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 December 29, 2018
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      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 February 1, 2019, 52,740,676 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 6.
 
 
 
EX-10.1
 
 
EX-10.2
 
 
EX-10.3
 
 
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
 
 
 
 


 
1
 

RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
(unaudited)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
680.5

 
$
1,304.6

Short-term investments
 
1,382.5

 
699.4

Accounts receivable, net of allowances of $212.9 million and $222.2 million
 
304.0

 
421.4

Inventories
 
914.5

 
761.3

Income tax receivable
 
34.4

 
38.0

Prepaid expenses and other current assets
 
380.5

 
323.7

Total current assets
 
3,696.4

 
3,548.4

Property and equipment, net
 
1,079.3

 
1,186.3

Deferred tax assets
 
76.5

 
86.6

Goodwill
 
924.8

 
950.5

Intangible assets, net
 
169.5

 
188.0

Other non-current assets
 
145.5

 
183.5

Total assets
 
$
6,092.0

 
$
6,143.3

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

 
$
10.1

Current portion of long-term debt
 
—

 
298.1

Accounts payable
 
169.1

 
165.6

Income tax payable
 
67.6

 
30.0

Accrued expenses and other current liabilities
 
1,037.0

 
1,083.4

Total current liabilities
 
1,273.7

 
1,587.2

Long-term debt
 
686.8

 
288.0

Income tax payable
 
152.2

 
124.8

Non-current liability for unrecognized tax benefits
 
88.5

 
79.2

Other non-current liabilities
 
536.9

 
606.7

Commitments and contingencies (Note 13)
 

 

Total liabilities
 
2,738.1

 
2,685.9

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 102.8 million and 102.0 million shares issued; 52.7 million and 55.4 million shares outstanding
 
1.0

 
1.0

Class B common stock, par value $.01 per share; 25.9 million shares issued and outstanding
 
0.3

 
0.3

Additional paid-in-capital
 
2,470.5

 
2,383.4

Retained earnings
 
5,996.3

 
5,752.2

Treasury stock, Class A, at cost; 50.1 million and 46.6 million shares
 
(5,012.9
)
 
(4,581.0
)
Accumulated other comprehensive loss
 
(101.3
)
 
(98.5
)
Total equity
 
3,353.9

 
3,457.4

Total liabilities and equity
 
$
6,092.0

 
$
6,143.3

See accompanying notes.

 
2
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions, except per share data)
(unaudited)
Net revenues
 
$
1,725.8

 
$
1,641.8

 
$
4,807.3

 
$
4,653.1

Cost of goods sold
 
(666.3
)
 
(645.6
)
 
(1,822.8
)
 
(1,809.9
)
Gross profit
 
1,059.5

 
996.2

 
2,984.5

 
2,843.2

Selling, general, and administrative expenses
 
(823.4
)
 
(779.8
)
 
(2,358.9
)
 
(2,266.9
)
Impairment of assets
 
(2.2
)
 
(3.9
)
 
(13.3
)
 
(24.8
)
Restructuring and other charges
 
(40.1
)
 
(23.3
)
 
(78.4
)
 
(78.7
)
Total other operating expenses, net
 
(865.7
)
 
(807.0
)
 
(2,450.6
)
 
(2,370.4
)
Operating income
 
193.8

 
189.2

 
533.9

 
472.8

Interest expense
 
(5.2
)
 
(4.8
)
 
(15.6
)
 
(14.4
)
Interest income
 
9.9

 
3.3

 
29.5

 
7.6

Other income (expense), net
 
1.0

 
(1.4
)
 
(0.6
)
 
(1.7
)
Income before income taxes
 
199.5

 
186.3

 
547.2

 
464.3

Income tax provision
 
(79.5
)
 
(268.1
)
 
(147.9
)
 
(342.8
)
Net income (loss)
 
$
120.0

 
$
(81.8
)
 
$
399.3

 
$
121.5

Net income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.50

 
$
(1.00
)
 
$
4.92

 
$
1.49

Diluted
 
$
1.48

 
$
(1.00
)
 
$
4.85

 
$
1.47

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
80.2

 
81.7

 
81.1

 
81.7

Diluted
 
81.2

 
81.7

 
82.3

 
82.5

Dividends declared per share
 
$
0.625

 
$
0.50

 
$
1.875

 
$
1.50

See accompanying notes.


 
3
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
(unaudited)
Net income (loss)
 
$
120.0

 
$
(81.8
)
 
$
399.3

 
$
121.5

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
 
(0.3
)
 
3.0

 
(37.2
)
 
90.7

Net gains (losses) on cash flow hedges
 
6.8

 
2.3

 
34.3

 
(22.0
)
Net gains (losses) on defined benefit plans
 
—

 
(0.5
)
 
0.1

 
(0.9
)
Other comprehensive income (loss), net of tax
 
6.5

 
4.8

 
(2.8
)
 
67.8

Total comprehensive income (loss)
 
$
126.5

 
$
(77.0
)
 
$
396.5

 
$
189.3

See accompanying notes.

