(2.0
)
 
0.5

Income tax receivables and payables
 
37.3

 
208.0

Deferred income
 
(21.8
)
 
(12.0
)
Other balance sheet changes
 
33.6

 
25.3

Net cash provided by operating activities
 
897.3

 
784.2

Cash flows from investing activities:
 
 
 
 
Acquisitions and ventures, net of cash acquired and purchase price settlements
 
(18.0
)
 
(10.1
)
Purchases of investments
 
(751.9
)
 
(1,070.0
)
Proceeds from sales and maturities of investments
 
950.7

 
1,248.4

Capital expenditures
 
(195.0
)
 
(160.1
)
Change in restricted cash deposits
 
7.0

 
1.0

Net cash provided by (used in) investing activities
 
(7.2
)
 
9.2

Cash flows from financing activities:
 
 
 
 
Proceeds from credit facilities
 
—

 
107.7

Repayments of borrowings on credit facilities
 
—

 
(107.7
)
Payments of capital lease obligations
 
(7.6
)
 
(5.6
)
Payments of dividends
 
(127.8
)
 
(55.8
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(496.7
)
 
(419.4
)
Proceeds from exercise of stock options
 
38.2

 
41.6

Excess tax benefits from stock-based compensation arrangements
 
32.9

 
25.5

Payment on interest rate swap termination
 
—

 
(7.6
)
Other financing activities
 
(1.5
)
 
0.2

Net cash used in financing activities
 
(562.5
)
 
(421.1
)
Effect of exchange rate changes on cash and cash equivalents
 
(0.1
)
 
(9.5
)
Net increase in cash and cash equivalents
 
327.5

 
362.8

Cash and cash equivalents at beginning of period
 
671.6

 
453.0

Cash and cash equivalents at end of period
 
$
999.1

 
$
815.8



See accompanying notes.
6
Table of Contents

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and where otherwise indicated)
(Unaudited)
1.
Description of Business
Ralph Lauren Corporation (“RLC”) is a global leader in the design, marketing and distribution of premium lifestyle products, including men’s, women’s and children’s apparel, accessories (including footwear), fragrances and home furnishings. RLC’s long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands and international markets. RLC’s brand names include Polo Ralph Lauren, Purple Label, Ralph Lauren Women’s Collection, Black Label, Blue Label, Lauren by Ralph Lauren, RRL, RLX Ralph Lauren, Denim & Supply Ralph Lauren, Rugby, Ralph Lauren, Ralph Lauren Childrenswear, Chaps and Club Monaco, among others. RLC and its subsidiaries are collectively referred to herein as the “Company,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
On October 30, 2012, the Company approved a plan to discontinue its Rugby brand operations (the “Rugby Closure Plan”). This decision was primarily based on the results of an analysis of the brand concept, including an opportunity for the Company to reallocate resources related to these operations to support other high growth business opportunities and initiatives. The Rugby Closure Plan will result in the closure of all of the Company’s 14 global freestanding retail Rugby stores, and its related domestic retail e-commerce site, located at Rugby.com. The Rugby Closure Plan is expected to be substantially completed by the end of fiscal year 2013. It will also result in a related reduction in workforce. See Notes 8 and 9 for a description of impairment and restructuring charges associated with the Rugby Closure Plan.
The Company classifies its businesses into three segments: Wholesale, Retail and Licensing. The Company’s wholesale sales are made principally to major department stores and specialty stores located throughout North America, Europe, Asia and South America. The Company also sells directly to consumers through retail stores located throughout North America, Europe, Asia and South America; through concessions-based shop-within-shops located primarily in Asia and Europe; and through its retail e-commerce channel in North America, Europe and Asia. The Company also licenses the right to unrelated third parties to operate retail stores and to use its various trademarks in connection with the manufacture and sale of designated products, such as apparel, eyewear and fragrances, in specified geographical areas for specified periods.
2.
Basis of Presentation
Interim Financial Statements
The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The interim consolidated financial statements are unaudited. In the opinion of management, however, such consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial condition, results of operations, comprehensive income and changes in cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“US GAAP”) 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 herein are adequate to make the information presented not misleading.
The consolidated balance sheet data as of March 31, 2012 is derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended March 31, 2012 (the “Fiscal 2012 10-K”), which should be read in conjunction with these unaudited interim consolidated financial statements. Reference is made to the Fiscal 2012 10-K for a complete set of financial statements.
Basis of Consolidation
The unaudited interim consolidated financial statements present the financial position, results of operations, comprehensive income and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

7
Table of Contents

Fiscal Year
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2013 will end on March 30, 2013 and will be a 52-week period (“Fiscal 2013”). Fiscal year 2012 ended on March 31, 2012 and also reflected a 52-week period (“Fiscal 2012”). Accordingly, the third quarter of Fiscal 2013 ended on December 29, 2012 and was a 13-week period. The third quarter of Fiscal 2012 ended on December 31, 2011 and was also a 13-week period.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include reserves for bad debt, customer returns, discounts, end-of-season markdowns and operational chargebacks; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; accounting for income taxes and related uncertain tax positions; the valuation of stock-based compensation and related expected forfeiture rates; reserves for restructuring; and accounting for business combinations.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
Seasonality of Business
The Company’s business is typically affected by seasonal trends, with higher levels of wholesale sales generated in its second and fourth quarters and higher retail sales generated in its second and third quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school and holiday shopping periods in the Retail segment. In addition, fluctuations in sales, operating income and cash flows in any fiscal quarter may be influenced 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-month periods ended December 29, 2012 are not necessarily indicative of the results and cash flows that may be expected for the full Fiscal 2013.
3.
Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable and collectability is reasonably assured.
Revenue within the Company’s Wholesale segment is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdown allowances, 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 notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company’s historical estimates of these costs have not differed materially from actual results.
Retail store and concessions-based shop-within-shop revenue is recognized net of estimated returns at the time of sale to consumers. E-commerce revenue from sales of products ordered through the Company’s retail Internet sites is recognized upon delivery and receipt of the shipment by its customers. Such revenue is also reduced by an estimate of returns.
Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property.

8
Table of Contents

Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (a) contractually guaranteed minimum royalty levels or (b) actual sales and royalty data, or estimates thereof, received from the Company’s licensees.
The Company accounts for sales and other related taxes on a net basis, excluding such taxes from revenue.
Shipping and Handling Costs
The costs associated with shipping goods to customers are reflected as a component of selling, general and administrative (“SG&A”) expenses in the consolidated statements of operations. Shipping costs were $9.9 million and $27.1 million during the three-month and nine-month periods ended December 29, 2012, respectively, and $8.3 million and $26.6 million during the three-month and nine-month periods ended December 31, 2011, respectively. The costs of preparing merchandise for sale, such as picking, packing, warehousing and order charges (“handling costs”) are also included in SG&A expenses. Handling costs were $36.4 million and $110.6 million during the three-month and nine-month periods ended December 29, 2012, respectively, and $36.4 million and $104.9 million during the three-month and nine-month periods ended December 31, 2011, respectively. Shipping and handling costs billed to customers are included in revenue.
Net Income per Common Share
Basic net income per common share is computed by dividing the net income applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company’s Class A and Class B common stock. Diluted net income per common share adjusts basic net income per common share for the effects of outstanding stock options, restricted stock, restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to those shares used in calculating diluted net income per common share as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Basic
 
91.1

 
92.2

 
91.6

 
92.8

Dilutive effect of stock options, restricted stock and restricted stock units
 
2.2

 
2.7

 
2.3

 
2.8

Diluted shares
 
93.3

 
94.9

 
93.9

 
95.6

Options to purchase shares of common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. In addition, the Company has outstanding restricted stock units that are issuable only upon the achievement of certain service and/or performance goals. Performance-based restricted stock units are included in the computation of diluted shares only to the extent that the underlying performance conditions (a) are satisfied as of the end of the reporting period or (b) would be satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of December 29, 2012 and December 31, 2011, there was an aggregate of approximately 1.1 million and 0.8 million, respectively, of additional shares issuable as of the end of each period upon the exercise of anti-dilutive options and the contingent vesting of performance-based restricted stock units that were excluded from the diluted share calculations.
Accounts Receivable
In the normal course of business, the Company extends credit to wholesale customers that satisfy defined credit criteria. Accounts receivable, net, is recorded at carrying value which approximates fair value, and is presented in the Company’s consolidated balance sheets net of certain reserves and allowances. These reserves and allowances consist of (a) reserves for returns, discounts, end-of-season markdowns and operational chargebacks (see Revenue Recognition for further discussion of related accounting policies) and (b) allowances for doubtful accounts.

