Document


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 July 2, 2016
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 August 5, 2016, 56,377,202 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-10.4
 
 
EX-12.1
 
 
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
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
(unaudited)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
457

 
$
456

Short-term investments
 
619

 
629

Accounts receivable, net of allowances of $223 million and $254 million
 
338

 
517

Inventories
 
1,242

 
1,125

Income tax receivable
 
60

 
58

Prepaid expenses and other current assets
 
286

 
268

Total current assets
 
3,002

 
3,053

Property and equipment, net
 
1,565

 
1,583

Deferred tax assets
 
116

 
119

Goodwill
 
930

 
918

Intangible assets, net
 
240

 
244

Other non-current assets
 
265

 
296

Total assets
 
$
6,118

 
$
6,213

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Short-term debt
 
$
90

 
$
116

Accounts payable
 
192

 
151

Income tax payable
 
22

 
33

Accrued expenses and other current liabilities
 
992

 
898

Total current liabilities
 
1,296

 
1,198

Long-term debt
 
602

 
597

Non-current liability for unrecognized tax benefits
 
77

 
81

Other non-current liabilities
 
577

 
593

Commitments and contingencies (Note 13)
 

 

Total liabilities
 
2,552

 
2,469

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 101.5 million and 101.0 million shares issued; 56.4 million and 57.0 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
 
2,259

 
2,258

Retained earnings
 
5,952

 
6,015

Treasury stock, Class A, at cost; 45.1 million and 44.0 million shares
 
(4,454
)
 
(4,349
)
Accumulated other comprehensive loss
 
(192
)
 
(181
)
Total equity
 
3,566

 
3,744

Total liabilities and equity
 
$
6,118

 
$
6,213

See accompanying notes.

 
3
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions, except per share data)
(unaudited)
Net sales
 
$
1,514

 
$
1,577

Licensing revenue
 
38

 
41

Net revenues
 
1,552

 
1,618

Cost of goods sold(a) 
 
(657
)
 
(652
)
Gross profit
 
895

 
966

Selling, general, and administrative expenses(a) 
 
(815
)
 
(822
)
Amortization of intangible assets
 
(6
)
 
(6
)
Impairment of assets
 
(19
)
 
(8
)
Restructuring charges
 
(86
)
 
(34
)
Total other operating expenses, net
 
(926
)
 
(870
)
Operating income (loss)
 
(31
)
 
96

Foreign currency gains (losses)
 
2

 
(1
)
Interest expense
 
(3
)
 
(4
)
Interest and other income, net
 
1

 
2

Equity in losses of equity-method investees
 
(2
)
 
(3
)
Income (loss) before income taxes
 
(33
)
 
90

Income tax benefit (provision)
 
11

 
(26
)
Net income (loss)
 
$
(22
)
 
$
64

Net income (loss) per common share:
 
 
 
 
Basic
 
$
(0.27
)
 
$
0.74

Diluted
 
$
(0.27
)
 
$
0.73

Weighted average common shares outstanding:
 
 
 
 
Basic
 
83.3

 
86.5

Diluted
 
83.3

 
87.5

Dividends declared per share
 
$
0.50

 
$
0.50

(a) Includes total depreciation expense of:
 
$
(72
)
 
$
(68
)

See accompanying notes.


 
4
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
(unaudited)
Net income (loss)
 
$
(22
)
 
$
64

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation gains (losses)
 
(9
)
 
19

Net losses on cash flow hedges
 
(2
)
 
(8
)
Other comprehensive income (loss), net of tax
 
(11
)
 
11

Total comprehensive income (loss)
 
$
(33
)
 
$
75


See accompanying notes.


 
5
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
(unaudited)
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(22
)
 
$
64

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
78

 
74

Deferred income tax expense (benefit)
 
3

 
(18
)
Equity in losses of equity-method investees
 
2

 
3

Non-cash stock-based compensation expense
 
18

 
32

Non-cash impairment of assets
 
19

 
8

Non-cash restructuring-related inventory charges
 
54

 
3

Excess tax benefits from stock-based compensation arrangements
 
—

 
(6
)
Other non-cash charges, net
 
10

 
1

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
174

 
265

Inventories
 
(168
)
 
(229
)
Prepaid expenses and other current assets
 
(23
)
 
12

Accounts payable and accrued liabilities
 
142

 
114

Income tax receivables and payables
 
(21
)
 
(9
)
Deferred income
 
(2
)
 
(3
)
Other balance sheet changes, net
 
(21
)
 
21

Net cash provided by operating activities
 
243

 
332

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(78
)
 
(68
)
Purchases of investments
 
(144
)
 
(329
)
Proceeds from sales and maturities of investments
 
182

 
325

Acquisitions and ventures
 
(1
)
 
(3
)
Change in restricted cash deposits
 
—

 
(2
)
Net cash used in investing activities
 
(41
)
 
(77
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of short-term debt
 
944

 
1,238

Repayments of short-term debt
 
(970
)
 
(1,317
)
Payments of capital lease obligations
 
(7
)
 
(5
)
Payments of dividends
 
(41
)
 
(43
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(115
)
 
(169
)
Proceeds from exercise of stock options
 
3

 
15

Excess tax benefits from stock-based compensation arrangements
 
—

 
6

Net cash used in financing activities
 
(186
)
 
(275
)
Effect of exchange rate changes on cash and cash equivalents
 
(15
)
 
