RL-2015.06.27-10Q


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 June 27, 2015
or
o

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 o
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 o
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
o
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No þ
At July 31, 2015, 59,766,590 shares of the registrant's Class A common stock, $.01 par value, and 25,881,276 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 5.
Item 6.
 
 
 
EX-10.1
 
 
EX-12.1
 
 
EX-14.1
 
 
EX-31.1
 
 
EX-31.2
 
 
EX-32.1
 
 
EX-32.2
 
 
EX-101
INSTANCE DOCUMENT
 
EX-101
SCHEMA DOCUMENT
 
EX-101
CALCULATION LINKBASE DOCUMENT
 
EX-101
LABELS LINKBASE DOCUMENT
 
EX-101
PRESENTATION LINKBASE DOCUMENT
 
EX-101
DEFINITION LINKBASE DOCUMENT
 


 
2
 

RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
 
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
(unaudited)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
490

 
$
500

Short-term investments
 
661

 
644

Accounts receivable, net of allowances of $223 million and $251 million
 
390

 
655

Inventories
 
1,270

 
1,042

Income tax receivable
 
69

 
57

Deferred tax assets
 
146

 
145

Prepaid expenses and other current assets
 
278

 
281

Total current assets
 
3,304

 
3,324

Property and equipment, net
 
1,419

 
1,436

Deferred tax assets
 
50

 
45

Goodwill
 
901

 
903

Intangible assets, net
 
260

 
267

Other non-current assets
 
134

 
131

Total assets
 
$
6,068

 
$
6,106

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Short-term debt
 
$
155

 
$
234

Accounts payable
 
207

 
210

Income tax payable
 
35

 
27

Accrued expenses and other current liabilities
 
832

 
715

Total current liabilities
 
1,229

 
1,186

Long-term debt
 
297

 
298

Non-current liability for unrecognized tax benefits
 
102

 
116

Other non-current liabilities
 
633

 
615

Commitments and contingencies (Note 14)
 

 

Total liabilities
 
2,261

 
2,215

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 100.7 million and 100.0 million shares issued; 59.8 million and 60.4 million shares outstanding
 
1

 
1

Class B common stock, par value $.01 per share; 25.9 million shares issued and outstanding
 
—

 
—

Additional paid-in-capital
 
2,170

 
2,117

Retained earnings
 
5,808

 
5,787

Treasury stock, Class A, at cost; 40.9 million and 39.6 million shares
 
(4,018
)
 
(3,849
)
Accumulated other comprehensive loss
 
(154
)
 
(165
)
Total equity
 
3,807

 
3,891

Total liabilities and equity
 
$
6,068

 
$
6,106

See accompanying notes.

 
3
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions, except per share data)
(unaudited)
Net sales
 
$
1,577

 
$
1,668

Licensing revenue
 
41

 
40

Net revenues
 
1,618

 
1,708

Cost of goods sold(a) 
 
(652
)
 
(665
)
Gross profit
 
966

 
1,043

Selling, general, and administrative expenses(a) 
 
(822
)
 
(788
)
Amortization of intangible assets
 
(6
)
 
(6
)
Impairment of assets
 
(8
)
 
(1
)
Restructuring charges
 
(34
)
 
(4
)
Total other operating expenses, net
 
(870
)
 
(799
)
Operating income
 
96

 
244

Foreign currency losses
 
(1
)
 
(3
)
Interest expense
 
(4
)
 
(4
)
Interest and other income, net
 
2

 
1

Equity in losses of equity-method investees
 
(3
)
 
(3
)
Income before provision for income taxes
 
90

 
235

Provision for income taxes
 
(26
)
 
(73
)
Net income
 
$
64

 
$
162

Net income per common share:
 
 
 
 
Basic
 
$
0.74

 
$
1.82

Diluted
 
$
0.73

 
$
1.80

Weighted average common shares outstanding:
 
 
 
 
Basic
 
86.5

 
88.9

Diluted
 
87.5

 
90.2

Dividends declared per share
 
$
0.50

 
$
0.45

(a) Includes total depreciation expense of:
 
$
(68
)
 
$
(63
)

See accompanying notes.


 
4
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
(unaudited)
Net income
 
$
64

 
$
162

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation gains (losses)
 
19

 
(3
)
Net gains (losses) on cash flow hedges
 
(8
)
 
2

Other comprehensive income (loss), net of tax
 
11

 
(1
)
Total comprehensive income
 
$
75

 
$
161


See accompanying notes.


 
5
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
(unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
64

 
$
162

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
74

 
69

Deferred income tax benefit
 
(18
)
 
(3
)
Equity in losses of equity-method investees
 
3

 
3

Non-cash stock-based compensation expense
 
32

 
23

Non-cash impairment of assets
 
8

 
1

Excess tax benefits from stock-based compensation arrangements
 
(6
)
 
(4
)
Other non-cash charges, net
 
1

 
5

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
265

 
230

Inventories
 
(226
)
 
(158
)
Prepaid expenses and other current assets
 
12

 
5

Accounts payable and accrued liabilities
 
114

 
79

Income tax receivables and payables
 
(9
)
 
27

Deferred income
 
(3
)
 
(4
)
Other balance sheet changes, net
 
21

 
(20
)
Net cash provided by operating activities
 
332

 
415

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(68
)
 
(85
)
Purchases of investments
 
(329
)
 
(411
)
Proceeds from sales and maturities of investments
 
325

 
236

Acquisitions and ventures
 
(3
)
 
(4
)
Change in restricted cash deposits
 
(2
)
 
—

Net cash used in investing activities
 
(77
)
 
(264
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of short-term debt
 
1,238

 
—

Repayments of short-term debt
 
(1,317
)
 
—

Payments of capital lease obligations
 
(5
)
 
(5
)
Payments of dividends
 
(43
)
 
(40
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(169
)
 
(211
)
Proceeds from exercises of stock options
 
15

 
14

Excess tax benefits from stock-based compensation arrangements
 
6

 
4

Net cash used in financing activities
 
(275
)
 
(238
)
Effect of exchange rate changes on cash and cash equivalents
 
10

 
1

Net decrease in cash and cash equivalents
 
(10
)
 
(86
)
Cash and cash equivalents at beginning of period
 
500

 
797

Cash and cash equivalents at end of period
 
$
490

 
$
711

See accompanying notes.

 
6
 

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 apparel, accessories, home furnishings, and other licensed product categories. RLC's long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands, sales channels, and international markets. RLC's brand names include Ralph Lauren, Ralph Lauren Collection, Purple Label, Black Label, Polo, Polo Ralph Lauren, Double RL, RLX Ralph Lauren, Lauren Ralph Lauren, Ralph Lauren Childrenswear, Denim & Supply Ralph Lauren, Chaps, Club Monaco, and American Living, among others. RLC and its subsidiaries are collectively referred to herein as the "Company," "we," "us," "our," and "ourselves," unless the context indicates otherwise.
The Company 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 around the world. The Company also sells directly to consumers through its integrated retail channel, which includes its retail stores, concession-based shop-within-shops, and e-commerce operations around the world. In addition, the Company licenses to unrelated third parties for specified periods the right to operate retail stores and/or to use its various trademarks in connection with the manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.
2.
Basis of Presentation
Interim Financial Statements
These interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and are unaudited. In the opinion of management, these consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, income, comprehensive income, and 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. ("U.S. 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 provided herein are adequate to prevent the information presented from being misleading.
This report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended March 28, 2015 (the "Fiscal 2015 10-K").
Basis of Consolidation
These unaudited interim consolidated financial statements present the consolidated financial position, income, comprehensive income, and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2016 will end on April 2, 2016 and will be a 53-week period ("Fiscal 2016"). Fiscal year 2015 ended on March 28, 2015 and was a 52-week period ("Fiscal 2015"). The first quarter of Fiscal 2016 ended on June 27, 2015 and was a 13-week period. The first quarter of Fiscal 2015 ended on June 28, 2014 and was also a 13-week period.

 
7
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and 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, operational chargebacks, and certain cooperative advertising allowances; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; fair value measurements; accounting for income taxes and related uncertain tax positions; valuation of stock-based compensation awards and related estimated forfeiture rates; reserves for restructuring activity; and accounting for business combinations, among others.
Reclassifications
Certain reclassifications have been made to the prior period's 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 in its second and fourth fiscal quarters and higher retail sales in its second and third fiscal quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods impacting the Retail segment. In addition, fluctuations in sales, operating income, and cash flows in any fiscal quarter may be affected by other events affecting retail sales, such as changes in weather patterns. Accordingly, the Company's operating results and cash flows for the three-month period ended June 27, 2015 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2016.
3.
Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectability is reasonably assured.
Revenue within the Company's Wholesale segment is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates for end-of-season markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these costs have not differed materially from actual results.
Retail store and concession-based shop-within-shop revenue is recognized net of estimated returns at the time of sale to consumers. E-commerce revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery of the shipment to its customers. Such revenue is also reduced by an estimate of returns.
Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes income for unredeemed gift cards when the likelihood of redemption by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property.