9
Table of Contents

A rollforward of the activity in the Company’s reserves for returns, discounts, end-of-season markdowns and operational chargebacks is presented below:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Beginning reserve balance
 
$
251.1

 
$
231.0

 
$
246.7

 
$
213.2

Amount charged against revenue to increase reserve
 
179.4

 
162.1

 
508.7

 
444.2

Amount credited against customer accounts to decrease reserve
 
(184.0
)
 
(162.7
)
 
(507.4
)
 
(424.4
)
Foreign currency translation
 
0.1

 
(4.5
)
 
(1.4
)
 
(7.1
)
Ending reserve balance
 
$
246.6

 
$
225.9

 
$
246.6

 
$
225.9

An allowance for doubtful accounts is determined through analysis of periodic aging of accounts receivable, assessments of collectability based on an evaluation of historical and anticipated trends, the financial condition of the Company’s customers and an evaluation of the impact of economic conditions, among other factors.
A rollforward of the activity in the Company’s allowance for doubtful accounts is presented below:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Beginning reserve balance
 
$
16.5

 
$
17.2

 
$
16.0

 
$
17.7

Amount recorded to expense to increase reserve(a)
 
1.0

 
1.1

 
2.8

 
2.0

Amount written off against customer accounts to decrease reserve
 
(0.6
)
 
(1.2
)
 
(1.7
)
 
(2.3
)
Foreign currency translation
 
0.1

 
(0.5
)
 
(0.1
)
 
(0.8
)
Ending reserve balance
 
$
17.0

 
$
16.6

 
$
17.0

 
$
16.6

 
(a) 
Amounts recorded to bad debt expense are included within SG&A expenses in the unaudited interim consolidated statements of operations.
Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department and specialty stores across North America, Europe, Asia and South America, 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. For Fiscal 2012, these customers in the aggregate contributed approximately 40% of all Wholesale revenues. Further, as of December 29, 2012, the Company’s three key wholesale customers represented approximately 30% of gross accounts receivable.
Derivative Financial Instruments
The Company records all derivative financial instruments on the consolidated balance sheets at fair value. In addition, for derivative instruments that qualify for hedge accounting, the effective portion of changes in their fair value is either (a) offset against the changes in fair value of the hedged assets, liabilities or firm commitments through earnings or (b) 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 derivative is being used to hedge changes in fair value or cash flows, respectively.

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Each derivative instrument entered into by the Company which qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged. For each derivative that is designated as a hedge, the Company formally documents the related risk management objective and strategy, including the identification of the hedging instrument, the hedged item and the risk exposure, as well as how hedge effectiveness will be assessed prospectively and retrospectively. To assess the effectiveness of derivative instruments that are designated as hedges, the Company uses non-statistical methods, including the dollar-offset method, which compare the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.
To the extent that a derivative contract designated as a cash flow hedge is not considered to be effective, any changes in fair value relating to the ineffective portion are immediately recognized in earnings within foreign currency gains (losses). If it is determined that a derivative has not been highly effective, and will continue not to be highly effective at hedging the designated exposure, hedge accounting is discontinued. If hedge accounting is discontinued, the change in fair value of the derivative previously recorded in AOCI is recognized when the hedged item affects earnings consistent with the original hedging strategy, unless the forecasted transaction is no longer probable of occurring in which case the accumulated amount is immediately recognized in earnings within foreign currency gains (losses).
As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The Company’s established policies and procedures for mitigating credit risk from derivative transactions include continually reviewing and assessing the creditworthiness of counterparties. The Company also enters into master netting arrangements with counterparties when possible to mitigate credit risk associated with its derivative instruments, which in certain instances allow the Company to net settle amounts owed under multiple derivative transactions with the same counterparty. However, 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, the Company classifies proceeds received or amounts paid upon the settlement of a derivative instrument in the same manner as the related item being hedged.
Forward Foreign Currency Exchange Contracts
The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risk from exchange rate fluctuations on inventory purchases, intercompany royalty payments made by certain of its international operations, intercompany contributions made to fund certain marketing efforts of its international operations, interest payments made in connection with outstanding debt and other foreign currency-denominated operational cash flows. To the extent foreign currency exchange contracts designated as cash flow hedges are highly effective in offsetting the change in the value of the hedged item, the related gains (losses) are initially deferred in equity as a component of AOCI and subsequently recognized in the consolidated statements of operations as follows:
•
Forecasted Inventory Purchases — Recognized as part of the cost of the inventory purchases being hedged within cost of goods sold when the related inventory is sold.
•
Intercompany Royalty Payments and Marketing Contributions — Recognized within foreign currency gains (losses) generally in the period in which the related royalties or marketing contributions being hedged are received or paid.
•
Interest Payments on Euro Debt — Recognized within foreign currency gains (losses) in the period in which the recorded liability impacts earnings due to foreign currency exchange remeasurement.

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Hedge of a Net Investment in a Foreign Operation
Changes in the fair value of a derivative instrument or a non-derivative financial instrument (such as debt) that is designated as a hedge of a net investment in a foreign operation are reported in the same manner as a translation adjustment to the extent it is effective as a hedge. In assessing the effectiveness of a non-derivative financial instrument that has been designated as a hedge of a net investment, the Company uses the spot rate method of accounting to value foreign currency exchange rate changes in both its foreign subsidiaries and the financial instrument. If the notional amount of the financial instrument designated as a hedge of a net investment is greater than the portion of the net investment being hedged, hedge ineffectiveness is recognized immediately in earnings within foreign currency gains (losses). To the extent the financial instrument remains effective, changes in its value are recorded in equity as a component of AOCI until the sale or liquidation of the hedged net investment.
Undesignated Hedges
All of the Company’s undesignated hedges are entered into to hedge specific economic risks, such as foreign currency exchange rate risk. Changes in the fair value of undesignated derivative instruments are immediately recognized in earnings within foreign currency gains (losses).
See Note 13 for further discussion of the Company’s derivative financial instruments.
For a summary of all of the Company’s significant accounting policies, refer to Note 3 to the audited consolidated financial statements included in the Company’s Fiscal 2012 10-K.
4.
Recently Issued Accounting Standards
Indefinite-Lived Intangible Assets Impairment Testing
In July 2012, the Financial Accounting Standards Board (“FASB”) issued revised guidance surrounding testing indefinite-lived intangible assets for impairment as Accounting Standards Update (“ASU”) No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). ASU 2012-02 simplifies the testing of indefinite-lived intangible assets for impairment by providing entities with the option of performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The results of such assessment may be used as a basis for determining whether it is necessary to perform the quantitative impairment test required under Accounting Standards Codification (“ASC”) topic 350, “Intangibles — Goodwill and Other” (“ASC 350”). ASU 2012-02 is effective for the Company's annual indefinite-lived intangible assets impairment assessment beginning in Fiscal 2014. The application of ASU 2012-02 is not expected to have an impact on the Company's consolidated financial statements.
Disclosure of Offsetting Assets and Liabilities
In December 2011, the FASB issued new, expanded disclosure requirements for financial instruments surrounding an entity’s rights of offset and related counterparty arrangements as ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires disclosure of both “gross” and “net” information for recognized financial instruments (including derivatives) that are (i) eligible for offset and presented “net” in the balance sheet or (ii) subject to enforceable master netting agreements, irrespective of whether an entity actually offsets and “net presents” such instruments in the balance sheet. ASU 2011-11 also requires disclosure of any collateral received or posted in connection with master netting agreements or similar arrangements. ASU 2011-11 requires retrospective application, and is effective for the Company as of the beginning of Fiscal 2014. The application of ASU 2011-11 is expected to expand the Company’s quarterly and annual financial instrument disclosures, but will not have an impact on its consolidated financial statements.
Goodwill Impairment Testing
In September 2011, the FASB issued revised guidance for goodwill impairment testing as ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 simplifies goodwill impairment testing by providing entities with the option of performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. The results of such assessment may be used as a basis for determining whether it is necessary to perform the two-step quantitative impairment test required under ASC 350. ASU 2011-08 is effective for the Company’s Fiscal 2013 annual goodwill impairment testing, which was performed during the second fiscal quarter using the qualitative assessment approach prescribed by the standard. The application of ASU 2011-08 did not have an impact on the Company’s consolidated financial statements.