10

Net increase (decrease) in cash and cash equivalents
 
1

 
(10
)
Cash and cash equivalents at beginning of period
 
456

 
500

Cash and cash equivalents at end of period
 
$
457

 
$
490


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, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Ralph Lauren Children, Denim & Supply Ralph Lauren, Chaps, and Club Monaco, among others. RLC and its subsidiaries are collectively referred to herein as the "Company," "we," "us," "our," and "ourselves," unless the context indicates otherwise.
The Company 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 (loss), comprehensive income (loss), 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 April 2, 2016 (the "Fiscal 2016 10-K").
Basis of Consolidation
These unaudited interim consolidated financial statements present the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2017 will end on April 1, 2017 and will be a 52-week period ("Fiscal 2017"). Fiscal year 2016 ended on April 2, 2016 and was a 53-week period ("Fiscal 2016"). The first quarter of Fiscal 2017 ended on July 2, 2016 and was a 13-week period. The first quarter of Fiscal 2016 ended on June 27, 2015 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 July 2, 2016 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2017.
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 operations. Shipping costs were $9 million during each of the three-month periods ended July 2, 2016 and June 27, 2015. 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 $41 million during each of the three-month periods ended July 2, 2016 and June 27, 2015. Shipping and handling costs billed to customers are included in revenue.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company's Class A and Class B common stock. Diluted net income (loss) per common share adjusts basic net income (loss) per common share for the dilutive effects of outstanding stock options, restricted stock, 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 (loss) per common share is reconciled to shares used to calculate diluted net income (loss) per common share as follows:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Basic shares
 
83.3

 
86.5

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

(a) 
1.0

Diluted shares
 
83.3

 
87.5

 
 
(a) 
Incremental shares of 1.0 million attributable to outstanding stock options, restricted stock, and RSUs were excluded from the computation of diluted shares for the three months ended July 2, 2016, as such shares would not be dilutive as a result of the net loss incurred during the period.
All earnings per share amounts have been calculated using unrounded numbers. Options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income 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 applicable market condition modifiers, if any) (i) have been satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of July 2, 2016 and June 27, 2015, there were 2.9 million and 2.6 million, respectively, additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs that were excluded from the diluted shares calculations. Additionally, in June 2016, the Company entered into an accelerated share repurchase program (the "ASR Program," as defined in Note 14). As of July 2, 2016, the additional shares yet to be delivered to the Company under the ASR Program would be anti-dilutive, and therefore were excluded from the diluted shares calculation.

 
9
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.
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
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Beginning reserve balance
 
$
240

 
$
240

Amount charged against revenue to increase reserve
 
132

 
150

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

 
1

Ending reserve balance
 
$
207

 
$
210

An allowance for doubtful accounts is determined through an analysis of accounts receivable aging, assessments of collectability based on an evaluation of historical and anticipated trends, the financial condition of the Company's customers, and an evaluation of the impact of economic conditions, among other factors. The Company's allowance for doubtful accounts was $16 million and $14 million as of July 2, 2016 and April 2, 2016, respectively. The change in the allowance for doubtful accounts was not material during either of the three-month periods ended July 2, 2016 and June 27, 2015.
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 2016, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately 11% 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 July 2, 2016, these three key wholesale customers constituted approximately 29% of total gross accounts receivable.
Inventories
The Company holds inventory that is sold through wholesale distribution channels to major department stores and specialty retail stores. The Company also holds retail inventory that is sold in its own stores and e-commerce sites directly to consumers. Substantially all of the Company's inventories are comprised of finished goods, which are stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average cost basis. Inventory held by the Company totaled $1.242 billion, $1.125 billion, and $1.270 billion as of July 2, 2016, April 2, 2016, and June 27, 2015, respectively.

 
10
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 (loss) ("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 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.
Cash Flow Hedges
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, 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 operations as follows:
•
Forecasted Inventory Transactions — recognized as part of the cost of the inventory being hedged within cost of goods sold when the related inventory is sold to a third party.
•
Intercompany Royalties — recognized within foreign currency gains (losses) generally in the period in which the related payments being hedged occur.

 
11
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.
Undesignated Hedges
All of the Company's undesignated hedges are entered into to hedge specific economic risks, particularly foreign currency exchange rate risk related to foreign currency-denominated balances. Changes in the fair value of undesignated derivative instruments are immediately recognized in earnings within foreign currency gains (losses).
See Note 12 for further discussion of the Company's derivative financial instruments.
Refer to Note 3 of the Fiscal 2016 10-K for a summary of all of the Company's significant accounting policies.
4.
Recently Issued Accounting Standards
Improvements to Employee Share-Based Payment Accounting
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to how share-based payments are accounted for and presented in the financial statements, including the accounting for forfeitures and tax-effects related to share-based payments at settlement, and the classification of excess tax benefits and shares surrendered for tax withholdings in the statement of cash flows. ASU 2016-09 is effective for the Company beginning in its fiscal year 2018, with early adoption permitted. The adoption methodology (i.e., prospective, retrospective, or modified-retrospective) varies by amendment. The Company is currently in the process of evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

 
12
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02 requires that, among other changes to current practice, a lessee's rights and obligations under almost all leases, including existing and new arrangements, be recognized as right-of-use assets and lease liabilities on the consolidated balance sheet. ASU 2016-02 is effective for the Company beginning in its fiscal year 2020, with early adoption permitted, and must be adopted using a modified retrospective approach which requires application of the guidance at the beginning of the earliest comparative period presented. The Company is currently in the process of evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures, but expects that it will result in a significant increase to its long-term assets and liabilities.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that will supersede most existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue 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.
In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers — Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 by one year. Accordingly, ASU 2014-09 is effective for the Company beginning in its fiscal year 2019. The FASB also issued several additional ASUs to amend and clarify certain topics within ASU 2014-09. 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 that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
5.
Property and Equipment
Property and equipment, net consists of the following:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
Land and improvements
 
$
17

 
$
17

Buildings and improvements
 
474

 
460

Furniture and fixtures
 
721

 
727

Machinery and equipment
 
371

 
359

Capitalized software
 
472

 
460

Leasehold improvements
 
1,253

 
1,248

Construction in progress
 
209

 
216

 
 
3,517

 
3,487

Less: accumulated depreciation
 
(1,952
)
 
(1,904
)
Property and equipment, net
 
$
1,565

 
$
1,583


 
13
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.
Other Assets and Liabilities
Prepaid expenses and other current assets consist of the following:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
Other taxes receivable
 