 
8
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (i) contractually guaranteed minimum royalty levels or (ii) actual sales and royalty data, or estimates thereof, received from the Company's licensees.
The Company accounts for sales taxes and other related taxes on a net basis, excluding such taxes from revenue.
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 income. Shipping costs were approximately $9 million during each of the three-month periods ended June 27, 2015 and June 28, 2014. 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 approximately $41 million and $42 million during the three-month periods ended June 27, 2015 and June 28, 2014, 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 net income attributable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company's Class A and Class B common stock. Diluted net income per common share adjusts basic net income per common share for the dilutive effects of outstanding stock options, restricted stock, restricted stock units ("RSUs"), and any other potentially dilutive instruments, only in the periods in which such effects are 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 shares used to calculate diluted net income per common share as follows:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Basic shares
 
86.5

 
88.9

Dilutive effect of stock options, restricted stock, and RSUs
 
1.0

 
1.3

Diluted shares
 
87.5

 
90.2

All earnings per share amounts have been calculated using unrounded numbers. Options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. In addition, the Company has outstanding RSUs that are issuable only upon the achievement of certain service and/or performance goals. Performance-based RSUs are included in the computation of diluted shares only to the extent that the underlying performance conditions (and any applicable market condition modifiers) (i) have been satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of June 27, 2015 and June 28, 2014, there were approximately 2.6 million and 1.2 million, respectively, additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs, which 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 is recorded at carrying value, which approximates fair value, and is presented in the Company's consolidated balance sheets net of certain reserves and allowances. These reserves and allowances consist of (i) reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances (see the Revenue Recognition section above for further discussion of related accounting policies) and (ii) allowances for doubtful accounts.

 
9
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A rollforward of the activity in the Company's reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances is presented below:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Beginning reserve balance
 
$
240

 
$
254

Amount charged against revenue to increase reserve
 
150

 
157

Amount credited against customer accounts to decrease reserve
 
(181
)
 
(165
)
Foreign currency translation
 
1

 
(1
)
Ending reserve balance
 
$
210

 
$
245

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. The Company's allowance for doubtful accounts was $13 million and $11 million as of June 27, 2015 and March 28, 2015, respectively. The change in the allowance for doubtful accounts was not material during either of the three-month periods ended June 27, 2015 and June 28, 2014.
Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department and specialty stores around the world, and extends credit based on an evaluation of each customer's financial capacity and condition, usually without requiring collateral. In the Company's wholesale business, concentration of credit risk is relatively limited due to the large number of customers and their dispersion across many geographic areas. However, the Company has three key wholesale customers that generate significant sales volume. During Fiscal 2015, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately 12% of its total net revenues, and the Company's sales to its three largest wholesale customers (including Macy's) accounted for approximately 24% of total net revenues. As of June 27, 2015, these three key wholesale customers constituted approximately 34% of total gross accounts receivable.
Derivative Financial Instruments
The Company records all derivative financial instruments on its consolidated balance sheets at fair value. For derivative instruments that qualify for hedge accounting, the effective portion of changes in their fair value is either (i) offset against the changes in fair value of the related hedged assets, liabilities, or firm commitments through earnings or (ii) recognized in equity as a component of accumulated other comprehensive income ("AOCI") until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge against changes in fair value or cash flows and net investments, respectively.
Each derivative instrument that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged. For each derivative instrument that is designated as a hedge, the Company formally documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item, and the risk exposure, as well as how hedge effectiveness will be assessed prospectively and retrospectively over the instrument's term. To assess hedge effectiveness, the Company generally uses regression analysis, a statistical method, to compare the change in the fair value of the derivative instrument to the change in fair value or cash flows of the related hedged item. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.
As a result of its use of derivative instruments, the Company is exposed to the risk that counterparties to such contracts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. The Company's established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of its counterparties' creditworthiness. The Company also

 
10
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

enters into master netting arrangements with counterparties, when possible, to mitigate credit risk associated with its derivative instruments. In the event of default or termination (as such terms are defined within the respective master netting arrangement), these arrangements allow the Company to net-settle amounts payable and receivable related to multiple derivative transactions with the same counterparty. The master netting arrangements specify a number of events of default and termination, including, among others, the failure to make timely payments.
The fair values of the Company's derivative instruments are recorded on its consolidated balance sheets on a gross basis. For cash flow reporting purposes, proceeds received or amounts paid upon the settlement of a derivative instrument are classified in the same manner as the related item being hedged, primarily within cash flows from operating activities.
Forward Foreign Currency Exchange Contracts
The Company enters into forward foreign currency exchange contracts to reduce its risk related to exchange rate fluctuations on inventory transactions, intercompany royalty payments made by certain of its international operations, intercompany contributions made to fund certain marketing efforts of its international operations, and other foreign currency-denominated operational cash flows. To the extent forward foreign currency exchange contracts are designated as cash flow hedges and are highly effective in offsetting changes in the value of the hedged items, the related gains or losses are initially deferred in equity as a component of AOCI and are subsequently recognized in the consolidated statements of income as follows:
•
Forecasted Inventory Transactions — recognized as part of the cost of the inventory being hedged within cost of goods sold when the related inventory is sold to a third party.
•
Intercompany Royalty Payments and Marketing Contributions — recognized within foreign currency gains (losses) generally in the period in which the related payments or contributions being hedged are received or paid.
To the extent that a derivative instrument designated as a cash flow hedge is not considered effective, any change in its fair value relating to such ineffectiveness is immediately recognized in earnings within foreign currency gains (losses). If it is determined that a derivative instrument has not been highly effective, and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued and further gains (losses) are immediately recognized in earnings within foreign currency gains (losses). Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the originally-documented hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings within foreign currency gains (losses).
Hedge of a Net Investment in a Foreign Operation
Changes in the fair value of a derivative instrument or the carrying value of a non-derivative instrument 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. In assessing the effectiveness of a derivative financial instrument that is designated as a hedge of a net investment, the Company uses a method based on changes in spot rates to measure the impact of foreign currency exchange rate changes on both its foreign subsidiary net investment and the related hedging instrument. If the notional amount of the instrument designated as the 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 instrument remains effective, changes in its value are recorded in equity as foreign currency translation gains (losses), a component of AOCI, and are recognized in earnings within foreign currency gains (losses) only upon the sale or liquidation of the hedged net investment.
Fair Value Hedges
Changes in the fair value of a derivative instrument that is designated as a fair value hedge, along with offsetting changes in the fair value of the related hedged item attributable to the hedged risk, are recorded in earnings. Hedge ineffectiveness is recorded in earnings to the extent that the change in the fair value of the hedged item does not offset the change in the fair value of the hedging instrument.

 
11
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Undesignated Hedges
All of the Company's undesignated hedges are entered into to hedge specific economic risks, particularly 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.
Refer to Note 3 in the Fiscal 2015 10-K for a summary of all of the Company's significant accounting policies.
4.
Recently Issued Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that will supersede most existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that an entity expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer under existing revenue recognition guidance. ASU 2014-09 is effective for the Company beginning in its fiscal year 2018. However, the FASB is expected to issue a separate ASU that would defer the effective date of ASU 2014-09 by one year. ASU 2014-09 may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company is currently in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements.
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 May 2013, 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 most leases, including existing and new arrangements, would be recognized as assets and liabilities on the balance sheet. The comment period for the Exposure Draft ended in September 2013, and the FASB has now substantially completed its redeliberations on certain portions of the proposal. If and when effective, 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 currently unable to determine the impact that this proposed change in accounting would have on its consolidated financial statements.
5.
Inventories
Inventories consist of the following:
 
 
June 27,
2015
 
March 28,
2015
 
June 28,
2014
 
 
(millions)
Raw materials
 
$
3

 
$
3

 
$
3

Work-in-process
 
1

 
2

 
2

Finished goods
 
1,266

 
1,037

 
1,175

Total inventories
 
$
1,270

 
$
1,042

 
$
1,180


 
12
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.
Property and Equipment
Property and equipment, net consists of the following:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
Land and improvements
 
$
17

 
$
17

Buildings and improvements
 
408

 
409

Furniture and fixtures
 
690

 
686

Machinery and equipment
 
320

 
317

Capitalized software
 
422

 
402

Leasehold improvements
 
1,208

 
1,185

Construction in progress
 
103

 
99

 
 
3,168

 
3,115

Less: accumulated depreciation
 
(1,749
)
 
(1,679
)
Property and equipment, net
 
$
1,419

 
$
1,436

7.
Other Assets and Liabilities
Prepaid expenses and other current assets consist of the following:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
Other taxes receivable
 