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Presentation of Comprehensive Income
In June 2011, the FASB issued revised guidance on the presentation of comprehensive income as ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income (“OCI”) as part of the consolidated statement of equity and provides two alternatives for presenting the components of net income and OCI, either: (i) in a single continuous statement of comprehensive income or (ii) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of comprehensive income. Additionally, this guidance requires items that are reclassified from AOCI to net income to be presented on the face of the financial statements. However, in December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred this requirement until the conclusion of further deliberations. The Company adopted the provisions of ASU 2011-05 during Fiscal 2013, which resulted in the inclusion of separate statements of comprehensive income for all periods presented within its consolidated financial statements beginning in the first quarter.
Proposed Amendments to Current Accounting Standards
The FASB is currently working on amendments to existing accounting standards governing a number of areas including, but not limited to, accounting for leases. In August 2010, the FASB issued an exposure draft, “Leases” (the “Exposure Draft”), which would replace the existing guidance in ASC topic 840, “Leases.” Under the Exposure Draft, among other changes in practice, a lessee’s rights and obligations under all leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. Subsequent to the end of the related comment period, the FASB made several amendments to the Exposure Draft, including (i) revising the definition of the “lease term” to include the non-cancelable lease term plus only those option periods for which there is significant economic incentive for the lessee to extend or not terminate the lease; (ii) redefining the initial lease liability to be recorded on the Company’s balance sheet to contemplate only those variable lease payments that are in substance “fixed”; and (iii) developing a principle to determine whether lease expense will be recognized on a straight-line or accelerated basis, which considers the nature of the underlying leased asset. The FASB continues to deliberate these and other lease-related matters and currently plans to issue a revised exposure draft for comment in the first half of 2013. If effective as currently planned, this proposed standard will likely have a significant impact on the Company’s consolidated financial statements. However, as the standard-setting process is still ongoing, the Company is unable at this time to determine the impact this proposed change in accounting will have on its consolidated financial statements.
5.
Inventories
Inventories consist of the following:
 
 
 
December 29,
2012
 
March 31,
2012
 
December 31,
2011
 
 
(millions)
Raw materials
 
$
4.5

 
$
5.1

 
$
6.8

Work-in-process
 
2.1

 
1.1

 
0.8

Finished goods
 
974.5

 
835.4

 
887.1

Total inventories
 
$
981.1

 
$
841.6

 
$
894.7


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6.
Property and Equipment
Property and equipment, net, consists of the following:
 
 
 
December 29,
2012
 
March 31,
2012
 
 
(millions)
Land and improvements
 
$
9.9

 
$
9.9

Buildings and improvements
 
114.5

 
115.9

Furniture and fixtures
 
615.6

 
561.8

Machinery and equipment
 
182.4

 
157.4

Capitalized software
 
245.7

 
213.6

Leasehold improvements
 
962.2

 
915.0

Construction in progress
 
108.7

 
84.9

 
 
2,239.0

 
2,058.5

Less: accumulated depreciation
 
(1,312.6
)
 
(1,174.4
)
Property and equipment, net
 
$
926.4

 
$
884.1

7.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
 
December 29,
2012
 
March 31,
2012
 
 
(millions)
Accrued operating expenses
 
$
189.5

 
$
175.7

Accrued payroll and benefits
 
158.3

 
227.7

Accrued inventory
 
151.5

 
108.0

Accrued capital expenditures
 
56.5

 
45.4

Deferred income
 
43.9

 
50.3

Other taxes payable
 
65.8

 
47.1

Other accrued expenses and current liabilities
 
16.5

 
39.5

Total accrued expenses and other current liabilities
 
$
682.0

 
$
693.7

8.
Impairments of Assets
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be fully recoverable. In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that the estimated future undiscounted net cash flows attributable to the asset are less than its carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value.
During the nine months ended December 29, 2012, the Company recorded non-cash impairment charges of $12.4 million, primarily to reduce the carrying value of certain long-lived assets related to its 14 global freestanding retail Rugby stores to their estimated fair values in connection with the expected closure of all of such stores by the end of Fiscal 2013.
During the nine months ended December 31, 2011, the Company recorded non-cash impairment charges of $2.2 million, primarily to reduce the carrying value of the long-lived assets of certain underperforming European retail stores to their estimated fair values.

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9.
Restructuring
The Company has recorded restructuring liabilities in recent years relating to various business growth and cost-savings initiatives. A description of the nature of significant non-acquisition-related restructuring activities and related costs is presented below.
Fiscal 2013 Restructuring
Rugby Closure Plan
During the third quarter of Fiscal 2013, the Company initiated a plan to discontinue our Rugby brand operations (the "Rugby Closure Plan" or the "Plan"). This decision was primarily based on the results of an analysis of the brand concept including an opportunity to reallocate resources related to these operations to support other high growth business opportunities and initiatives. The Rugby Closure Plan will result in the closure of all of the Company’s 14 global freestanding retail Rugby stores (certain of which will be converted to other Ralph Lauren brand concepts) and its related domestic retail e-commerce site, located at Rugby.com, expected to occur by the end of Fiscal 2013. The Rugby Closure Plan also includes a related reduction in workforce of approximately 190 employees.
In connection with the Rugby Closure Plan, during the third quarter of Fiscal 2013, the Company recorded restructuring charges of $1.6 million related to employee severance and benefit costs, which are largely expected to be paid by the end of Fiscal 2013. The Company expects to record additional restructuring costs related to the Plan of approximately $10 million during the fourth quarter of Fiscal 2013, primarily related to lease termination and store closing costs.
Other Restructuring Charges
In addition to the restructuring charges incurred in connection with the Rugby Closure Plan as discussed above, the Company recorded $1.8 million of other net restructuring charges during the nine months ended December 29, 2012, which included $3.0 million of severance and lease termination costs associated with the suspension of the Company's operations in Argentina and $1.4 million of severance costs primarily associated with the Company's corporate operations, partially offset by $2.6 million of reversals of reserves deemed no longer necessary in connection with the Company's Fiscal 2012 restructuring plan in the Asia-Pacific region, discussed below.
Fiscal 2012 Restructuring
During the nine months ended December 31, 2011, the Company recognized net restructuring charges of $2.3 million principally related to costs associated with the closure of certain retail stores and concession shops in connection with the Company's restructuring plan in the Asia-Pacific region.