$
113

 
$
112

Prepaid rent expense
 
41

 
37

Derivative financial instruments
 
21

 
16

Tenant allowances receivable
 
13

 
13

Prepaid samples
 
13

 
9

Restricted cash
 
12

 
17

Prepaid advertising and marketing
 
9

 
7

Other prepaid expenses and current assets
 
64

 
57

Total prepaid expenses and other current assets
 
$
286

 
$
268

Other non-current assets consist of the following:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
Non-current investments
 
$
149

 
$
187

Restricted cash
 
34

 
29

Security deposits
 
31

 
32

Derivative financial instruments
 
11

 
6

Other non-current assets
 
40

 
42

Total other non-current assets
 
$
265

 
$
296

Accrued expenses and other current liabilities consist of the following:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
Accrued inventory
 
$
197

 
$
176

Accrued operating expenses
 
182

 
186

Other taxes payable
 
156

 
139

Accrued payroll and benefits
 
149

 
149

Restructuring reserve
 
107

 
40

Accrued capital expenditures
 
55

 
65

Deferred income
 
48

 
50

Dividends payable
 
41

 
41

Derivative financial instruments
 
27

 
26

Capital lease obligations
 
22

 
21

Other accrued expenses and current liabilities
 
8

 
5

Total accrued expenses and other current liabilities
 
$
992

 
$
898


 
14
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other non-current liabilities consist of the following:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
Capital lease obligations
 
$
264

 
$
266

Deferred rent obligations
 
217

 
222

Derivative financial instruments
 
26

 
33

Deferred tax liabilities
 
13

 
17

Deferred compensation
 
8

 
8

Other non-current liabilities
 
49

 
47

Total other non-current liabilities
 
$
577

 
$
593

7.
Impairment of Assets
During the three months ended July 2, 2016, the Company recorded non-cash impairment charges of $19 million, primarily to write off certain fixed assets related to its domestic and international stores and shop-within-shops in connection with the Way Forward Plan (see Note 8).
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 8).
8.
Restructuring Charges
A description of significant restructuring activities and related costs is included below.
Way Forward Plan
On June 2, 2016, the Company's Board of Directors approved a restructuring plan with the objective of delivering sustainable, profitable sales growth and long-term value creation for shareholders (the "Way Forward Plan"). The Company plans to refocus on its core brands and evolve its product, marketing, and shopping experience to increase desirability and relevance. It also intends to evolve its operating model to enable sustainable, profitable sales growth by significantly reducing supply chain lead times, improving its sourcing, and executing a disciplined multi-channel distribution and expansion strategy. As part of the Way Forward Plan, the Company plans to rightsize its cost structure and implement a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Way Forward Plan includes strengthening the Company's leadership team and creating a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan will result in a reduction in workforce and the closure of certain stores, and is expected to be substantially completed by the end of Fiscal 2017.
In connection with the Way Forward Plan, the Company currently expects to incur total estimated charges of up to $400 million, comprised of cash-related restructuring charges of approximately $300 million and non-cash charges of approximately $100 million. The Company also expects to incur an additional non-cash charge of up to $150 million associated with the reduction of inventory out of current liquidation channels in line with its Way Forward Plan. The Company's assessment of restructuring-related activities is still ongoing and incremental charges beyond this range may be incurred.

 
15
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the charges recorded in connection with the Way Forward Plan during the three months ended July 2, 2016 is as follows:
 
 
Three Months Ended
 
 
July 2, 2016
 
 
(millions)
Cash-related restructuring charges:
 
 
Severance and benefit costs
 
$
77

Lease termination and store closure costs
 
2

Other cash charges
 
2

Total cash-related restructuring charges
 
81

Non-cash charges:
 
 
Impairment of assets (see Note 7)
 
19

Inventory-related charges(a)
 
54

Total non-cash charges
 
73

Total charges
 
$
154

 
 
(a) 
Includes charges of $50 million associated with the reduction of inventory out of current liquidation channels. Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
A summary of the activity in the restructuring reserve related to the Way Forward Plan is as follows:
 
 
Severance and Benefit Costs
 
Lease Termination
and Store
Closure Costs
 
Other Cash Charges
 
Total
 
 
(millions)
Balance at April 2, 2016
 
$
—

 
$
—

 
$
—

 
$
—

Additions charged to expense
 
77

 
2

 
2

 
81

Cash payments charged against reserve
 
(7
)
 
—

 
—

 
(7
)
Balance at July 2, 2016
 
$
70

 
$
2

 
$
2

 
$
74

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 historical 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"). Actions associated with the Global Reorganization Plan resulted in a reduction in workforce and the closure of certain stores and shop-within-shops.

 
16
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the charges recorded in connection with the Global Reorganization Plan during the three-month periods ended July 2, 2016 and June 27, 2015, as well as the cumulative charges recorded since its inception, is as follows:
 
 
Three Months Ended
 
 
 
 
July 2,
2016
 
June 27,
2015
 
Cumulative Charges
 
 
(millions)
Cash-related restructuring charges:
 
 
 
 
 
 
Severance and benefit costs
 
$
5

 
$
32

 
$
69

Lease termination and store closure costs
 
—

 
1

 
8

Other cash charges(a)
 
—

 
1

 
14

Total cash-related restructuring charges
 
5

 
34

 
91

Non-cash charges:
 
 
 
 
 
 
Impairment of assets (see Note 7)
 
—

 
8

 
27

Accelerated stock-based compensation expense(b)
 
—

 
—

 
9

Inventory-related charges(c)
 
—

 
3

 
20

Total non-cash charges
 
—

 
11

 
56

Total charges
 
$
5

 
$
45

 
$
147

 
 
(a) 
Other cash charges primarily consisted of consulting fees recorded in connection with the Global Reorganization Plan.
(b) 
Accelerated stock-based compensation expense, which is recorded within restructuring charges in the consolidated statements of operations, was recorded in connection with vesting provisions associated with certain separation agreements.
(c) 
Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
Actions associated with the Global Reorganization Plan are now complete and no additional charges are expected to be incurred in relation to this plan.
A summary of current period activity in the restructuring reserve related to the Global Reorganization Plan is as follows:
 