$
94

 
$
93

Derivative financial instruments
 
43

 
65

Prepaid rent expense
 
35

 
31

Prepaid samples
 
14

 
12

Tenant allowances receivable
 
13

 
14

Prepaid advertising and marketing
 
12

 
7

Restricted cash
 
7

 
2

Other prepaid expenses and current assets
 
60

 
57

Total prepaid expenses and other current assets
 
$
278

 
$
281

Other non-current assets consist of the following:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
Restricted cash
 
$
33

 
$
36

Security deposits
 
31

 
28

Derivative financial instruments
 
29

 
22

Other non-current assets
 
41

 
45

Total other non-current assets
 
$
134

 
$
131


 
13
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accrued expenses and other current liabilities consist of the following:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
Accrued inventory
 
$
205

 
$
75

Accrued operating expenses
 
194

 
183

Other taxes payable
 
119

 
108

Accrued payroll and benefits
 
111

 
162

Accrued capital expenditures
 
52

 
62

Dividends payable
 
43

 
43

Deferred income
 
41

 
38

Restructuring reserve
 
34

 
5

Capital lease obligations
 
19

 
19

Other accrued expenses and current liabilities
 
14

 
20

Total accrued expenses and other current liabilities
 
$
832

 
$
715

Other non-current liabilities consist of the following:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
Deferred rent obligations
 
$
238

 
$
219

Capital lease obligations
 
222

 
238

Deferred tax liabilities
 
87

 
87

Derivative financial instruments
 
17

 
1

Deferred income
 
15

 
20

Deferred compensation
 
9

 
9

Other non-current liabilities
 
45

 
41

Total other non-current liabilities
 
$
633

 
$
615

8.
Impairment of Assets
During the three months ended June 27, 2015, the Company recorded non-cash impairment charges of $8 million, primarily to write off certain fixed assets related to its domestic and international stores and shop-within-shops in connection with the Global Reorganization Plan (see Note 9).
During the three months ended June 28, 2014, the Company recorded non-cash impairment charges of $1 million, primarily to write off certain fixed assets related to its European operations.

 
14
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.
Restructuring Charges
A description of significant restructuring activities and related costs is included below.
Fiscal 2016
Global Reorganization Plan
On May 12, 2015, the Company's Board of Directors approved a reorganization and restructuring plan comprised of the following major actions: (i) the reorganization of the Company from its current channel and regional structure to an integrated global brand-based operating structure, which will streamline the Company's business processes to better align its cost structure with its long-term growth strategy; (ii) a strategic store and shop-within-shop performance review conducted by region and brand; (iii) a targeted corporate functional area review; and (iv) the consolidation of certain of the Company's luxury lines (collectively, the "Global Reorganization Plan"). The Global Reorganization Plan will result in a reduction in workforce and, once a performance review is complete, the closure of certain stores and shop-within-shops. The Global Reorganization Plan is expected to be substantially implemented by the end of Fiscal 2016.
The Company expects to incur total estimated charges of $70 million to $100 million in connection with the Global Reorganization Plan, comprised of restructuring charges totaling $55 million to $80 million, to be settled in cash, and non-cash charges totaling $15 million to $20 million. The Company anticipates that these restructuring and non-cash charges will be incurred over the course of Fiscal 2016, primarily during the first half of the year.
A summary of the restructuring and non-cash charges recorded in connection with the Global Reorganization Plan is as follows:
 
 
Three Months Ended
 
 
June 27, 2015
 
 
(millions)
Restructuring charges:
 
 
Severance and benefit costs
 
$
32

Lease termination and store closure costs
 
1

Other cash charges
 
1

Total restructuring charges
 
34

Non-cash charges:
 
 
Impairment of assets(a)
 
8

Inventory-related charges(b)
 
3

Total non-cash charges
 
11

Total restructuring and non-cash charges
 
$
45

 
 
(a) 
See Note 8 for additional information.
(b) 
Inventory-related charges are recorded within cost of goods sold in the unaudited interim consolidated statements of income.

 
15
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the activity in the restructuring reserve related to the Global Reorganization Plan is as follows:
 
 
Severance and Benefit Costs
 
Lease Termination and Store Closure Costs
 
Other Costs
 
Total
 
 
(millions)
Balance at March 28, 2015
 
$
—

 
$
—

 
$
—

 
$
—

Additions charged to expense
 
32

 
1

 
1

 
34

Cash payments charged against reserve
 
(3
)
 
—

 
—

 
(3
)
Balance at June 27, 2015
 
$
29

 
$
1

 
$
1

 
$
31

Fiscal 2015
During Fiscal 2015, the Company recorded restructuring charges of $10 million, $4 million of which were recorded during the three months ended June 28, 2014. These charges were primarily related to severance and benefit costs associated with certain of its retail, wholesale, and corporate operations. At March 28, 2015, the restructuring reserve related to these charges was $5 million, which was reduced by payments to $3 million at June 27, 2015.
10.
Income Taxes
Effective Tax Rate
The Company's effective tax rate, which is calculated by dividing each fiscal period's provision for income taxes by pretax income, was 29.0% and 31.1% during the three-month periods ended June 27, 2015 and June 28, 2014, respectively. The effective tax rates in both periods were lower than the U.S. federal statutory income tax rate of 35% principally as a result of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S. In addition, the effective tax rate for the three months ended June 27, 2015 was favorably impacted by the reversal of certain tax reserves due to the expiration of statutes of limitations, partially offset by additional tax reserves largely associated with the conclusion of a tax examination.
Uncertain Income Tax Benefits
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. The total amount of unrecognized tax benefits, including interest and penalties, was $102 million and $116 million as of June 27, 2015 and March 28, 2015, respectively, and is included within non-current liability for unrecognized tax benefits in the consolidated balance sheets. The reduction in unrecognized tax benefits, including interest and penalties, primarily related to the reversal of $9 million of tax reserves due to the expiration of statutes of limitations and tax audit settlements of $8 million, partially offset by additional tax reserves associated with the conclusion of a tax examination.
The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was $75 million and $85 million as of June 27, 2015 and March 28, 2015, respectively.
Future Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.

 
16
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended March 31, 2007.
11.
Debt
Debt consists of the following:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
$300 million 2.125% Senior Notes(a)
 
$
297

 
$
298

Commercial paper notes
 
155

 
234

Total debt
 
452

 
532

Less: short-term debt
 
155

 
234

Total long-term debt
 
$
297

 
$
298

 
 
(a) 
During the first quarter of Fiscal 2016, the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate Senior Notes (see Note 13). Accordingly, the carrying value of the Senior Notes as of June 27, 2015 reflects an adjustment of $2 million for the change in fair value attributable to the benchmark interest rate. The carrying value of the Senior Notes is also net of unamortized debt issuance costs of $1 million and $2 million as of June 27, 2015 and March 28, 2015, respectively.
Senior Notes
In September 2013, the Company completed a registered public debt offering and issued $300 million aggregate principal amount of unsecured senior notes due September 26, 2018 (the "Senior Notes") at a price equal to 99.896% of their principal amount. The Senior Notes bear interest at a fixed rate of 2.125%, payable semi-annually. The proceeds from this offering were used for general corporate purposes, including repayment of the Company's previously outstanding €209 million principal amount of 4.5% Euro-denominated notes, which matured on October 4, 2013.
The Company has the option to redeem the Senior Notes, in whole or in part, at any time at a price equal to accrued interest on the redemption date, plus the greater of (i) 100% of the principal amount of Senior Notes to be redeemed or (ii) the sum of the present value of Remaining Scheduled Payments, as defined in the indenture governing the Senior Notes (the "Indenture"). The Indenture contains certain covenants that restrict the Company's ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of the Company's property or assets to another party. However, the Indenture does not contain any financial covenants.
Commercial Paper
In May 2014, the Company initiated a commercial paper borrowing program (the "Commercial Paper Program") that allowed it to issue up to $300 million of unsecured commercial paper notes through private placement using third-party broker-dealers. In May 2015, the Company initiated an expansion of its Commercial Paper Program to allow for a total issuance of up to $500 million of unsecured commercial paper notes.
Borrowings under the Commercial Paper Program are supported by the Global Credit Facility, as defined below, and may be used to support the Company's general working capital and corporate needs. Maturities of commercial paper notes vary, but cannot exceed 397 days from the date of issuance. Commercial paper notes issued under the Commercial Paper Program rank equally with the Company's other forms of unsecured indebtedness. As of June 27, 2015, the Company had $155 million in borrowings outstanding under its Commercial Paper Program, with a weighted-average annual interest rate of 0.30% and a weighted-average remaining term of 21 days.