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10.
Income Taxes
Uncertain Income Tax Benefits
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for the three-month and nine-month periods ended December 29, 2012 and December 31, 2011 is presented below:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Unrecognized tax benefits beginning balance
 
$
129.5

 
$
124.8

 
$
129.0

 
$
125.0

Additions related to current period tax positions
 
0.7

 
0.7

 
2.3

 
2.6

Additions related to prior period tax positions
 
7.5

 
3.1

 
9.1

 
3.3

Reductions related to prior period tax positions
 
(23.7
)
 
(0.3
)
 
(25.2
)
 
(1.0
)
Reductions related to settlements with taxing authorities
 
(10.4
)
 
—

 
(10.4
)
 
—

Additions (reductions) related to foreign currency translation
 
1.1

 
(2.3
)
 
(0.1
)
 
(3.9
)
Unrecognized tax benefits ending balance
 
$
104.7

 
$
126.0

 
$
104.7

 
$
126.0

 
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for the three-month and nine-month periods ended December 29, 2012 and December 31, 2011 is presented below:

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Accrued interest and penalties beginning balance
 
$
57.0

  
$
35.4

 
$
39.0

  
$
31.4

Net additions charged to expense
 
1.6

 
1.8

 
21.6

(a) 
5.9

Reductions related to prior period tax positions
 
(7.2
)
  
—

 
(9.3
)
 
—

Reductions related to settlements with taxing authorities
 
(1.2
)
 
—

 
(1.2
)
 
—

Additions (reductions) related to foreign currency translation
 
0.7

  
(0.4
)
 
0.8

  
(0.5
)
Accrued interest and penalties ending balance
 
$
50.9

  
$
36.8

 
$
50.9

  
$
36.8

 
(a) 
Includes a reserve of $16.8 million for an interest assessment on a prior year withholding tax. No underlying tax exposure exists. The interest assessed was not material to the Company’s consolidated financial statements in any prior or current fiscal period, and is not expected to be material for the full Fiscal 2013.
The total amount of unrecognized tax benefits, including interest and penalties, was $155.6 million as of December 29, 2012 and $168.0 million as of March 31, 2012, and is included within non-current liability for unrecognized tax benefits in the consolidated balance sheets. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $118.3 million as of December 29, 2012.
Future Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing 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 those events could cause the Company’s current estimate to change materially in the future.

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During the third quarter of Fiscal 2013, the Company reached a settlement agreement with respect to a tax examination for the taxable years ended March 29, 2008 through April 3, 2010. In connection with this agreement, the Company recognized a tax benefit of $15.4 million during the third quarter of Fiscal 2013. The Company's unrecognized tax benefits declined by approximately $33.7 million, excluding interest and penalties, as a result of this settlement during the third quarter of Fiscal 2013.
The Company files tax returns in the U.S. federal and various state, local and foreign jurisdictions. With few exceptions for those tax returns, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2004.
11.
Debt
Euro Debt
As of December 29, 2012, the Company had outstanding €209.2 million principal amount of 4.5% notes due October 4, 2013 (the “Euro Debt”). The Company has the option to redeem all of the outstanding Euro Debt at any time at a redemption price equal to the principal amount plus a premium. The Company also has the option to redeem all of the outstanding Euro Debt at any time at par plus accrued interest in the event of certain developments involving U.S. tax law. Partial redemption of the Euro Debt is not permitted in either instance. In the event of a change of control of the Company, each holder of the Euro Debt has the option to require the Company to redeem the Euro Debt at its principal amount plus accrued interest. The indenture governing the Euro Debt (the “Indenture”) contains certain limited covenants that restrict the Company’s ability, subject to specified exceptions, to incur liens or enter into a sale and leaseback transaction for any principal property. The Indenture does not contain any financial covenants.
As of December 29, 2012, the carrying value of the Euro Debt was $274.1 million classified as current portion of long-term debt on the Company's consolidated balance sheets, compared to $274.4 million as of March 31, 2012 classified as long-term debt.
Revolving Credit Facilities
Global Credit Facility
The Company has a credit facility that provides for a $500 million senior unsecured revolving line of credit through March 2016, also used to support the issuance of letters of credit (the “Global Credit Facility”). Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and other currencies, including Euros, Hong Kong Dollars and Japanese Yen. The Company has the ability to expand its borrowing availability to $750 million, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility.
As of December 29, 2012, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $13.9 million of outstanding letters of credit.
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 investments. The Global Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the “leverage ratio”) of no greater than 3.75 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding plus 8 times consolidated rent expense for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense and (iv) consolidated rent expense. As of December 29, 2012, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company’s Global Credit Facility.

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Table of Contents

Pan-Asia Credit Facilities
During Fiscal 2013, certain of the Company's subsidiaries in Asia entered into uncommitted credit facilities with regional branches of JPMorgan Chase (the “Banks”) in China, Malaysia, South Korea and Taiwan (the “Pan-Asia Credit Facilities”). These credit facilities will be used to fund general working capital and corporate needs of the Company's operations in the respective regions. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the Company and are determined at the sole discretion of the Banks, subject to availability of the Banks' funds and satisfaction of certain regulatory requirements. The Pan-Asia Credit Facilities do not contain any financial covenants.
The key terms of the Pan-Asia Credit Facilities are as follows:
•
Chinese Credit Facility - During the first quarter of Fiscal 2013, Ralph Lauren Trading (Shanghai) Co., Ltd. entered into a new facility that provides for a revolving line of credit of up to 100 million Chinese Renminbi (approximately $16 million) through April 10, 2013. The Chinese Credit Facility may also be used to support bank guarantees. Borrowings bear interest at either (i) at least 95% of the short-term interest rate published by the People's Bank of China or (ii) a rate based on the Bank's cost of funds, as determined by JPMorgan Chase Bank (China) Company Limited, Shanghai Branch at its discretion based on prevailing market conditions.
•
Malaysia Credit Facility - During the third quarter of Fiscal 2013, Ralph Lauren (Malaysia) Sdn Bhd entered into a revolving line of credit of up to 15.9 million Malaysian Ringgit (approximately $5 million) through September 13, 2013. Borrowings bear interest at an annual rate based on JPMorgan Chase Bank Berhad's cost of funds, as determined at its discretion based on prevailing market conditions, plus 1.125%.
•
South Korea Credit Facility - During the third quarter of Fiscal 2013, Ralph Lauren (Korea) Ltd. entered into a revolving line of credit of up to 11.3 billion South Korean Won (approximately $11 million) through October 31, 2013. Borrowings bear interest at an annual rate based on (i) at least the 91-day South Korea Certificate of Deposit rate plus 1.125% or (ii) a rate determined by JPMorgan Chase Bank, N.A., Seoul Branch based on its cost of funds, as determined at its discretion based on prevailing market conditions.
•
Taiwan Credit Facility - During the third quarter of Fiscal 2013, Ralph Lauren (Hong Kong) Retail Company Limited, Taiwan Branch entered into a revolving line of credit of up to 59.0 million New Taiwan Dollars (approximately $2 million) through October 23, 2013. Borrowings bear interest at an annual rate based on JPMorgan Chase Bank, N.A., Taipei Branch's cost of funds, as determined at its discretion based on prevailing market conditions, plus 1.125%.
As of December 29, 2012, there were no borrowings outstanding under any of the Pan-Asia Credit Facilities.
Refer to Note 14 of the Fiscal 2012 10-K for additional disclosure of the terms and conditions of the Company’s debt and credit facilities.
12.
Fair Value Measurements
US GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable).
The three levels are defined as follows:
•
Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 — inputs to the valuation methodology based on quoted prices for similar assets and liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.
•
Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.

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Table of Contents

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table summarizes the Company’s financial assets and liabilities that are measured and recorded at fair value on a recurring basis:
 
 
 
December 29,
2012
 
March 31,
2012
 
 
(millions)
Financial assets recorded at fair value(a):
 
 
 
 
Government bonds — U.S.
 
$
22.9

 
$
59.4

Government bonds — non-U.S.
 
113.0

 
96.0

Corporate bonds — non-U.S.
 