 
Severance and Benefit Costs
 
Lease Termination
and Store
Closure Costs
 
Other Cash Charges
 
Total
 
 
(millions)
Balance at April 2, 2016
 
$
31

 
$
6

 
$
3

 
$
40

Additions charged to expense
 
5

 
—

 
—

 
5

Cash payments charged against reserve
 
(10
)
 
—

 
(2
)
 
(12
)
Balance at July 2, 2016
 
$
26

 
$
6

 
$
1

 
$
33

9.
Income Taxes
Effective Tax Rate
The Company's effective tax rate, which is calculated by dividing each fiscal period's income tax benefit (provision) by pretax income (loss), was 32.8% and 29.0% during the three-month periods ended July 2, 2016 and June 27, 2015, respectively. The effective tax rates in both periods presented were lower than the U.S. federal statutory income tax rate of 35% 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 July 2, 2016 was lower than the statutory income tax rate due to additional income tax reserves largely associated

 
17
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

with an anticipated tax settlement, partially offset by state income tax reserve releases. The effective tax rate for the three months ended June 27, 2015 was also lower than the statutory income tax rate due to the reversal of certain tax reserves as a result of the expiration of statues 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 $77 million and $81 million as of July 2, 2016 and April 2, 2016, respectively, and is included within non-current liability for unrecognized tax benefits in the consolidated balance sheets. The net reduction of $4 million in unrecognized tax benefits, including interest and penalties, primarily related to state reserve releases of $3 million, settlement payments of $2 million, and other reductions of $3 million, partially offset by an increase of $4 million relating to an income tax matter currently under consideration at appeals with the Internal Revenue Service.
The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was $59 million and $60 million as of July 2, 2016 and April 2, 2016, 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, it is reasonably possible that the balance of gross unrecognized tax benefits, excluding interest and penalties, could be reduced by approximately $9 million during the next twelve months due to an anticipated settlement by the Company and the Internal Revenue Service of an income tax matter currently under consideration at appeals for its fiscal years ended April 2, 2011 and March 31, 2012 and the potential conclusion of a federal income tax audit for its fiscal years ended March 30, 2013 and March 29, 2014. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended April 1, 2006.
10.
Debt
Debt consists of the following:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
$300 million 2.125% Senior Notes(a)
 
$
303

 
$
301

$300 million 2.625% Senior Notes(b)
 
299

 
296

Commercial paper notes
 
90

 
90

Borrowings outstanding under credit facilities
 
—

 
26

Total debt
 
692

 
713

Less: short-term debt
 
90

 
116

Total long-term debt
 
$
602

 
$
597

 
 
(a) 
During Fiscal 2016, the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.125% Senior Notes (see Note 12). Accordingly, the carrying value of the 2.125% Senior Notes as of July 2, 2016 and April 2, 2016 reflects adjustments of $4 million and $2 million, respectively, for the change in fair value attributable to the benchmark interest rate. The carrying value of the 2.125% Senior Notes is also net of unamortized debt issuance costs and discount of $1 million as of both July 2, 2016 and April 2, 2016.

 
18
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(b) 
During Fiscal 2016, the Company entered into an interest rate swap contract which it designated as a hedge against changes in the fair value of its fixed-rate 2.625% Senior Notes (see Note 12). Accordingly, the carrying value of the 2.625% Senior Notes as of July 2, 2016 and April 2, 2016 reflects adjustments of $1 million and $2 million, respectively, for the change in fair value attributable to the benchmark interest rate. The carrying value of the 2.625% Senior Notes is also net of unamortized debt issuance costs and discount of $2 million as of both July 2, 2016 and April 2, 2016.
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, which bear interest at a fixed rate of 2.125%, payable semi-annually (the "2.125% Senior Notes"). The 2.125% Senior Notes were issued at a price equal to 99.896% of their principal amount. 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.
In August 2015, the Company completed a second registered public debt offering and issued an additional $300 million aggregate principal amount of unsecured senior notes due August 18, 2020, which bear interest at a fixed rate of 2.625%, payable semi-annually (the "2.625% Senior Notes"). The 2.625% Senior Notes were issued at a price equal to 99.795% of their principal amount. The proceeds from this offering were used for general corporate purposes.
The Company has the option to redeem the 2.125% Senior Notes and 2.625% Senior Notes (collectively, the "Senior Notes"), in whole or in part, at any time at a price equal to accrued and unpaid interest on the redemption date, plus the greater of (i) 100% of the principal amount of the series of Senior Notes to be redeemed or (ii) the sum of the present value of Remaining Scheduled Payments, as defined in the supplemental indentures governing such Senior Notes (together with the indenture governing the Senior Notes, the "Indenture"). The Indenture contains certain covenants that restrict the Company's ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of the Company's property or assets to another party. However, the Indenture does not contain any financial covenants.    
Commercial Paper
In May 2014, 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 expanded 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. Accordingly, the Company does not expect combined borrowings outstanding under the Commercial Paper Program and Global Credit Facility to exceed $500 million. Commercial Paper Program borrowings may be used to support the Company's general working capital and corporate needs. Maturities of commercial paper notes vary, but cannot exceed 397 days from the date of issuance. Commercial paper notes issued under the Commercial Paper Program rank equally with the Company's other forms of unsecured indebtedness. As of July 2, 2016, the Company had $90 million in borrowings outstanding under its Commercial Paper Program, with a weighted-average annual interest rate of 0.44% and a weighted-average remaining term of 4 days.
Revolving Credit Facilities
Global Credit Facility
In February 2015, the Company entered into an amended and restated credit facility (which was further amended in March 2016) 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