 
17
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revolving Credit Facilities
Global Credit Facility
In February 2015, the Company entered into an amended and restated credit facility that provides for a $500 million senior unsecured revolving line of credit through February 11, 2020 (the "Global Credit Facility") under terms and conditions substantially similar to those previously in effect. The Global Credit Facility is also used to support the issuance of letters of credit and the maintenance of the Commercial Paper Program. Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and other currencies, including Euros, Hong Kong Dollars, and Japanese Yen. The Company has the ability to expand its borrowing availability under the Global Credit Facility to $750 million, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility. As of June 27, 2015, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $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 certain investments. The Global Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the "leverage ratio") of no greater than 3.75 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding plus eight 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 June 27, 2015, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company's Global Credit Facility.
Domestic Credit Facility
In August 2014, the Company entered into an uncommitted credit facility (the "Domestic Credit Facility") with Santander Bank, N.A. ("Santander"), which provides for a revolving line of credit up to $100 million through August 19, 2015. Borrowings under the Domestic Credit Facility are granted at the sole discretion of Santander, subject to availability of its funds, and bear interest at a rate equal to the London Interbank Offered Rate plus a spread determined by Santander at the time of borrowing. The Domestic Credit Facility does not contain any financial covenants. As of June 27, 2015, there were no borrowings outstanding under the Domestic Credit Facility.
Pan-Asia Credit Facilities
Certain of the Company's subsidiaries in Asia have uncommitted credit facilities with regional branches of JPMorgan Chase (the "Banks") in China, Malaysia, South Korea, and Taiwan (the "Pan-Asia Credit Facilities"). These credit facilities are subject to annual renewal and may be used to fund general working capital and corporate needs of the Company's operations in the respective countries. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the parent company and are granted at the sole discretion of the Banks, subject to availability of the Banks' funds and satisfaction of certain regulatory requirements. The Pan-Asia Credit Facilities do not contain any financial covenants. The Company's Pan-Asia Credit Facilities by country are as follows:
•
China Credit Facility — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to 100 million Chinese Renminbi (approximately $16 million) through April 7, 2016, and may also be used to support bank guarantees. As of June 27, 2015, bank guarantees supported by this facility were not material.
•
Malaysia Credit Facility — provides Ralph Lauren (Malaysia) Sdn Bhd with a revolving line of credit of up to 16 million Malaysian Ringgit (approximately $4 million) through September 30, 2015.
•
South Korea Credit Facility — provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to 11 billion South Korean Won (approximately $10 million) through October 31, 2015.

 
18
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•
Taiwan Credit Facility — provides Ralph Lauren (Hong Kong) Retail Company Ltd., Taiwan Branch with a revolving line of credit of up to 59 million New Taiwan Dollars (approximately $2 million) through October 15, 2015.
As of June 27, 2015, there were no borrowings outstanding under any of the Pan-Asia Credit Facilities.
Refer to Note 14 of the Fiscal 2015 10-K for additional disclosure of the terms and conditions of the Company's debt and credit facilities.
12.
Fair Value Measurements
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
•
Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 — inputs to the valuation methodology based on quoted prices for similar assets 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.
The following table summarizes the Company's financial assets and liabilities that are measured and recorded at fair value on a recurring basis, excluding accrued interest components:
 
 
June 27,
2015
 
March 28,
2015
 
 
(millions)
Financial assets recorded at fair value:
 
 
 
 
Corporate bonds — non-U.S.(a)
 
$
8

 
$
8

Derivative financial instruments(b)
 
72

 
87

Total
 
$
80

 
$
95

Financial liabilities recorded at fair value:
 
 
 
 
Derivative financial instruments(b)
 
$
28

 
$
19

Total
 
$
28

 
$
19

 
(a) 
Based on Level 1 measurements.
(b) 
Based on Level 2 measurements.
To the extent the Company invests in bonds, such investments are classified as available-for-sale and recorded at fair value in its consolidated balance sheets based upon quoted prices in active markets.
The Company's derivative financial instruments are recorded at fair value in its consolidated balance sheets and are valued using pricing models that are primarily based on market observable external inputs, including spot and forward currency exchange rates, benchmark interest rates, and discount rates consistent with the instrument's tenor, and consider the impact of the Company's own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments.

 
19
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company's cash and cash equivalents, restricted cash, and time deposits are recorded at carrying value, which approximates fair value based on Level 1 measurements.
The Company's debt instruments are recorded at their carrying values in its consolidated balance sheets, which may differ from their respective fair values. The fair value of the Senior Notes is estimated based on external pricing data, including available quoted market prices, and with reference to comparable debt instruments with similar interest rates, credit ratings, and trading frequency, among other factors. The fair value of the Company's commercial paper notes is estimated using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's outstanding borrowings. Due to their short-term nature, the fair value of commercial paper notes outstanding at June 27, 2015 approximates their carrying value.
The following table summarizes the carrying values and the estimated fair values of the Company's debt instruments:
 
 
June 27, 2015
 
March 28, 2015
 
 
Carrying Value
 
Fair Value(a)
 
Carrying Value
 
Fair Value(a)
 
 
(millions)
$300 million 2.125% Senior Notes
 
$
297

(b) 
$
303

 
$
298

(b) 
$
304

Commercial paper notes
 
155

 
155

 
234

 
234

 
 
(a) 
Based on Level 2 measurements.
(b) 
See Note 11 for discussion of the carrying value of the Senior Notes as of June 27, 2015 and March 28, 2015.
Unrealized gains or losses resulting from changes in the fair value of the Company's debt do not result in the realization or expenditure of cash, unless the debt is retired prior to its maturity.
Non-financial Assets and Liabilities
The Company's non-financial assets, which primarily consist of goodwill, other intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial 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 periods ended June 27, 2015 and June 28, 2014, the Company recorded non-cash impairment charges to reduce the carrying values of certain long-lived store and shop-within-shop assets to their fair values. 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 timing of the stores' or shop-within-shops' 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 periods ended June 27, 2015 and June 28, 2014:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Aggregate carrying value of long-lived assets written down to fair value
 
$
8

 
$
1

Impairment charges (see Note 8)
 
(8
)
 
(1
)
No goodwill impairment charges were recorded during either of the three-month periods ended June 27, 2015 or June 28, 2014.

 
20
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.
Financial Instruments
Derivative Financial Instruments
The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows and the value of reported net assets of its international operations, as well as changes in the fair value of its fixed-rate debt attributed to changes in the benchmark interest rate. Consequently, the Company uses derivative financial instruments to manage and mitigate such risks. The Company does not enter into derivative transactions for speculative or trading purposes.
The following table summarizes the Company's outstanding derivative instruments on a gross basis as recorded in its consolidated balance sheets as of June 27, 2015 and March 28, 2015:
 
 
Notional Amounts
 
Derivative Assets
 
Derivative Liabilities
Derivative Instrument(a)
 
June 27,
2015
 
March 28,
2015
 
June 27,
2015
 
March 28,
2015
 
June 27,
2015
 
March 28,
2015
 
 
 
 
 
 
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
 
$
578

 
$
587

 
(c) 
 
$
36

 
PP
 
$
49

 
AE
 
$
8

 
AE
 
$
9

FC — Other(d)
 
101

 
118

 
PP
 
5

 
PP
 
5

 
—
 
—

 
AE
 
1

IRS — Senior Notes
 
300

 
—

 
—
 
—

 
—
 
—

 
ONCL
 
2

 
—
 
—

CCS — NI
 
313

 
—

 
—
 
—

 
—
 
—

 
ONCL
 
12

 
—
 
—

Total Designated Hedges
 
$
1,292

 
$
705

 
 
 
$
41

 
 
 
$
54

 
 
 
$
22

 
 
 
$
10

Undesignated Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Other(e)
 
$
546

 
$
464

 
(f) 
 
$
31

 
(g) 
 
$
33

 
(h) 
 
$
6

 
(i) 
 
$
9

Total Hedges
 
$
1,838

 
$
1,169

 
 
 
$
72

 
 
 
$
87

 
 
 
$
28

 
 
 
$
19

 
(a) 
FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contract; Senior Notes = $300 million 2.125% senior notes; CCS = Cross-currency swap contract; NI = Net investment hedge.
(b) 
PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCL = Other non-current liabilities.
(c) 
$35 million included within prepaid expenses and other current assets and $1 million included within other non-current assets.
(d) 
Primarily includes designated hedges of foreign currency-denominated intercompany royalty payments and other operational exposures.
(e) 
Primarily includes undesignated hedges of foreign currency-denominated intercompany loans.
(f) 
$3 million included within prepaid expenses and other current assets and $28 million included within other non-current assets.
(g) 
$11 million included within prepaid expenses and other current assets and $22 million included within other non-current assets.
(h) 
$3 million included within accrued expenses and other current liabilities and $3 million included within other non-current liabilities.
(i) 
$8 million included within accrued expenses and other current liabilities and $1 million included within other non-current liabilities.