87.8

 
99.0

Variable rate municipal securities — U.S.
 
18.5

 
69.2

Auction rate securities
 
2.3

 
2.3

Other securities
 
—

 
0.5

Derivative financial instruments
 
15.0

 
32.5

Total
 
$
259.5

 
$
358.9

Financial liabilities recorded at fair value(b):
 
 
 
 
Derivative financial instruments
 
$
8.2

 
$
2.6

Total
 
$
8.2

 
$
2.6

 
(a) 
Based on Level 1 measurements, except for auction rate securities and derivative financial instruments, which are based on Level 2 measurements.
(b) 
Based on Level 2 measurements.
Certain of the Company’s government bonds, and all of its corporate bonds and variable rate municipal securities (“VRMS”) are classified as available-for-sale securities and are recorded at fair value in the Company’s consolidated balance sheets based upon quoted prices in active markets.
The Company’s auction rate securities are classified as available-for-sale securities and are recorded at fair value in the Company’s consolidated balance sheets. Third-party pricing institutions may value auction rate securities at par, which may not necessarily reflect prices that would be obtained in the current market. When quoted market prices are unobservable, fair value is estimated based on a number of known factors and external pricing data, including known maturity dates, the coupon rate based upon the most recent reset market clearing rate, the price/yield representing the average rate of recent successfully traded securities and the total principal balance of each security.
The Company’s derivative financial instruments are recorded at fair value in the Company’s consolidated balance sheets and are valued using a pricing model, primarily based on market observable external inputs including forward and spot rates for foreign currencies, which considers the impact of the Company’s own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments.
The Company’s cash and cash equivalents, restricted cash and held-to-maturity investments are recorded at carrying value, which approximates fair value based on Level 1 measurements.
The Company’s Euro Debt is recorded at carrying value in the Company’s consolidated balance sheets, adjusted for foreign currency fluctuations, any unamortized discount, and changes in the fair value of any outstanding interest rate swaps and unamortized gains (losses) incurred upon the termination of such swaps (see Note 13), which may differ from its fair value. The fair value of the Euro Debt is estimated based on external pricing data, including available quoted market prices of the Euro Debt and of comparable European debt instruments with similar interest rates, credit ratings and trading frequency, among other factors. The following table summarizes the carrying value and the estimated fair value of the Company’s Euro Debt:


19
Table of Contents

 
 
December 29, 2012
 
March 31, 2012
 
 
Carrying
Value
 
Fair
Value(a)
 
Carrying
Value
 
Fair
Value(a)
 
 
(millions)
Euro Debt
 
$
274.1

 
$
284.0

 
$
274.4

 
$
289.4

 
 
(a) Based on Level 2 measurements.
Unrealized gains or losses on the Company’s Euro Debt do not result in the realization or expenditure of cash, unless the debt is retired prior to its maturity.
Non-financial Assets and Liabilities
The Company’s non-financial instruments, which primarily consist of goodwill, other intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering external market participant assumptions.
During the three-month and nine-month periods ended December 29, 2012 and December 31, 2011, the Company recorded non-cash impairment charges to reduce the carrying value of certain long-lived assets to their fair value. These charges related to assets of certain underperforming retail stores that were planned for closure, as well as certain stores to be closed in connection with the Rugby Closure Plan. The fair values of these assets were determined based on Level 3 measurements. Inputs to these fair value measurements included estimates of the amount and the timing of the stores' net future discounted cash flows based on historical experience, current trends and market conditions. The following table summarizes the impairment charges recorded during the three-month and nine-month periods ended December 29, 2012 and December 31, 2011:
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Aggregate carrying value of long-lived assets written down to fair value
 
$
11.4

 
$
2.0

 
$
12.4

 
$
3.2

Impairment charge
 
(11.4
)
(a) 
(2.0
)
 
(12.4
)
(a) 
(2.2
)
 
(a) Includes impairment charges recorded in connection with the Rugby Closure Plan. See Note 8 for additional information.
13.
Financial Instruments
Derivative Financial Instruments
The Company is primarily exposed to changes in foreign currency exchange rates relating to certain anticipated cash flows from its international operations and potential declines in the value of reported net assets of certain of its foreign operations, as well as changes in the fair value of its fixed-rate debt relating to changes in interest rates. Consequently, the Company periodically uses derivative financial instruments to manage such risks. The Company does not enter into derivative transactions for speculative or trading purposes.

20
Table of Contents

The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in the consolidated balance sheets as of December 29, 2012 and March 31, 2012:
 
 
 
Notional Amounts
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Instrument(a)
 
December 29, 2012
 
March 31, 2012
 
December 29, 2012
 
March 31, 2012
 
December 29, 2012
 
March 31, 2012
 
 
 
 
 
 
 
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 — Inventory purchases
 
$
340.3

 
$
482.2

 
(c) 
 
$
11.8

 
PP
 
$
26.6

 
AE
 
$
(4.6
)
 
AE
 
$
(1.4
)
 
FC — I/C royalty payments
 
47.6

 
70.0

 
PP
 
1.4

 
PP
 
4.8

 
AE
 
(2.0
)
 
—
 
—

  
FC — Interest payments
 
—

 
12.6

 
—
 
—

 
—
 
—

 
—
 
—

 
AE
 
—

(d) 
FC — Other
 
14.1

 
8.3

 
PP
 
0.5

 
—
 
—

 
AE
 
(0.1
)
 
AE
 
(0.3
)
 
NI — Euro Debt
 
274.1

 
274.4

 
—
 
—

 
—
 
—

 
STD
 
(284.0
)
(e)  
LTD
 
(289.4
)
(e) 
Total Designated Hedges
 
$
676.1

 
$
847.5

 
 
 
$
13.7

 
 
 
$
31.4

 
 
 
$
(290.7
)
 
 
 
$
(291.1
)
 
Undesignated Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Other(f)
 
$
142.2

 
$
158.1

 
(g) 
 
$
1.3

 
(h) 
 
$
1.1

 
(i) 
 
$
(1.5
)
 
(j) 
 
$
(0.9
)
 
Total Hedges
 
$
818.3

 
$
1,005.6

 
 
 
$
15.0

 
 
 
$
32.5

 
 
 
$
(292.2
)
 
 
 
$
(292.0
)
 
 
(a) 
FC = Forward exchange contracts for the sale or purchase of foreign currencies; NI = Net Investment Hedge; Euro Debt = Euro-denominated 4.5% notes due October 4, 2013.
(b) 
PP = Prepaid expenses and other; OA = Other assets; AE = Accrued expenses and other; ONCL = Other non-current liabilities; STD = Current portion of long-term debt; LTD = Long-term debt.
(c) 
$11.3 million included within PP and $0.5 million included within OA.
(d) 
The fair value of the interest payment-related derivative instrument was less than $0.1 million as of March 31, 2012.
(e) 
The Company’s Euro Debt is reported at carrying value in the Company’s consolidated balance sheets. The carrying value of the Euro Debt was $274.1 million as of December 29, 2012 and $274.4 million as of March 31, 2012.
(f) 
Primarily related to undesignated hedges of foreign currency-denominated revenues, intercompany loans, and other net operational exposures.
(g) 
$0.8 million included within PP and $0.5 million included within OA.
(h) 
$0.7 million included within PP and $0.4 million included within OA.
(i) 
$1.1 million included within AE and $0.4 million included within ONCL.
(j) 
$0.8 million included within AE and $0.1 million included within ONCL.
The following tables summarize the impact of the Company’s derivative instruments on its unaudited interim consolidated financial statements for the three-month and nine-month periods ended December 29, 2012 and December 31, 2011:
 
 
 
Gains (Losses) Recognized in OCI(b)
 
 
Three Months Ended
 
Nine Months Ended
Derivative Instrument(a)
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
 
 
(millions)
 
 
Designated Cash Flow Hedges:
 
 
 