 
19
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

reductions in borrowing ability throughout the term of the Global Credit Facility. As of July 2, 2016, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $8 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 four times consolidated rent expense for the four most recent 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, (iv) consolidated rent expense, (v) restructuring and other non-recurring expenses, and (vi) acquisition-related costs. As of July 2, 2016, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company's Global 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 and South Korea (the "Pan-Asia Credit Facilities"). These credit facilities are subject to annual renewal and may be used to fund general working capital and corporate needs of the Company's operations in the respective countries. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the parent company and are granted at the sole discretion of the Banks, subject to availability of the Banks' funds and satisfaction of certain regulatory requirements. The Pan-Asia Credit Facilities do not contain any financial covenants. The Company's Pan-Asia Credit Facilities by country are as follows:
•
China Credit Facility — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to 100 million Chinese Renminbi (approximately $15 million) through April 6, 2017, and may also be used to support bank guarantees. As of July 2, 2016, bank guarantees supported by this facility were not material.
•
South Korea Credit Facility — provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to 47 billion South Korean Won (approximately $41 million) through October 31, 2016.
During the first quarter of Fiscal 2017, the Company repaid $26 million in borrowings that were previously outstanding under the Pan-Asia Credit Facilities. As of July 2, 2016, there were no borrowings outstanding under the Pan-Asia Credit Facilities.
Refer to Note 13 of the Fiscal 2016 10-K for additional disclosure of the terms and conditions of the Company's debt and credit facilities.
11.
Fair Value Measurements
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
•
Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.

 
20
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•
Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.
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:
 
 
July 2,
2016
 
April 2,
2016
 
 
(millions)
Financial assets recorded at fair value:
 
 
 
 
Corporate bonds — non-U.S.(a)
 
$
8

 
$
8

Derivative financial instruments(b)
 
32

 
22

Total
 
$
40

 
$
30

Financial liabilities recorded at fair value:
 
 
 
 
Derivative financial instruments(b)
 
$
53

 
$
59

Total
 
$
53

 
$
59

 
(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.
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 values of the Senior Notes are estimated based on external pricing data, including available quoted market prices, and with reference to comparable debt instruments with similar interest rates, credit ratings, and trading frequency, among other factors. The fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities are estimated using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's outstanding borrowings. Due to their short-term nature, the fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities approximate their carrying values for the periods presented.

 
21
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the carrying values and the estimated fair values of the Company's debt instruments:
 
 
July 2, 2016
 
April 2, 2016
 
 
Carrying Value
 
Fair Value(a)
 
Carrying Value
 
Fair Value(a)
 
 
(millions)
$300 million 2.125% Senior Notes
 
$
303

(b) 
$
306

 
$
301

(b) 
$
306

$300 million 2.625% Senior Notes
 
299

(b) 
313

 
296

(b) 
308

Commercial paper notes
 
90

 
90

 
90

 
90

Borrowings outstanding under credit facilities
 
—

 
—

 
26

 
26

 
 
(a) 
Based on Level 2 measurements.
(b) 
See Note 10 for discussion of the carrying values of the Company's Senior Notes as of July 2, 2016 and April 2, 2016.
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 July 2, 2016 and June 27, 2015, 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' and 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 July 2, 2016 and June 27, 2015:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Aggregate carrying value of long-lived assets written down to fair value
 
$
19

 
$
8

Impairment charges (see Note 7)
 
(19
)
 
(8
)
No goodwill impairment charges were recorded during either of the three-month periods ended July 2, 2016 or June 27, 2015.

 
22
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.
Financial Instruments
Derivative Financial Instruments
The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows and the value of the reported net assets of its international operations, as well as changes in the fair value of its fixed-rate debt 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 July 2, 2016 and April 2, 2016:
 
 
Notional Amounts
 
Derivative Assets
 
Derivative Liabilities
Derivative Instrument(a)
 
July 2,
2016
 
April 2,
2016
 
July 2,
2016
 
April 2,
2016
 
July 2,
2016
 
April 2,
2016
 
 
 
 
 
 
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
 
$
492

 
$
532

 
(e) 
 
$
8

 
PP
 
$
1

 
AE
 
$
5

 
AE
 
$
14

FC — Other(c)
 
194

 
210

 
—
 
—

 
—
 
—

 
(f) 
 
23

 
AE
 
9

IRS — Fixed-rate debt
 
600

 
600

 
ONCA
 
5

 
ONCA
 
2

 
—
 
—

 
ONCL
 
2

CCS — NI
 
615

 
630

 
—
 
—

 
—
 
—

 
ONCL
 
18

 
ONCL
 
31

Total Designated Hedges
 
$
1,901

 
$
1,972

 
 
 
$
13

 
 
 
$
3

 
 
 
$
46

 
 
 
$
56

Undesignated Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Other(d)
 
$
581

 
$
541

 
(g) 
 
$
19

 
(g) 
 
$
19

 
(h) 
 
$
7

 
AE
 
$
3

Total Hedges
 
$
2,482

 
$
2,513

 
 
 
$
32

 
 
 
$
22

 
 
 
$
53

 
 
 
$
59

 
(a) 
FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contracts; CCS = Cross-currency swap contracts; NI = Net investment hedges.
(b) 
PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCA = Other non-current assets; ONCL = Other non-current liabilities.
(c) 
Primarily includes designated hedges of foreign currency-denominated intercompany royalty payments and other operational exposures.
(d) 
Primarily includes undesignated hedges of foreign currency-denominated intercompany loans and other intercompany balances.
(e) 
$6 million included within prepaid expenses and other current assets and $2 million included within other non-current assets.
(f) 
$17 million included within accrued expenses and other current liabilities and $6 million included within other non-current liabilities.
(g) 
$15 million included within prepaid expenses and other current assets and $4 million included within other non-current assets as of both periods presented.
(h) 
$5 million included within accrued expenses and other current liabilities and $2 million included within other non-current liabilities.