 
21
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheets on a gross basis, even though they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its derivative instruments on a net basis in accordance with the terms of each of its master netting arrangements, spread across eight separate counterparties, the amounts presented in the consolidated balance sheets as of June 27, 2015 and March 28, 2015 would be adjusted from the current gross presentation as detailed in the following table:
 
 
June 27, 2015
 
March 28, 2015
Derivative Instrument
 
Gross Amounts Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements
 
Net
Amount
 
Gross Amounts Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet that are Subject to Master Netting Agreements
 
Net
Amount
 
 
(millions)
Derivative assets
 
$
72

 
$
(24
)
 
$
48

 
$
87

 
$
(14
)
 
$
73

Derivative liabilities
 
$
28

 
$
(24
)
 
$
4

 
$
19

 
$
(14
)
 
$
5

The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. Refer to Note 3 for further discussion of the Company's master netting arrangements.
The following table summarizes the pretax impact of the effective portion of gains and losses from the Company's designated derivative instruments on its unaudited interim consolidated financial statements for the three-month periods ended June 27, 2015 and June 28, 2014:
 
 
Gains (Losses)
Recognized in OCI
 
Gains (Losses) Reclassified from AOCI to Earnings
 
Location of Gains (Losses)
Reclassified from AOCI to Earnings
 
 
Three Months Ended
 
Three Months Ended
 
Derivative Instrument
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
 
 
 
 
(millions)
 
 
 
 
Designated Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
FC — Inventory purchases
 
$
(2
)
 
$
1

 
$
7

 
$
(1
)
 
Cost of goods sold
FC — Other
 
1

 
(2
)
 
—

 
(2
)
 
Foreign currency gains (losses)
 
 
$
(1
)
 
$
(1
)
 
$
7

 
$
(3
)
 
 
Designated Hedge of Net Investment:
 
 
 
 
 
 
 
 
 
 
CCS
 
$
(12
)
 
$
—

 
$
—

 
$
—

 
(a) 
Total Designated Hedges
 
$
(13
)
 
$
(1
)
 
$
7

 
$
(3
)
 
 
 
(a) 
Amounts are to be recognized in earnings only upon the sale or liquidation of the hedged net investment.
As of June 27, 2015, it is expected that approximately $37 million of net gains deferred in AOCI related to derivative instruments will be recognized in earnings over the next twelve months. No material gains or losses relating to ineffective cash flow hedges were recognized during any of the fiscal periods presented.

 
22
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the pretax impact of gains and losses from the Company's undesignated derivative instruments on its unaudited interim consolidated financial statements for the three-month periods ended June 27, 2015 and June 28, 2014:
 
 
Gains (Losses)
Recognized in Earnings
 
Location of Gains (Losses)
Recognized in Earnings
 
 
Three Months Ended
 
Derivative Instrument
 
June 27,
2015
 
June 28,
2014
 
 
 
(millions)
 
 
Undesignated Hedges:
 
 
 
 
 
 
FC — Other
 
$
4

 
$
(2
)
 
Foreign currency gains (losses)
Total Undesignated Hedges
 
$
4

 
$
(2
)
 
 
Risk Management Strategies
Forward Foreign Currency Exchange Contracts
The Company primarily enters into forward foreign currency exchange contracts to reduce its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, intercompany contributions made to fund certain marketing efforts of its international operations, and other foreign currency-denominated operational and intercompany 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 South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, and the Hong Kong Dollar, the Company hedges a portion of its foreign currency exposures anticipated over a two-year period. In doing so, the Company uses forward foreign currency exchange contracts that generally have maturities of two months to two years to provide continuing coverage throughout the hedging period.
Interest Rate Swap Contract
During the first quarter of Fiscal 2016, the Company entered into a pay-floating rate, receive-fixed rate interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate Senior Notes attributed to changes in the benchmark interest rate (the "Interest Rate Swap"). The Interest Rate Swap, which matures on September 26, 2018, has a notional amount of $300 million and swaps the 2.125% fixed interest rate on the Company's Senior Notes for a variable interest rate based on the 3-month London Interbank Offered Rate ("LIBOR") plus a fixed spread. Changes in the fair value of the Interest Rate Swap were offset by changes in the fair value of the Senior Notes, with no resulting ineffectiveness recognized in earnings during the three months ended June 27, 2015.
Cross-Currency Swap Contract
During the first quarter of Fiscal 2016, the Company entered into a €280 million notional amount pay-floating rate, receive-floating rate cross-currency swap contract which it designated as a hedge of its net investment in certain of its European subsidiaries (the "Cross-Currency Swap"). The Cross-Currency Swap, which matures on September 26, 2018, swaps the USD-based variable interest rate payment based on the 3-month LIBOR plus a fixed spread (as paid under the Interest Rate Swap described above) for a Euro-based variable interest rate payment based on the 3-month Euro Interbank Offered Rate plus a fixed spread. As a result, the Cross-Currency Swap, in conjunction with the Interest Rate Swap, economically converts the Company's $300 million fixed-rate Senior Notes to a €280 million floating-rate Euro-denominated liability. No material gains or losses related to the ineffective portion, or the amount excluded from effectiveness testing, were recognized in earnings during the three months ended June 27, 2015.
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.

 
23
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Investments
As of June 27, 2015, the Company's short-term and non-current investments consisted of $661 million of time deposits and $8 million of non-U.S. corporate bonds, respectively. As of March 28, 2015, the Company's short-term and non-current investments consisted of $644 million of time deposits and $8 million of non-U.S. corporate bonds, respectively.
No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded during either of the three-month periods ended June 27, 2015 and June 28, 2014.
See Note 3 to the Fiscal 2015 10-K for further discussion of the Company's accounting policies relating to its investments.
14.
Commitments and Contingencies
Customs Audit
In September 2014, one of the Company's international subsidiaries received a pre-assessment notice from the relevant customs officials concerning the method used to determine the dutiable value of imported inventory. The notice communicated the customs officials' assertion that the Company should have applied an alternative duty method, which could result in up to approximately $46 million in incremental duty and non-creditable value-added tax, including approximately $11 million in interest and penalties. The Company believes that the alternative duty method claimed by the customs officials is not applicable to the Company's facts and circumstances and is vigorously contesting their asserted methodology.

In October 2014, the Company filed an appeal of the pre-assessment notice in accordance with the standard procedures established by the relevant customs authorities. In response to the filing of the Company's appeal of the pre-assessment notice, the review committee instructed the customs officials to reconsider their assertion of the alternative duty method and conduct a re-audit to evaluate the facts and circumstances noted in the pre-assessment notice. As a result, the pre-assessment notice has been retracted by the customs authorities and the Company believes the re-audit will result in the realization of the prior customs officials' claims not being meritorious and that the Company will ultimately prevail. Management does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company’s consolidated financial statements.

Litigation
Wathne Imports Litigation
On September 13, 2005, Wathne Imports, Ltd. ("Wathne"), the Company's former domestic licensee for luggage and handbags, filed suit against the Company in the Supreme Court of the State of New York, County of New York, alleging, among other things, that the Company had breached a 1999 License Agreement and Design Services Agreement with Wathne and had engaged in deceptive trade practices, fraud, and negligent misrepresentation. The complaint originally sought, among other things, injunctive relief, compensatory damages in excess of $250 million, and punitive damages in excess of $750 million. Following a motion to dismiss, a motion for summary judgment, and several appeals, only two claims remained against the Company, both related to an alleged breach of the License Agreement: (i) whether the Company discontinued the "Polo Sport" trademark on handbags and luggage without providing a replacement mark; and (ii) whether the Company usurped Wathne's right to manufacture and sell certain high-end handbags under the "Ralph Lauren" trademark. Wathne sought damages of up to approximately $100 million, plus interest, for these remaining claims. The Court recently granted the Company's motion to strike Wathne's jury demand, and that decision was affirmed on appeal. A bench trial began on July 29, 2015, and the remaining claims were subsequently settled on August 5, 2015. The settlement of this matter did not 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, importation and exportation of its products, taxation, unclaimed property, and employee

 
24
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

relations. The Company believes at present that the resolution of currently pending matters, other than those separately discussed above, will not individually or in the aggregate have a material adverse effect on its consolidated financial statements. However, the Company's assessment of the current litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims.
In the normal course of business, the Company enters into agreements that provide general indemnifications. The Company has not made any significant indemnification payments under such agreements in the past, and does not currently anticipate incurring any material indemnification payments.
15.
Equity
Summary of Changes in Equity
A reconciliation of the beginning and ending amounts of equity is presented below:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Balance at beginning of period
 
$
3,891

 
$
4,034

Comprehensive income
 
75

 
161

Dividends declared
 
(43
)
 