 
 
 
 
 
FC — Inventory purchases
 
$
(10.9
)
 
$
11.3

 
$
(14.2
)
 
$
35.1

FC — I/C royalty payments
 
0.4

 
1.3

 
(5.5
)
 
5.4

FC — Interest payments
 
0.4

 
(0.1
)
 
—

 
(0.5
)
FC — Other
 
0.5

 
—

 
1.1

 
(1.0
)
 
 
$
(9.6
)
 
$
12.5

 
$
(18.6
)
 
$
39.0

Designated Hedge of Net Investment:
 
 
 
 
 
 
 
 
Euro Debt
 
$
(7.4
)
 
$
8.9

 
$
2.7

 
$
24.3

Total Designated Hedges
 
$
(17.0
)
 
$
21.4

 
$
(15.9
)
 
$
63.3



21
Table of Contents

 
 
Gains (Losses) Reclassified from AOCI(b) to Earnings
 
Location of Gains (Losses) Reclassified from AOCI(b) to Earnings
 
 
Three Months Ended
 
Nine Months Ended
 
Derivative Instrument(a)
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
 
(millions)
 
 
Designated Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
FC — Inventory purchases
 
$
11.4

 
$
(3.2
)
 
$
22.2

 
$
(2.3
)
 
Cost of goods sold
FC — I/C royalty payments
 
0.6

 
(0.4
)
 
3.1

 
(3.9
)
 
Foreign currency gains (losses)
FC — Interest payments
 
(0.2
)
 
(0.3
)
 
(0.3
)
 
(0.7
)
 
Foreign currency gains (losses)
FC — Other
 
—

 
(0.3
)
 
(0.5
)
 
0.6

 
Foreign currency gains (losses)
Total Designated Hedges
 
$
11.8

 
$
(4.2
)
 
$
24.5

 
$
(6.3
)
 
 

 
 
Gains (Losses) Recognized in Earnings
 
Location of Gains (Losses)
Recognized in Earnings
 
 
Three Months Ended
 
Nine Months Ended
 
Derivative Instrument(a)
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
 
(millions)
 
 
Undesignated Hedges:
 
 
 
 
 
 
 
 
 
 
FC — Other(c)
 
$
0.9

 
$
(0.7
)
 
$
(4.0
)
 
$
1.9

 
Foreign currency gains (losses)
Total Undesignated Hedges
 
$
0.9

 
$
(0.7
)
 
$
(4.0
)
 
$
1.9

 
 
 
(a) 
FC = Forward exchange contracts for the sale or purchase of foreign currencies; Euro Debt = Euro-denominated 4.5% notes due October 4, 2013.
(b) 
AOCI, including the respective fiscal period’s OCI, is classified as a component of total equity.
(c) 
Primarily related to undesignated hedges of foreign currency-denominated revenues, intercompany loans, and other net operational exposures.
Over the next twelve months, it is expected that approximately $13 million of net gains deferred in AOCI related to derivative financial instruments as of December 29, 2012 will be recognized in earnings. No material gains or losses relating to ineffective hedges were recognized during any of the fiscal periods presented.
The following is a summary of the Company’s risk management strategies and the effect of those strategies on the consolidated financial statements.
Foreign Currency Risk Management
Forward Foreign Currency Exchange Contracts
The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risk from exchange rate fluctuations on inventory purchases, intercompany royalty payments made by certain of its international operations, intercompany contributions to fund certain marketing efforts of its international operations, interest payments made in connection with outstanding debt and other foreign currency-denominated operational cash flows. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the Hong Kong Dollar, the South Korean Won, the Swiss Franc and the British Pound Sterling, the Company hedges a portion of its foreign currency exposures anticipated over the ensuing twelve-month to two-year periods. In doing so, the Company uses foreign currency exchange forward contracts that generally have maturities of three months to two years to provide continuing coverage throughout the hedging period.
Hedge of a Net Investment in Certain European Subsidiaries
The Company designates the entire principal amount of its outstanding Euro Debt as a hedge of its net investment in certain of its European subsidiaries. To the extent this hedge remains effective, changes in the carrying value of the Euro Debt resulting from fluctuations in the Euro exchange rate will continue to be reported in equity as a component of AOCI.

22
Table of Contents

Interest Rate Risk Management
Interest Rate Swap Contracts
During the first quarter of Fiscal 2011, the Company entered into a fixed-to-floating interest rate swap with an aggregate notional value of €209.2 million, which was designated as a fair value hedge to mitigate its exposure to changes in the fair value of its Euro Debt due to changes in the benchmark interest rate. The interest rate swap was executed to swap the 4.5% fixed interest rate on the Company’s Euro Debt for a variable interest rate. On April 11, 2011, the interest rate swap agreement was terminated by the Company at a loss of $7.6 million. This loss was recorded as an adjustment to the carrying value of the Company’s Euro Debt and is being recognized within interest expense over the remaining term of the debt, through October 4, 2013. During each of the three-month and nine-month periods ended December 29, 2012 and December 31, 2011, $0.8 million and $2.3 million, respectively, of this loss was recognized as interest expense within the Company’s consolidated statements of operations.
See Note 3 for further discussion of the Company’s accounting policies relating to its derivative financial instruments.
Investments
The following table summarizes the Company’s short-term and non-current investments recorded in the consolidated balance sheets as of December 29, 2012 and March 31, 2012:
 
 
 
December 29, 2012
 
March 31, 2012
Type of Investment
 
Short-term
< 1 year
 
Non-current
1 - 3 years
 
Total
 
Short-term
< 1 year
 
Non-current
1 - 3 years
 
Total
 
 
 
 
 
 
(millions)
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Government bonds — U.S.
 
$
0.6

 
$
—

 
$
0.6

 
$
3.2

 
$
—

 
$
3.2

Total held-to-maturity investments
 
$
0.6

 
$
—

 
$
0.6

 
$
3.2

 
$
—

 
$
3.2

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
Government bonds — U.S.
 
$
13.2

 
$
9.7

 
$
22.9

 
$
52.1

 
$
7.3

 
$
59.4

Government bonds — non-U.S.
 
83.1

 
29.9

 
113.0

 
40.4

 
55.6

 
96.0

Corporate bonds — non-U.S.
 
40.7

 
47.1

 
87.8

 
64.8

 
34.2

 
99.0

Variable rate municipal securities — U.S.
 
18.5

 
—

 
18.5

 
69.2

 
—

 
69.2

Auction rate securities
 
—

 
2.3

 
2.3

 
—

 
2.3

 
2.3

Other securities
 
—

 
—

 
—

 
—

 
0.5

 
0.5

Total available-for-sale investments
 
$
155.5

 
$
89.0

 
$
244.5

 
$
226.5

 
$
99.9

 
$
326.4

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
157.1

 
$
—

 
$
157.1

 
$
286.0

 
$
—

 
$
286.0

Total Investments
 
$
313.2

 
$
89.0

 
$
402.2

 
$
515.7

 
$
99.9

 
$
615.6

Held-to-maturity investments consist of debt securities that the Company has the intent and ability to retain until maturity. These securities are recorded at cost, adjusted for the amortization of premiums and discounts, which approximates fair value.
Available-for-sale investments primarily consist of government and corporate bonds, VRMS and auction rate securities. The Company’s government and corporate bonds are diversified across a wide range of high-credit quality U.S. and non-U.S. issuers. The Company does not hold any investments in sovereign debt securities issued by Greece, Ireland, Portugal, Spain or Italy. VRMS investments represent long-term municipal bonds with interest rates that reset at pre-determined short-term intervals, and can typically be put to the issuer and redeemed for cash upon demand, or shortly thereafter. Auction rate securities also have characteristics similar to short-term investments. However, the Company has classified these securities as non-current investments in its consolidated balance sheets as current market conditions call into question its ability to redeem these investments for cash within the next twelve months.
No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded in any of the fiscal periods presented.
See Note 3 to the Company’s Fiscal 2012 10-K for further discussion of the Company’s accounting policies relating to its investments.