 
23
 

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 July 2, 2016 and April 2, 2016 would be adjusted from the current gross presentation as detailed in the following table:
 
 
July 2, 2016
 
April 2, 2016
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
 
$
32

 
$
(27
)
 
$
5

 
$
22

 
$
(11
)
 
$
11

Derivative liabilities
 
$
53

 
$
(27
)
 
$
26

 
$
59

 
$
(11
)
 
$
48

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 tables summarize the pretax impact of the effective portion of gains and losses from the Company's designated derivative instruments on its consolidated financial statements for the three-month periods ended July 2, 2016 and June 27, 2015:
 
 
Gains (Losses) Recognized in OCI
 
 
 
 
Three Months Ended
 
 
Derivative Instrument
 
July 2,
2016
 
June 27,
2015
 
 
 
 
(millions)
 
 
Designated Cash Flow Hedges:
 
 
 
 
 
 
FC — Inventory purchases
 
$
11

 
$
(2
)
 
 
FC — Other
 
(16
)
 
1

 
 
 
 
$
(5
)
 
$
(1
)
 
 
Designated Hedges of Net Investments:
 
 
 
 
 
 
CCS(a)
 
$
13

 
$
(12
)
 
 
Total Designated Hedges
 
$
8

 
$
(13
)
 
 
 
 
Gains (Losses) Reclassified from AOCI to Earnings
 
Location of Gains (Losses)
Reclassified from
AOCI to Earnings
 
 
Three Months Ended
 
Derivative Instrument
 
July 2,
2016
 
June 27,
2015
 
 
 
(millions)
 
 
Designated Cash Flow Hedges:
 
 
 
 
 
 
FC — Inventory purchases
 
$
3

 
$
7

 
Cost of goods sold
FC — Other
 
(5
)
 
—

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

 
 
 
(a) 
Amounts recognized in OCI would be recognized in earnings only upon the sale or liquidation of the hedged net investment.
As of July 2, 2016, it is expected that $13 million of net losses 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.

 
24
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the pretax impact of gains and losses from the Company's undesignated derivative instruments on its consolidated financial statements for the three-month periods ended July 2, 2016 and June 27, 2015:
 
 
Gains (Losses) Recognized in Earnings
 
Location of Gains (Losses)
Recognized in Earnings
 
 
Three Months Ended
 
Derivative Instrument
 
July 2,
2016
 
June 27,
2015
 
 
 
(millions)
 
 
Undesignated Hedges:
 
 
 
 
 
 
FC — Other
 
$
(8
)
 
$
4

 
Foreign currency gains (losses)
Total Undesignated Hedges
 
$
(8
)
 
$
4

 
 
Risk Management Strategies
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 made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, and other foreign currency-denominated operational and intercompany balances and 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 Contracts
During Fiscal 2016, the Company entered into two pay-floating rate, receive-fixed rate interest rate swap contracts which it designated as hedges against changes in the respective fair values of its fixed-rate 2.125% Senior Notes and its fixed-rate 2.625% Senior Notes attributed to changes in the benchmark interest rate (the "Interest Rate Swaps"). The Interest Rate Swaps, which mature on September 26, 2018 and August 18, 2020, respectively, both have notional amounts of $300 million and swap the fixed interest rates on the Company's 2.125% Senior Notes and 2.625% Senior Notes for variable interest rates based on the 3-month London Interbank Offered Rate ("LIBOR") plus a fixed spread. Changes in the fair values of the Interest Rate Swaps were offset by changes in the fair values of the 2.125% Senior Notes and 2.625% Senior Notes attributed to changes in the benchmark interest rate, with no resulting ineffectiveness recognized in earnings during any of the fiscal periods presented.
Cross-Currency Swap Contracts
During Fiscal 2016, the Company entered into two pay-floating rate, receive-floating rate cross-currency swap contracts, with notional amounts of €280 million and €274 million, which it designated as hedges of its net investment in certain of its European subsidiaries (the "Cross-Currency Swaps"). The Cross-Currency Swaps, which mature on September 26, 2018 and August 18, 2020, respectively, swap the U.S. Dollar-denominated variable interest rate payments based on 3-month LIBOR plus a fixed spread (as paid under the Interest Rate Swaps described above) for Euro-denominated variable interest rate payments based on the 3-month Euro Interbank Offered Rate plus a fixed spread. As a result, the Cross-Currency Swaps, in conjunction with the Interest Rate Swaps, economically convert the Company's $300 million fixed-rate 2.125% and $300 million fixed-rate 2.625% obligations to €280 million and €274 million floating-rate Euro-denominated liabilities, respectively. No material gains or losses related to the ineffective portion, or the amount excluded from effectiveness testing, were recognized in interest expense within the consolidated statements of operations during any of the fiscal periods presented.
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.

 
25
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Investments
As of July 2, 2016, the Company's short-term investments consisted of $611 million of time deposits and $8 million of non-U.S. corporate bonds, and its non-current investments consisted of $149 million of time deposits. As of April 2, 2016, the Company's short-term investments consisted of $621 million of time deposits and $8 million of non-U.S. corporate bonds, and its non-current investments consisted of $187 million of time deposits. The Company's non-current investments as of both July 2, 2016 and April 2, 2016 have maturities of one to two years.
No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded during any of the fiscal periods presented.
Refer to Note 3 of the Fiscal 2016 10-K for further discussion of the Company's accounting policies relating to its investments.
13.
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 $46 million in incremental duty and non-creditable value-added tax, including $11 million in interest and penalties. The Company believes that the alternative duty method claimed by the customs officials is not applicable to the Company's facts and circumstances and is vigorously contesting their asserted methodology.
In October 2014, the Company filed an appeal of the pre-assessment notice in accordance with the standard procedures established by the relevant customs authorities. In response to the filing of the Company's appeal of the pre-assessment notice, the review committee instructed the customs officials to reconsider their assertion of the alternative duty method and conduct a re-audit to evaluate the facts and circumstances noted in the pre-assessment notice. In December 2015, the Company received the results of the re-audit conducted and a customs audit assessment notice in the amount of $34 million, which the Company recorded within restructuring and other charges in its consolidated statements of operations during the third quarter of Fiscal 2016. Although the Company disagrees with the assessment notice, in order to secure the Company's rights, the Company was required to pay the assessment amount and then subsequently file an appeal with the customs authorities. The Company continues to maintain its original filing position and will vigorously contest any other proposed methodology asserted by the customs officials. Should the Company be successful in its merits, a full refund for the amounts paid plus interest will be required to be paid by the customs authorities. If the Company is unsuccessful in its current appeal with the customs authorities, it may further appeal this decision within the courts. At this time, while the Company believes that the customs officials' claims are not meritorious and that the Company should prevail, the outcome of the appeals process is subject to risk and uncertainty.
Other Matters
The Company is involved, from time to time, in litigation, other legal claims, and proceedings involving matters associated with or incidental to its business, including, among other things, matters involving credit card fraud, trademark and other intellectual property, licensing, importation and exportation of its products, taxation, unclaimed property, and employee relations. The Company believes at present that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on its consolidated financial statements. However, the Company's assessment of any current litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims.
In the normal course of business, the Company enters into agreements that provide general indemnifications. The Company has not made any significant indemnification payments under such agreements in the past, and does not currently anticipate incurring any material indemnification payments.