(39
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(169
)
 
(211
)
Stock-based compensation
 
32

 
23

Shares issued and tax benefits recognized pursuant to stock-based compensation arrangements
 
21

 
18

Conversion of stock-based compensation awards
 
—

 
(14
)
Balance at end of period
 
$
3,807

 
$
3,972

Common Stock Repurchase Program
A summary of the Company's repurchases of Class A common stock under its common stock repurchase program is presented below:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Cost of shares repurchased
 
$
150

 
$
180

Number of shares repurchased
 
1.1

 
1.2

As of June 27, 2015, the remaining availability under the Company's Class A common stock repurchase program was approximately $430 million, reflecting the May 12, 2015 approval by the Company's Board of Directors to expand the program by up to an additional $500 million of Class A common stock repurchases. Repurchases of shares of Class A common stock are subject to overall business and market conditions.
In addition, during each of the three-month periods ended June 27, 2015 and June 28, 2014, 0.2 million shares of Class A common stock, at a cost of $19 million and $31 million, respectively, were surrendered to, or withheld by, the Company in

 
25
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

satisfaction of withholding taxes in connection with the vesting of awards under the Company's 1997 Long-Term Stock Incentive Plan, as amended (the "1997 Incentive Plan"), and its Amended and Restated 2010 Long-Term Stock Incentive Plan (the "2010 Incentive Plan").
Repurchased and surrendered shares are accounted for as treasury stock at cost and held in treasury for future use.
Dividends
Since 2003, the Company has maintained a regular quarterly cash dividend program on its common stock. On February 3, 2015, the Company's Board of Directors approved an increase to the Company's quarterly cash dividend on its common stock from $0.45 per share to $0.50 per share. The first quarter Fiscal 2016 dividend of $0.50 per share was declared on June 11, 2015, was payable to stockholders of record at the close of business on June 26, 2015, and was paid on July 10, 2015. Dividends paid amounted to $43 million and $40 million during the three-month periods ended June 27, 2015 and June 28, 2014, respectively.
Conversion of Stock-based Compensation Awards
During the three months ended June 28, 2014, the Company converted certain fully-vested and expensed stock-based compensation awards to a cash contribution into a deferred compensation account. The Company recorded the excess of these awards' then current redemption value over their original grant-date fair value to retained earnings, with a corresponding increase to other non-current liabilities in the consolidated balance sheet.
16.
Accumulated Other Comprehensive Income
The following table presents the components of other comprehensive income (loss), net of tax, accumulated in equity:
 
 
Foreign Currency Translation Gains
(Losses)(a)
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Net Unrealized Losses on Defined
Benefit Plans
 
Total Accumulated Other Comprehensive Income (Loss)
 
 
(millions)
Balance at March 29, 2014
 
$
125

 
$
(4
)
 
$
(7
)
 
$
114

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
OCI before reclassifications(b)
 
(3
)
 
—

 
—

 
(3
)
Amounts reclassified from AOCI to earnings
 
—

 
2

 
—

 
2

Other comprehensive income (loss), net of tax
 
(3
)
 
2

 
—

 
(1
)
Balance at June 28, 2014
 
$
122

 
$
(2
)
 
$
(7
)
 
$
113

 
 
 
 
 
 
 
 
 
Balance at March 28, 2015
 
$
(193
)
 
$
43

 
$
(15
)
 
$
(165
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
OCI before reclassifications(b)
 
19

 
(1
)
 
—

 
18

Amounts reclassified from AOCI to earnings
 
—

 
(7
)
 
—

 
(7
)
Other comprehensive income (loss), net of tax
 
19

 
(8
)
 
—

 
11

Balance at June 27, 2015
 
$
(174
)
 
$
35

 
$
(15
)
 
$
(154
)

 
26
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
(a)
Includes losses of $7 million (net of a $5 million income tax benefit) during the three months ended June 27, 2015 related to the effective portion of changes in the fair value of the Cross-Currency Swap designated as a hedge of the Company's net investment in certain of its European subsidiaries (see Note 13).
(b) 
Amounts are presented net of taxes. Foreign currency translation gains (losses) reflect a $4 million income tax benefit for the three months ended June 27, 2015. The tax effects relating to all other components of OCI before reclassification are immaterial for the periods presented.
The following table presents reclassifications from AOCI to earnings for cash flow hedges, by component:
 
 
Three Months Ended
 
 
 
 
June 27,
2015
 
June 28,
2014
 
Location of Gains (Losses)
Reclassified from AOCI to Earnings
 
 
(millions)
 
 
Gains (losses) on cash flow hedges(a):
 
 
 
 
 
 
    FC — Inventory purchases
 
$
7

 
$
(1
)
 
Cost of goods sold
    FC — Other
 
—

 
(2
)
 
Foreign currency gains (losses)
    Tax effect
 
—

 
1

 
Provision for income taxes
        Net of tax
 
$
7

 
$
(2
)
 
 
 
(a) 
FC = Forward foreign currency exchange contracts.
17.
Stock-based Compensation
The Company's stock-based compensation awards are currently issued under the 2010 Incentive Plan, which was approved by its stockholders on August 5, 2010. However, any prior awards granted under the 1997 Incentive Plan remain subject to the terms of that plan. Any awards that expire, are forfeited, or are surrendered to the Company in satisfaction of taxes are available for issuance under the 2010 Incentive Plan.
Stock-based compensation awards that may be issued under the 2010 Incentive Plan include, but are not limited to, (i) stock options, (ii) restricted stock, and (iii) RSUs. In recent years, the Company's annual grants of stock-based compensation awards to its employees primarily consisted of stock options and RSUs. However, in Fiscal 2016, the annual grants consisted entirely of RSUs, as the Company elected to issue service-based RSUs in lieu of stock options. Additionally, new vesting provisions for certain awards granted to retirement-eligible employees were introduced. Specifically, beginning in Fiscal 2016, for certain service-based and performance-based RSUs granted to retirement-eligible employees, or employees who will become retirement-eligible prior to the end of the awards' respective stated vesting periods, vesting continues post-retirement for all or a portion of the remaining unvested RSUs. Accordingly, the related stock-based compensation expense is recognized on an accelerated basis over a term commensurate with the period that the employee is required to provide service in order to vest in the award.
Refer to Note 20 in the Fiscal 2015 10-K for additional details surrounding the Company's stock-based compensation awards, including information related to vesting terms, service and performance conditions, and payout percentages.

 
27
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Impact on Results
A summary of total stock-based compensation expense recorded within SG&A expenses and the related income tax benefits recognized during the three-month periods ended June 27, 2015 and June 28, 2014 is as follows:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Compensation expense
 
$
32

 
$
23

Income tax benefit
 
$
(12
)
 
$
(8
)
The Company issues its annual grants of stock-based compensation awards in the first half of each fiscal year. Due to the timing of the annual grants and other factors, including the composition of the retirement-eligible employee population, stock-based compensation expense recognized during the three-month period ended June 27, 2015 is not indicative of the level of compensation expense expected to be incurred for the full Fiscal 2016.
Stock Options
A summary of stock option activity under all plans for the three months ended June 27, 2015 is as follows:
 
 
Number of Options
 
 
(thousands)
Options outstanding at March 28, 2015
 
3,225

Granted
 
—

Exercised
 
(306
)
Cancelled/Forfeited
 
(55
)
Options outstanding at June 27, 2015
 
2,864

Restricted Stock Awards and Service-based RSUs
The fair values of restricted stock awards granted to non-employee directors are determined based on the fair value of the Company's Class A common stock on the date of grant. The weighted-average grant date fair values of restricted stock awards granted, which entitle holders to receive cash dividends in connection with the payments of dividends on the Company's Class A common stock, were $131.40 and $162.36 per share during the three-month periods ended June 27, 2015 and June 28, 2014, respectively.
The fair values of service-based RSUs granted to certain of the Company's senior executives, as well as to certain of its other employees, are based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for any awards not entitled to accrue dividend equivalents while outstanding. The weighted-average grant date fair values of service-based RSU awards granted were $128.92 and $153.05 per share during the three-month periods ended June 27, 2015 and June 28, 2014, respectively.