23
Table of Contents

14.
Commitments and Contingencies
Wathne Imports Litigation
On August 19, 2005, Wathne Imports, Ltd. (“Wathne”), the Company’s then domestic licensee for luggage and handbags, filed a complaint in the U.S. District Court in the Southern District of New York against the Company and Mr. Ralph Lauren, its Chairman and Chief Executive Officer, asserting, among other things, federal trademark law violations, breach of contract, breach of obligations of good faith and fair dealing, fraud and negligent misrepresentation. The complaint sought, among other relief, injunctive relief, compensatory damages in excess of $250 million and punitive damages of not less than $750 million. On September 13, 2005, Wathne withdrew this complaint from the U.S. District Court and filed a complaint in the Supreme Court of the State of New York, New York County, making substantially the same allegations and claims (excluding the federal trademark claims), and seeking similar relief. On February 1, 2006, the Court granted the Company’s motion to dismiss all of the causes of action, including the cause of action against Mr. Lauren, except for breach of contract related claims, and denied Wathne’s motion for a preliminary injunction. Following some discovery, the Company moved for summary judgment on the remaining claims. Wathne cross-moved for partial summary judgment. In an April 11, 2008 Decision and Order, the Court granted the Company’s summary judgment motion to dismiss most of the claims against the Company, and denied Wathne’s cross-motion for summary judgment. Wathne appealed the dismissal of its claims to the Appellate Division of the Supreme Court. Following a hearing on May 19, 2009, the Appellate Division issued a Decision and Order on June 9, 2009 which, in large part, affirmed the lower Court’s ruling. We subsequently made a motion to exclude Wathne’s proposed expert’s damages report and, on January 23, 2012, the Court granted the Company’s motion. Wathne appealed the ruling to the Appellate Division and, on October 18, 2012, the Appellate Division reversed the order of the lower Court. At this time, a trial date has not yet been scheduled. The Company intends to continue to contest the claims in this lawsuit vigorously. Management does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company’s consolidated financial statements.
Other Matters
The Company is otherwise 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, and employee relations. The Company believes that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on its financial statements. However, the Company’s assessment of the current litigation or other legal claims could 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.
15.
Equity
Summary of Changes in Equity
 
 
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Balance at beginning of period
 
$
3,652.5

 
$
3,304.7

Comprehensive income
 
587.0

 
577.5

Cash dividends declared
 
(109.3
)
 
(55.4
)
Repurchases of common stock
 
(496.7
)
 
(419.4
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
136.2

 
122.3

Balance at end of period
 
$
3,769.7

 
$
3,529.7


24
Table of Contents

Class B Common Stock Conversion    
During the third quarter of Fiscal 2013, the Lauren Family, L.L.C., a limited liability company managed by the children of Mr. Ralph Lauren, the Company's Chairman and Chief Executive Officer, converted 950,000 shares of Class B common stock into an equal number of shares of Class A common stock pursuant to the terms of the security, which were subsequently sold on the open market as part of a predetermined, systematic trading plan. These transactions resulted in reclassifications within equity, and had no effect on the Company's consolidated balance sheets.
Common Stock Repurchase Program
On August 9, 2012, the Company’s Board of Directors approved an expansion of the Company’s existing stock repurchase program that allows it to repurchase up to an additional $500 million of Class A common stock. Repurchases of shares of Class A common stock are subject to overall business and market conditions.
During the nine months ended December 29, 2012, 3.0 million shares of Class A common stock were repurchased by the Company at a cost of $450.0 million under its repurchase program. The remaining availability under the Company’s common stock repurchase program was approximately $627 million as of December 29, 2012. In addition, 0.4 million shares of Class A common stock at a cost of $46.7 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company’s 1997 Long-Term Stock Incentive Plan, as amended (the “1997 Incentive Plan”) and its 2010 Long-Term Stock Incentive Plan (the “2010 Incentive Plan”).
During the nine months ended December 31, 2011, 3.2 million shares of Class A common stock were repurchased by the Company at a cost of $395.1 million under its repurchase program. In addition, 0.2 million shares of Class A common stock at a cost of $24.3 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the 1997 Incentive Plan and the 2010 Incentive Plan.
Repurchased and surrendered shares are accounted for as treasury stock at cost and held in treasury for future use.
Dividends
Since 2003, the Company has maintained a regular quarterly cash dividend program on its common stock. On May 21, 2012, the Company’s Board of Directors approved an increase to the Company’s quarterly cash dividend on its common stock from $0.20 per share to $0.40 per share. The third quarter Fiscal 2013 dividend of $0.40 per share was declared on December 7, 2012, was payable to stockholders of record at the close of business on December 17, 2012, and was paid on December 28, 2012. Dividends paid amounted to $127.8 million during the nine months ended December 29, 2012 and $55.8 million during the nine months ended December 31, 2011.
16.
Stock-based Compensation
Long-term Stock Incentive Plans
On August 5, 2010, the Company’s stockholders approved the 2010 Incentive Plan, which replaced the Company’s 1997 Incentive Plan. The 2010 Incentive Plan provides for up to 3.0 million of new shares authorized for issuance to participants, in addition to the shares that remained available for issuance under the 1997 Incentive Plan as of August 5, 2010 that are not subject to outstanding awards under the 1997 Incentive Plan. In addition, any outstanding awards under the 1997 Incentive Plan that expire, are forfeited, or are surrendered to the Company in satisfaction of taxes, will be transferred to the 2010 Incentive Plan and be available for issuance. Any new grants are being issued under the 2010 Incentive Plan. However, awards that were outstanding as of August 5, 2010 continue to remain subject to the terms of the 1997 Incentive Plan.
Under both the 2010 Incentive Plan and the 1997 Incentive Plan (the “Plans”), there are limits as to the number of shares available for certain awards and to any one participant. Equity awards that may be made under the Plans include, but are not limited to (a) stock options, (b) restricted stock and (c) restricted stock units (“RSUs”).

25
Table of Contents

Impact on Results
A summary of the total compensation expense recorded within SG&A expenses and the associated income tax benefits recognized related to stock-based compensation arrangements is as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Compensation expense
 
$
22.3

 
$
21.2

 
$
65.1

 
$
55.2

Income tax benefit
 
$
(7.6
)
 
$
(7.3
)
 
$
(21.9
)
 
$
(19.2
)
The Company issues its annual grant of stock-based compensation awards in the second quarter of its fiscal year. Due to the timing of the annual grant, stock-based compensation expense recognized during the three-month and nine-month periods ended December 29, 2012 is not indicative of the level of compensation expense expected to be incurred for the full Fiscal 2013.
Stock Options
Stock options are granted to employees and non-employee directors with exercise prices equal to the fair market value of the Company’s Class A common stock on the date of grant. Generally, options become exercisable ratably (graded-vesting schedule) over a three-year vesting period. Stock options generally expire seven years from the date of grant. The Company recognizes compensation expense for share-based awards that have graded vesting and no performance conditions on an accelerated basis.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions. The Company develops its assumptions by analyzing the historical exercise behavior of employees and nonemployee directors. The Company’s weighted average assumptions used to estimate the fair value of stock options granted during the nine months ended December 29, 2012 and December 31, 2011 were as follows:
 
 
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
Expected term (years)
 
4.6

 
4.7

Expected volatility
 
44.4
%
 
44.7
%
Expected dividend yield
 
1.05
%
 
0.73
%
Risk-free interest rate
 
0.6
%
 
1.3
%
Weighted-average option grant date fair value
 
$47.90

 
$49.06

A summary of stock option activity under all plans during the nine months ended December 29, 2012 is as follows:
 
 
 