 
26
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.
Equity
Summary of Changes in Equity
A reconciliation of the beginning and ending amounts of equity is presented below:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Balance at beginning of period
 
$
3,744

 
$
3,891

Comprehensive income (loss)
 
(33
)
 
75

Dividends declared
 
(41
)
 
(43
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(115
)
(a) 
(169
)
Stock-based compensation
 
18

 
32

Shares issued and tax benefits (shortfalls) recognized pursuant to stock-based compensation arrangements
 
(7
)
 
21

Balance at end of period
 
$
3,566

 
$
3,807

 
(a) 
Includes $10 million of Class A common stock yet to be delivered to the Company under its ASR Program (as defined below), which was recorded as a reduction to additional paid-in capital in the Company's consolidated balance sheet as of July 2, 2016.
Common Stock Repurchase Program
In June 2016, as part of its common stock repurchase program, the Company entered into an accelerated share repurchase program with a third-party financial institution under which it made an upfront payment of $100 million in exchange for an initial delivery of 0.9 million shares of its Class A common stock, representing 90% of the total shares ultimately expected to be delivered over the program's term (the "ASR Program"). The initial shares received, which had an aggregate cost of $90 million based on the June 20, 2016 closing share price, were immediately retired and recorded as an increase to treasury stock. As of July 2, 2016, $10 million, representing the difference between the upfront $100 million payment and the $90 million cost of the initial share delivery, was recorded as a reduction to additional paid-in capital in the Company's consolidated balance sheet.
At the ASR Program's conclusion, the financial institution may be required to deliver additional shares of Class A common stock to the Company, or, under certain circumstances, the Company may be required to, at its election, deliver shares of its Class A common stock or make a cash payment to the financial institution. Final settlement of the ASR Program is expected to occur during the second quarter of Fiscal 2017, with the number of shares to be delivered, or the amount of any cash payment to be made, determined based on the volume-weighted average price per share of the Company's Class A common stock over the term of the ASR Program, less an agreed-upon discount.
A summary of the Company's repurchases of Class A common stock under its common stock repurchase program, including the ASR Program, is as follows:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Cost of shares repurchased
 
$
90

(a) 
$
150

Number of shares repurchased
 
0.9

 
1.1

 
(a) 
Excludes $10 million of Class A common stock yet to be delivered to the Company under its ASR Program.

 
27
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of July 2, 2016, the remaining availability under the Company's Class A common stock repurchase program was $200 million, reflecting the May 11, 2016 approval by the Company's Board of Directors to expand the program by up to an additional $200 million of Class A common stock repurchases, partially offset by the $100 million payment made under the ASR Program. 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 July 2, 2016 and June 27, 2015, 0.2 million shares of Class A common stock, at a cost of $15 million and $19 million, respectively, were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company's 1997 Long-Term Stock Incentive Plan, as amended (the "1997 Incentive Plan"), and its Amended and Restated 2010 Long-Term Stock Incentive Plan (the "2010 Incentive Plan").
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. The first quarter Fiscal 2017 dividend of $0.50 per share was declared on June 21, 2016, was payable to stockholders of record at the close of business on July 1, 2016, and was paid on July 15, 2016. Dividends paid amounted to $41 million and $43 million during the three-month periods ended July 2, 2016 and June 27, 2015, respectively.
15.
Accumulated Other Comprehensive Income (Loss)
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(b)
 
Net Unrealized Losses on Defined
Benefit Plans(c)
 
Total Accumulated Other Comprehensive Income (Loss)
 
 
(millions)
Balance at March 28, 2015
 
$
(193
)
 
$
43

 
$
(15
)
 
$
(165
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
OCI before reclassifications
 
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
)
 
 
 
 
 
 
 
 
 
Balance at April 2, 2016
 
$
(157
)
 
$
(12
)
 
$
(12
)
 
$
(181
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
OCI before reclassifications
 
(9
)
 
(3
)
 
—

 
(12
)
Amounts reclassified from AOCI to earnings
 
—

 
1

 
—

 
1

Other comprehensive loss, net of tax
 
(9
)
 
(2
)
 
—

 
(11
)
Balance at July 2, 2016
 
$
(166
)
 
$
(14
)
 
$
(12
)
 
$
(192
)
 
(a)
OCI before reclassifications to earnings related to foreign currency translation gains (losses) includes an income tax provision of $4 million for the three months ended July 2, 2016, and includes an income tax benefit of $4 million for the three-month period ended June 27, 2015. OCI before reclassifications to earnings for the three-month periods ended July 2, 2016 and June 27, 2015 include a gain of $8 million (net of a $5 million income tax provision) and a loss of $7 million (net of a $5 million income tax benefit), respectively, related to the effective portion of changes in the fair values of the Cross-Currency Swaps designated as hedges of the Company's net investment in certain of its European subsidiaries (see Note 12).