 
28
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of restricted stock and service-based RSU activity during the three months ended June 27, 2015 is as follows:
 
 
Number of Shares
 
 
Restricted Stock
 
Service-based RSUs
 
 
(thousands)
Nonvested at March 28, 2015
 
5

 
47

Granted
 
8

 
429

Vested
 
(3
)
 
(8
)
Forfeited
 
(1
)
 
(10
)
Nonvested at June 27, 2015
 
9

 
458

Performance-based RSUs
The fair value of the Company's performance-based RSUs that are not subject to a market condition in the form of a total shareholder return ("TSR") modifier is based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for those securities that are not entitled to dividend equivalents. The weighted-average grant date fair values of performance-based RSUs that do not contain a TSR modifier granted during the three-month periods ended June 27, 2015 and June 28, 2014 were $128.97 and $158.00 per share, respectively.
The fair value of the Company's performance-based RSUs with a TSR modifier is determined on the date of grant using a Monte Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine its expected TSR performance ranking. No such awards were granted during the three months ended June 27, 2015. The weighted-average grant date fair value of performance-based RSUs with a TSR modifier granted during the three months ended June 28, 2014 was $169.47.
A summary of performance-based RSU activity during the three months ended June 27, 2015 is as follows:
 
 
Number of Shares
 
 
Performance-based
RSUs — without
TSR Modifier
 
Performance-based
RSUs — with
TSR Modifier
 
 
(thousands)
Nonvested at March 28, 2015
 
697

 
214

Granted
 
304

 
—

Change due to performance/market condition achievement
 
(8
)
 
(20
)
Vested
 
(293
)
 
(50
)
Forfeited
 
(21
)
 
—

Nonvested at June 27, 2015
 
679

 
144

18.
Segment Information
The Company has three reportable segments based on its business activities and organization: Wholesale, Retail, and Licensing. These segments offer a variety of products through different channels of distribution. The Wholesale segment consists of apparel, accessories, 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 integrated worldwide retail operations, which sell products through its retail stores, concession-based shop-within-shops, and e-commerce sites, which are 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 2015 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. Certain corporate overhead expenses related to global functions, most notably the Company's executive office, information technology, finance and accounting, human resources, and legal departments, largely remain at corporate. Additionally, other costs that cannot be allocated to the segments based on specific usage are also maintained at corporate, including corporate advertising and marketing expenses, depreciation and amortization of corporate assets, and other general and administrative expenses resulting from corporate-level activities and projects.

 
29
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net revenues and operating income for each of the Company's reportable segments are as follows:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Net revenues:
 
 
 
 
Wholesale
 
$
642

 
$
708

Retail
 
935

 
960

Licensing
 
41

 
40

Total net revenues
 
$
1,618

 
$
1,708


 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Operating income:
 
 
 
 
Wholesale(a)
 
$
137

 
$
180

Retail(b)
 
110

 
168

Licensing
 
36

 
36

 
 
283

 
384

Unallocated corporate expenses
 
(153
)
 
(136
)
Unallocated restructuring charges(c)
 
(34
)
 
(4
)
Total operating income
 
$
96

 
$
244

 
(a) 
During the three-month period ended June 27, 2015, the Company recorded non-cash impairment charges of $3 million, primarily to write off certain fixed assets related to its shop-within-shops in connection with the Global Reorganization Plan. During the three-month period ended June 28, 2014, the Company recorded non-cash impairment charges of $1 million, primarily to write off certain fixed assets related its European operations. See Notes 8 and 9 for additional information.
(b) 
During the three-month period ended June 27, 2015, the Company recorded non-cash impairment charges of $5 million, primarily to write off certain fixed assets related to its stores and concession-based shop-within-shops in connection with the Global Reorganization Plan. See Notes 8 and 9 for additional information.
(c) 
The three-month periods ended June 27, 2015 and June 28, 2014 included certain unallocated restructuring charges (see Note 9), which are detailed below:
 
 
 
Three Months Ended
 
 
 
June 27,
2015
 
June 28,
2014
 
 
 
(millions)
 
Unallocated restructuring charges:
 
 
 
 
 
Wholesale-related
 
$
(8
)
 
$
(2
)
 
Retail-related
 
(11
)
 
(2
)
 
Licensing-related
 
(1
)
 
—

 
Corporate operations-related
 
(14
)
 
—

 
Total unallocated restructuring charges
 
$
(34
)
 
$
(4
)

 
30
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Depreciation and amortization expense for the Company's segments is as follows:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Depreciation and amortization:
 
 
 
 
Wholesale
 
$
15

 
$
17

Retail
 
39

 
34

Unallocated corporate expenses
 
20

 
18

Total depreciation and amortization
 
$
74

 
$
69

Net revenues by geographic location of the reporting subsidiary are as follows:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Net revenues(a):
 
 
 
 
The Americas(b)
 
$
1,079

 
$
1,139

Europe(c)
 
333

 
360

  Asia(d)
 
206

 
209

Total net revenues
 
$
1,618

 
$
1,708

 
(a) 
Net revenues for certain of the Company's licensed operations are included within the geographic location of the reporting subsidiary which holds the respective license.
(b) 
Includes the U.S., Canada, and Latin America. Net revenues earned in the U.S. during the three-month periods ended June 27, 2015 and June 28, 2014 were $1.029 billion and $1.084 billion, respectively.
(c) 
Includes the Middle East.
(d) 
Includes Australia and New Zealand.
19.
Additional Financial Information
Cash Interest and Taxes
Cash paid for interest and income taxes is as follows:
 
 
Three Months Ended
 
 
June 27,
2015
 
June 28,
2014
 
 
(millions)
Cash paid for interest
 
$
2

 
$
2

Cash paid for income taxes
 
$
43

 
$
50


 
31
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Non-cash Transactions
Non-cash investing activities included the capitalization of fixed assets and recognition of related obligations in the net amount of $52 million and $38 million for the three-month periods ended June 27, 2015 and June 28, 2014, respectively. In addition, non-cash investing activities for the three months ended June 28, 2014 included the capitalization of a fixed asset, for which a $19 million non-binding advance payment was made during the Company's fiscal year ended March 29, 2014 and recorded within prepaid expenses and other current assets as of March 29, 2014.
There were no other significant non-cash investing or financing activities for the periods presented.

 
32
 

Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Special Note Regarding Forward-Looking Statements
Various statements in this Form 10-Q, or incorporated by reference into this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases, and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "project," "we believe," "is or remains optimistic," "currently envisions," and similar words or phrases and involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed in or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others:
•
the loss of key personnel, including Mr. Ralph Lauren;
•
our ability to achieve anticipated operating enhancements and/or cost reductions from our restructuring plans, including our transition to a global brand-based operating structure;
•
our ability to successfully implement our anticipated growth strategies and to capitalize on our repositioning initiatives in certain regions and merchandise categories;
•
our exposure to currency exchange rate fluctuations from both a transactional and translational perspective, and risks associated with increases in the costs of raw materials, transportation, and labor;
•
our ability to secure our facilities and systems and those of our third-party service providers from, among other things, cybersecurity breaches, acts of vandalism, computer viruses, or similar Internet or email events;
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our ability to continue to maintain our brand image and reputation and protect our trademarks;
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the impact of global economic conditions on us, our customers, our suppliers, and our vendors and on our ability and their ability to access sources of liquidity;
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the impact of the volatile state of the global economy or consumer preferences on purchases of premium lifestyle products that we offer for sale and our ability to forecast consumer demand, which could result in a build-up of inventory;
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changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors, and consolidations, liquidations, restructurings, and other ownership changes in the retail industry;
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a variety of legal, regulatory, tax, political, and economic risks, including risks related to the importation and exportation of products, tariffs, and other trade barriers which our international operations are subject to and other risks associated with our international operations, such as compliance with the Foreign Corrupt Practices Act or violations of other anti-bribery and corruption laws prohibiting improper payments, and the burdens of complying with a variety of foreign laws and regulations, including tax laws, trade and labor restrictions, and related laws that may reduce the flexibility of our business;
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the impact to our business of events of unrest and instability that are currently taking place in certain parts of the world, as well as from any terrorist action, retaliation, and the threat of further action or retaliation;
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our ability to continue to expand or grow our business internationally and the impact of related changes in our customer, channel, and geographic sales mix as a result;
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changes to our effective tax rates;
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changes in our relationships with department store customers and licensing partners;
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our efforts to improve the efficiency of our distribution system and to continue to enhance and upgrade our global information technology systems and our global e-commerce platform;
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our intention to introduce new products or enter into or renew alliances and exclusive relationships;