Number of
Shares
 
 
(thousands)
Options outstanding at March 31, 2012
 
3,178

Granted
 
625

Exercised
 
(613
)
Cancelled/Forfeited
 
(49
)
Options outstanding at December 29, 2012
 
3,141


26
Table of Contents

Restricted Stock and Service-based RSUs
The Company grants restricted shares of Class A common stock and service-based RSUs to certain of its senior executives and non-employee directors. Restricted stock shares granted to non-employee directors vest over a three-year period of time. Service-based RSUs granted to executives generally vest over a three to five-year period of time, subject to the executive’s continuing employment. The fair values of restricted stock shares and service-based RSUs are based on the fair value of the Company’s Class A common stock on the date of grant, as adjusted to reflect the absence of dividends for those restricted securities that are not entitled to dividend equivalents. The weighted-average grant date fair values of restricted stock shares and service-based RSUs granted during the nine months ended December 29, 2012 were $173.33 and $150.17, respectively. The weighted-average grant date fair value of service-based RSUs granted during the nine months ended December 31, 2011 was $132.94. No restricted stock shares were granted during the nine months ended December 31, 2011.
A summary of restricted stock and service-based RSU activity during the nine months ended December 29, 2012 is as follows:
 
 
 
Restricted
Stock
 
Service-
based RSUs
 
 
Number of
Shares
 
Number of
Shares
 
 
(thousands)
Nonvested at March 31, 2012
 
8

 
235

Granted
 
2

 
9

Vested
 
(5
)
 
(105
)
Forfeited
 
—

 
—

Nonvested at December 29, 2012
 
5

 
139

Performance-based RSUs
The Company grants performance-based RSUs to senior executives and other key executives, as well as certain of its other employees. Performance-based RSUs generally vest (a) upon the completion of a three-year period of time (cliff vesting), subject to the employee’s continuing employment and the Company’s achievement of certain performance goals over the three-year period or (b) ratably, over a three-year period of time (graded vesting), subject to the employee’s continuing employment during the applicable vesting period and the achievement by the Company of certain performance goals in the initial year of the three-year vesting period. In addition, beginning in the second quarter of Fiscal 2013, the Company granted a new type of performance-based RSU subject to an additional market condition in the form of a total shareholder return (“TSR”) modifier to certain members of senior management, as discussed further below.
Performance-based RSUs — without TSR Modifier
The fair values of the Company’s performance-based RSU awards that do not contain a TSR modifier are based on the fair value of the Company’s Class A common stock on the date of grant, as adjusted to reflect the absence of dividends for those securities that are not entitled to dividend equivalents. The weighted-average grant date fair values of such performance-based RSUs granted during the nine months ended December 29, 2012 and December 31, 2011 were $137.45 and $124.43, respectively. 
A summary of performance-based RSU without TSR Modifier activity during the nine months ended December 29, 2012 is as follows:
 
 
 
Number of
Shares
 
 
(thousands)
Nonvested at March 31, 2012
 
1,302

Granted
 
351

Change due to performance condition achievement
 
164

Vested
 
(754
)
Forfeited
 
(40
)
Nonvested at December 29, 2012
 
1,023


27
Table of Contents

Performance-based RSUs — with TSR Modifier
In July 2012, the Company granted a new type of cliff vesting performance-based RSU award which, in addition to being subject to continuing employment requirements and the Company’s performance goals noted above, is also subject to a market condition in the form of a TSR modifier. The actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of certain performance goals, as well as its TSR relative to the S&P 500 over the related three-year performance period. Depending on the level of achievement, the actual number of shares that vest may range from 0% to 187.5% of the awards originally granted.
The performance goals are established at or near the beginning of the three-year performance period. The number of shares to be earned ranges between 0% (if the specified threshold performance level is not attained) and 150% (if performance meets or exceeds the maximum achievement level) of the awards originally granted. If actual performance exceeds the pre-established threshold, the number of shares earned is calculated based on the relative performance between specified levels of achievement. At the end of the three-year performance period, if the performance condition is achieved at or above threshold, the number of shares earned is further adjusted by a TSR modifier payout percentage, which ranges between 75% and 125%, based on the Company’s TSR level relative to the performance of the S&P 500 index over the respective three-year period.
The Company estimates the fair value of its performance-based RSUs with a TSR modifier on the date of grant using a Monte Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine its expected TSR performance ranking. Expense is only recorded for awards that are expected to vest, net of estimated forfeitures. The assumptions used to estimate the fair value of performance-based RSUs with a TSR modifier granted during the nine months ended December 29, 2012 were as follows:
 
 
 
Nine Months Ended
 
 
December 29,
2012
Expected term (years)
 
3.0

Expected volatility
 
34.0
%
Expected dividend yield
 
1.13
%
Risk-free interest rate
 
0.3
%
Weighted-average grant date fair value
 
$136.16

 
A summary of performance-based RSU with TSR Modifier activity during the nine months ended December 29, 2012 is as follows:

 
 
Number of
Shares
 
 
(thousands)
Nonvested at March 31, 2012
 
—

Granted
 
73

Change due to performance or market conditions achievement
 
—

Vested
 
—

Forfeited
 
—

Nonvested at December 29, 2012
 
73


28
Table of Contents

17.
Segment Information
The Company has three reportable segments based on its business activities and organization: Wholesale, Retail and Licensing. Such segments offer a variety of products through different channels of distribution. The Wholesale segment consists of women’s, men’s and children’s apparel, accessories (including footwear), home furnishings, and related products which are sold to major department stores, specialty stores, golf and pro shops and the Company’s owned, licensed and franchised retail stores in the U.S. and overseas. The Retail segment consists of the Company’s worldwide retail operations, which sell products through its retail stores, its concessions-based shop-within-shops, and its e-commerce websites. The stores, concessions-based shop-within-shops and websites sell products purchased from the Company’s licensees, suppliers and Wholesale segment. The Licensing segment generates revenues from royalties earned on the sale of the Company’s apparel, home and other products internationally and domestically through licensing alliances. The licensing agreements grant the licensees rights to use the Company’s various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods.
The accounting policies of the Company’s segments are consistent with those described in Notes 2 and 3 to the Company’s consolidated financial statements included in the Fiscal 2012 10-K. Sales and transfers between segments are generally recorded at cost and treated as transfers of inventory. All intercompany revenues, including such sales between segments, are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment’s performance is evaluated based upon operating income before restructuring charges and certain other one-time items, such as legal charges, if any. Corporate overhead expenses (exclusive of certain expenses for senior management, overall branding-related expenses and certain other corporate-related expenses) are allocated to the segments based upon specific usage or other allocation methods.
Net revenues and operating income for each of the Company’s segments are as follows:

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Net revenues:
 
 
 
 
 
 
 
 
Wholesale
 
$
733.9

 
$
750.0

 
$
2,342.5

 
$
2,418.5

Retail
 
1,062.0

 
1,006.0

 
2,820.2

 
2,680.8

Licensing
 
50.2

 
49.6

 
138.8

 
137.3

Total net revenues
 
$
1,846.1

 
$
1,805.6

 
$
5,301.5

 
$
5,236.6


 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
 
 
(millions)
Operating income:
 
 
 
 
 
 
 
 
Wholesale(a)
 
$
144.9

 
$
112.6

 
$
531.3

 
$
503.9

Retail(b)
 
201.2

 
193.3

 
537.2

 
510.3

Licensing(c)
 
37.0

 
35.9

 
101.3

 
99.2

 
 
383.1

 
341.8

 
1,169.8

 
1,113.4

Unallocated corporate expenses
 
(76.1
)
 
(70.1
)
 
(221.7
)
 
(208.1
)
Unallocated restructuring charges, net(d)
 
(2.6
)
 
(1.6
)
 
(3.4
)
 
(2.3
)
Total operating income
 
$
304.4

 
$
270.1

 
$
944.7

 
$
903.0