 
28
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(b) 
OCI before reclassifications to earnings related to net unrealized gains (losses) on cash flow hedges is net of an income tax benefit of $2 million for the three months ended July 2, 2016. The tax effect on OCI before reclassifications to earnings for the three months ended June 27, 2015 was immaterial. The tax effects on amounts reclassified from AOCI to earnings are presented in a table below.
(c) 
Activity is presented net of taxes, which were immaterial for both periods presented.
The following table presents reclassifications from AOCI to earnings for cash flow hedges, by component:
 
 
Three Months Ended
 
Location of Gains (Losses)
Reclassified from AOCI
to Earnings
 
 
July 2,
2016
 
June 27,
2015
 
 
 
(millions)
 
 
Gains (losses) on cash flow hedges(a):
 
 
 
 
 
 
    FC — Inventory purchases
 
$
3

 
$
7

 
Cost of goods sold
    FC — Other
 
(5
)
 
—

 
Foreign currency gains (losses)
    Tax effect
 
1

 
—

 
Provision for income taxes
        Net of tax
 
$
(1
)
 
$
7

 
 
 
(a) 
FC = Forward foreign currency exchange contracts.
16.
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.
Refer to Note 19 of the Fiscal 2016 10-K for a detailed description of the Company's stock-based compensation awards, including information related to vesting terms, service and performance conditions, and payout percentages.
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 July 2, 2016 and June 27, 2015 is as follows:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Compensation expense
 
$
18

 
$
32

Income tax benefit
 
$
(6
)
 
$
(12
)
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 July 2, 2016 is not indicative of the level of compensation expense expected to be incurred for the full Fiscal 2017.

 
29
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options
A summary of stock option activity under all plans during the three months ended July 2, 2016 is as follows:
 
 
Number of Options
 
 
(thousands)
Options outstanding at April 2, 2016
 
2,418

Granted
 
—

Exercised
 
(55
)
Cancelled/Forfeited
 
(100
)
Options outstanding at July 2, 2016
 
2,263

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 value 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, was $131.40 per share during the three months ended June 27, 2015. No such awards were granted during the three months ended July 2, 2016.
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 $82.54 and $128.92 per share during the three-month periods ended July 2, 2016 and June 27, 2015, respectively.
A summary of restricted stock and service-based RSU activity during the three months ended July 2, 2016 is as follows:
 
 
Number of Shares
 
 
Restricted Stock
 
Service-based RSUs
 
 
(thousands)
Nonvested at April 2, 2016
 
14

 
490

Granted
 
—

 
584

Vested
 
—

 
(138
)
Forfeited
 
—

 
(50
)
Nonvested at July 2, 2016
 
14

 
886

Performance-based RSUs
The fair values of the Company's performance-based RSUs that are not subject to a market condition in the form of a total shareholder return ("TSR") modifier are based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for 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 July 2, 2016 and June 27, 2015 were $85.59 and $128.97 per share, respectively.
The fair values of the Company's performance-based RSUs with a TSR modifier are 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-month periods ended July 2, 2016 and June 27, 2015.

 
30
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of performance-based RSU activity during the three months ended July 2, 2016 is as follows:
 
 
Number of Shares
 
 
Performance-based
RSUs — without
TSR Modifier
 
Performance-based
RSUs — with
TSR Modifier
 
 
(thousands)
Nonvested at April 2, 2016
 
691

 
142

Granted
 
389

 
—

Change due to performance/market condition achievement
 
(14
)
 
(25
)
Vested
 
(216
)
 
(49
)
Forfeited
 
(60
)
 
(5
)
Nonvested at July 2, 2016
 
790

 
63

17.
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 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 and suppliers. 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 of the Fiscal 2016 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 as unallocated expenses. 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.
Net revenues and operating income (loss) for each of the Company's reportable segments are as follows:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Net revenues:
 
 
 
 
Wholesale
 
$
607

 
$
642

Retail
 
907

 
935

Licensing
 
38

 
41

Total net revenues
 
$
1,552

 
$
1,618



 
31
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Operating income (loss):
 
 
 
 
Wholesale(a)
 
$
133

 
$
137

Retail(b)
 
63

 
110

Licensing
 
34

 
36

 
 
230

 
283

Unallocated corporate expenses
 
(175
)
 
(153
)
Unallocated restructuring charges(c)
 
(86
)
 
(34
)
Total operating income (loss)
 
$
(31
)
 
$
96

 
(a) 
During the three-month period ended July 2, 2016, the Company recorded non-cash inventory-related charges and asset impairment charges of $10 million and $1 million, respectively, in connection with the Way Forward Plan. During the three-month period ended June 27, 2015, the Company recorded non-cash asset impairment charges of $3 million in connection with the Global Reorganization Plan. See Notes 7 and 8 for additional information.
(b) 
During the three-month period ended July 2, 2016, the Company recorded non-cash inventory-related charges and asset impairment charges of $44 million and $18 million, respectively, in connection with the Way Forward Plan. During the three-month period ended June 27, 2015, the Company recorded non-cash inventory-related charges and asset impairment charges of $3 million and $5 million, respectively, in connection with the Global Reorganization Plan. See Notes 7 and 8 for additional information.
(c) 
The three-month periods ended July 2, 2016 and June 27, 2015 included certain unallocated restructuring charges (see Note 8), which are detailed below:
 
 
 
Three Months Ended
 
 
 
July 2,
2016
 
June 27,
2015
 
 
 
(millions)
 
Unallocated restructuring charges:
 
 
 
 
 
Wholesale-related
 
$
(15
)
 
$
(8
)
 
Retail-related
 
(15
)
 
(11
)
 
Licensing-related
 
(2
)
 
(1
)
 
Corporate operations-related
 
(54
)
 
(14
)
 
Total unallocated restructuring charges
 
$
(86
)
 
$
(34
)
Depreciation and amortization expense for the Company's segments is as follows:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Depreciation and amortization:
 
 
 
 
Wholesale
 
$
17

 
$
15

Retail
 
37

 
39

Unallocated corporate
 
24

 
20

Total depreciation and amortization
 
$
78

 
$
74


 
32
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net revenues by geographic location of the reporting subsidiary are as follows:
 
 
Three Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
 
(millions)
Net revenues(a):
 
 
 
 
The Americas(b)
 
$
961

 
$
1,079

Europe(c)
 
380

 
333

  Asia(d)
 
211

 
206

Total net revenues
 
$
1,552

 
$
1,618

 
(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 July 2, 2016 and June 27, 2015 were $910 million and $1.029 billion, respectively.
(c) 
Includes the Middle East.
(d) 
Includes Australia and New Zealand.