 
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our ability to access sources of liquidity to provide for our cash needs, including our debt obligations, payment of dividends, capital expenditures, and potential repurchases of our Class A common stock;
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our ability to open new retail stores, concession shops, and e-commerce sites in an effort to expand our direct-to-consumer presence;
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our ability to make certain strategic acquisitions and successfully integrate the acquired businesses into our existing operations;
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the impact to our business resulting from potential costs and obligations related to the early termination of our long-term, non-cancellable leases;
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the potential impact to the trading prices of our securities if our Class A common stock share repurchase activity and/or cash dividend rate differs from investors' expectations;
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our ability to maintain our credit profile and ratings within the financial community; and
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the potential impact on our operations and on our customers resulting from natural or man-made disasters.
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended March 28, 2015 (the "Fiscal 2015 10-K"). There are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A — "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
In this Form 10-Q, references to "Ralph Lauren," "ourselves," "we," "our," "us," and the "Company" refer to Ralph Lauren Corporation and its subsidiaries, unless the context indicates otherwise. We utilize a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2016 will end on April 2, 2016 and will be a 53-week period ("Fiscal 2016"). Fiscal year 2015 ended on March 28, 2015 and was a 52-week period ("Fiscal 2015"). The first quarter of Fiscal 2016 ended on June 27, 2015 and was a 13-week period. The first quarter of Fiscal 2015 ended on June 28, 2014 and was also a 13-week period.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the accompanying unaudited interim consolidated financial statements and footnotes to help provide an understanding of our results of operations, financial condition, and liquidity. MD&A is organized as follows:
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Overview.    This section provides a general description of our business, current trends and outlook, and a summary of our financial performance for the three-month period ended June 27, 2015. In addition, this section includes a discussion of recent developments and transactions affecting comparability that we believe are important in understanding our results of operations and financial condition, and in anticipating future trends.
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Results of operations.    This section provides an analysis of our results of operations for the three-month period ended June 27, 2015 compared to the three-month period ended June 28, 2014.
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Financial condition and liquidity.    This section provides a discussion of our financial condition and liquidity as of June 27, 2015, which includes (i) an analysis of our financial condition compared to the prior fiscal year-end; (ii) an analysis of changes in our cash flows for the three-month period ended June 27, 2015 compared to the three-month period ended June 28, 2014; (iii) an analysis of our liquidity, including common stock repurchases, payments of dividends, our outstanding debt and covenant compliance, and the availability under our credit facilities and our commercial paper borrowing program; and (iv) any material changes in our contractual and other obligations since March 28, 2015.
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Market risk management.    This section discusses any significant changes in our risk exposures related to foreign currency exchange rates, interest rates, and our investments since March 28, 2015.

 
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Critical accounting policies.    This section discusses any significant changes in our critical accounting policies since March 28, 2015. Critical accounting policies typically require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 3 of the Fiscal 2015 10-K.
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Recently issued accounting standards.    This section discusses the potential impact on our reported results of operations and financial condition of certain accounting standards that have been recently issued or proposed.
OVERVIEW
Our Business
Our Company is a global leader in the design, marketing, and distribution of premium lifestyle products, including apparel, accessories, home furnishings, and other licensed product categories. Our long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands, sales channels, and international markets. Our brand names include Ralph Lauren, Ralph Lauren Collection, Purple Label, Black Label, Polo, Polo Ralph Lauren, Double RL, RLX Ralph Lauren, Lauren Ralph Lauren, Ralph Lauren Childrenswear, Denim & Supply Ralph Lauren, Chaps, Club Monaco, and American Living, among others.
We classify our businesses into three segments: Wholesale, Retail, and Licensing. Our Wholesale business, which represented approximately 46% of our Fiscal 2015 net revenues, consists of sales made principally to major department stores and specialty stores around the world. Our Retail business, which represented approximately 52% of our Fiscal 2015 net revenues, consists of sales made directly to consumers through our integrated retail channel, which includes our retail stores, concession-based shop-within-shops, and our e-commerce operations around the world. Our Licensing business, which represented approximately 2% of our Fiscal 2015 net revenues, consists of royalty-based arrangements under which we license to unrelated third parties for specified periods the right to operate retail stores and/or to use our various trademarks in connection with the manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings. Approximately 37% of our Fiscal 2015 net revenues were earned outside of the U.S.
Our business is typically affected by seasonal trends, with higher levels of wholesale sales in our second and fourth fiscal quarters and higher retail sales in our second and third fiscal quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods impacting our Retail segment. In addition, fluctuations in net sales, operating income, and cash flows in any fiscal quarter may be affected by other events impacting retail sales, such as changes in weather patterns. Accordingly, our operating results and cash flows for the three-month period ended June 27, 2015 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2016.
Current Trends and Outlook
Although the global economy has shown signs of modest recovery, future expectations of growth reflect sustained uncertainty. Certain worldwide events, including political unrest, disease epidemic, monetary policy changes, and foreign exchange rate volatility in various parts of the world, as well as the recent debt crisis in Greece, have contributed to this uncertainty and continue to impact the global economy as a whole, as well as the world's stock markets. Adverse weather conditions in certain parts of the world, including the U.S., have also resulted in a challenging Spring/Summer selling season for many retailers. As a result of these factors, among others, several organizations that monitor the world’s economy, including the International Monetary Fund and the World Bank, have recently scaled back their predictions of economic growth for 2015. While certain geographic regions are withstanding these pressures better than others, the level of consumer travel and spending on discretionary items remains constrained due to the continued economic uncertainty. Consequently, consumer retail traffic remains relatively weak and inconsistent, which has led to increased competition and a desire to offset traffic declines with increased levels of conversion. Certain of our operations have experienced and have been impacted by these dynamics, with variations across the geographic regions and businesses in which we operate.
If the economic uncertainty and challenging industry trends continue or worsen, the constrained level of worldwide consumer spending and modified consumption behavior may continue to have a negative effect on our sales, inventory levels, and operating margin for the remainder of Fiscal 2016. Furthermore, our results have been, and are expected to continue to be, negatively impacted by unfavorable foreign exchange rate fluctuations. Despite these challenges, we remain optimistic about our future growth prospects

 
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and continue to invest in our longer-term growth initiatives, including our restructuring activities and transition to a global brand-based operating structure as described within "Recent Developments" below, while continually monitoring macroeconomic risks and remaining focused on disciplined expense management. Although we continue to expect that the dilutive effects of investments that we are making in our business will create operating margin pressure in the near-term, we expect that these initiatives will create longer-term shareholder value. We will continue to monitor these risks and evaluate and adjust our operating strategies and foreign currency and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brand.
For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A — "Risk Factors" in our Fiscal 2015 10-K.
Summary of Financial Performance
Operating Results
During the three months ended June 27, 2015, we reported net revenues of $1.618 billion, net income of $64 million, and net income per diluted share of $0.73, as compared to net revenues of $1.708 billion, net income of $162 million, and net income per diluted share of $1.80 during the three months ended June 28, 2014. The comparability of our operating results has been affected by restructuring and non-cash charges incurred in connection with the Global Reorganization Plan (as defined within "Recent Developments" below) and unfavorable foreign currency effects, as discussed further below.
Our operating performance for the three months ended June 27, 2015 reflected a decline in net revenues of 5.3% on a reported basis and 0.4% on a constant currency basis, as defined within "Transactions and Trends Affecting Comparability of Results of Operations and Financial Condition" below. On a reported basis, the decline in net revenues for the three months ended June 27, 2015 reflected lower net revenues from our wholesale and retail businesses, primarily driven by unfavorable foreign currency effects and a shift in the timing of certain shipments related to our domestic wholesale business. Our gross margin percentage declined 130 basis points to 59.7% during the three months ended June 27, 2015, primarily driven by unfavorable foreign currency effects. Selling, general, and administrative ("SG&A") expenses increased due to increased investments in our stores, facilities, and infrastructure consistent with our longer-term initiatives.
Net income declined by $98 million during the three months ended June 27, 2015 as compared to the three months ended June 28, 2014, primarily due to a $148 million decrease in operating income, partially offset by a $47 million decline in our provision for income taxes. The lower income tax provision for the three months ended June 27, 2015 was primarily driven by lower pretax income and a decline in our reported effective tax rate of 210 basis points. Net income per diluted share declined by $1.07 to $0.73 per share during the three months ended June 27, 2015, as compared to the three months ended June 28, 2014, primarily due to lower net income, partially offset by lower weighted-average diluted shares outstanding. Our operating results during the three months ended June 27, 2015 were also negatively impacted by $45 million of pretax restructuring and non-cash charges recorded in connection with the Global Reorganization Plan, which had an after-tax effect of reducing net income by $31 million, or approximately $0.36 per diluted share.
Financial Condition and Liquidity
We ended the first quarter of Fiscal 2016 in a net cash and investments position (cash and cash equivalents plus short-term and non-current investments, less total debt) of $707 million, as compared to $620 million as of the end of Fiscal 2015. The increase in our net cash and investments position at June 27, 2015 as compared to March 28, 2015 was primarily due to our operating cash flows of $332 million, partially offset by our use of cash to support Class A common stock repurchases of $169 million, including withholdings in satisfaction of tax obligations for stock-based compensation awards, to invest in our business through $68 million in capital expenditures, and to make cash dividend payments of $43 million.
We generated $332 million of cash from operations during the three months ended June 27, 2015, compared to $415 million during the three months ended June 28, 2014. The decline in our operating cash flows primarily related to the decline in net income before non-cash charges, partially offset by a net favorable change related to our operating assets and liabilities during the three months ended June 27, 2015 as compared to the prior fiscal year period.