 
4
 

RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
(unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
399.3

 
$
121.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
212.0

 
219.4

Deferred income tax expense (benefit)
 
13.7

 
(8.0
)
Loss on sale of property
 
11.6

 
—

Non-cash stock-based compensation expense
 
65.3

 
56.3

Non-cash impairment of assets
 
13.3

 
24.8

Non-cash restructuring-related inventory charges
 
3.1

 
1.3

Other non-cash charges
 
7.6

 
10.3

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
105.9

 
158.9

Inventories
 
(179.3
)
 
(11.6
)
Prepaid expenses and other current assets
 
(75.7
)
 
(4.2
)
Accounts payable and accrued liabilities
 
24.9

 
105.0

Income tax receivables and payables
 
82.7

 
279.7

Deferred income
 
(10.6
)
 
3.8

Other balance sheet changes
 
9.3

 
(6.1
)
Net cash provided by operating activities
 
683.1

 
951.1

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(149.2
)
 
(123.0
)
Purchases of investments
 
(2,627.8
)
 
(985.5
)
Proceeds from sales and maturities of investments
 
1,975.2

 
795.3

Acquisitions and ventures
 
(4.5
)
 
(4.6
)
Proceeds from sale of property
 
20.0

 
—

Settlement of net investment hedges
 
(23.8
)
 
—

Net cash used in investing activities
 
(810.1
)
 
(317.8
)
Cash flows from financing activities:
 
 
 
 
Repayments of short-term debt
 
(9.9
)
 
—

Proceeds from the issuance of long-term debt
 
398.1

 
—

Repayments of long-term debt
 
(300.0
)
 
—

Payments of capital lease obligations
 
(14.8
)
 
(21.2
)
Payments of dividends
 
(141.6
)
 
(121.7
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(431.9
)
 
(15.9
)
Proceeds from exercise of stock options
 
21.8

 
0.1

Other financing activities
 
(2.8
)
 
—

Net cash used in financing activities
 
(481.1
)
 
(158.7
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
 
(23.9
)
 
36.8

Net increase (decrease) in cash, cash equivalents, and restricted cash
 
(632.0
)
 
511.4

Cash, cash equivalents, and restricted cash at beginning of period
 
1,355.5

 
711.8

Cash, cash equivalents, and restricted cash at end of period
 
$
723.5

 
$
1,223.2

See accompanying notes.

 
5
 

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 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, 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 diversifies its business by geography (North America, Europe, and Asia, among other regions) and channel of distribution (wholesale, retail, and licensing). This allows the Company to maintain a dynamic balance as its operating results do not depend solely on the performance of any single geographic area or channel of distribution. The Company's wholesale sales are made principally to major department stores and specialty stores around the world, as well as to certain unrelated third party-owned stores to which the Company has licensed the right to operate in defined geographic territories using its trademarks. The Company also sells directly to consumers through its integrated retail channel, which includes its retail stores, concession-based shop-within-shops, and digital commerce operations around the world. In addition, the Company licenses to unrelated third parties for specified periods the right to access its various trademarks in connection with the licensees' manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.
The Company organizes its business into the following three reportable segments: North America, Europe, and Asia. In addition to these reportable segments, the Company also has other non-reportable segments. See Note 17 for further discussion of the Company's segment reporting structure.
2.
Basis of Presentation
Interim Financial Statements
These interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and are unaudited. In the opinion of management, these consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company for the interim periods presented. In addition, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") and the notes thereto have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
This report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended March 31, 2018 (the "Fiscal 2018 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 2019 will end on March 30, 2019 and will be a 52-week period ("Fiscal 2019"). Fiscal year 2018 ended on March 31, 2018 and was also a

 
6
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

52-week period ("Fiscal 2018"). The third quarter of Fiscal 2019 ended on December 29, 2018 and was a 13-week period. The third quarter of Fiscal 2018 ended on December 30, 2017 and was also a 13-week period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include reserves for bad debt, customer returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; fair value measurements; accounting for income taxes and related uncertain tax positions; valuation of stock-based compensation awards and related estimated forfeiture rates; 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 our retail business. As a result of changes in our business, consumer spending patterns, and the macroeconomic environment, historical quarterly operating trends and working capital requirements may not be indicative of our future performance. 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 and nine-month periods ended December 29, 2018 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2019.
3.
Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue across all segments of the business when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services, and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales and other related taxes collected from customers and remitted to government authorities are excluded from revenue.
Revenue within the Company's wholesale business is generally recognized upon shipment of products, at which point title passes and risk of loss is transferred to the customer. In certain arrangements where the Company retains the risk of loss during shipment, revenue is recognized upon receipt of products by the customer. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates for end-of-season markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these amounts have not differed materially from actual results.

 
7
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue within the Company's retail business is recognized when the customer takes physical possession of the products, which occurs either at the point of sale for merchandise purchased at the Company's retail stores and concession-based shop-within-shops, or upon receipt of shipment for merchandise ordered through direct-to-consumer digital commerce sites. Such revenues are recorded net of estimated returns based on historical trends. Payment is due at the point of sale.
Gift cards issued to customers by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed (referred to as "breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks (i.e., symbolic intellectual property) and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for certain arrangements may be subject to a contractually-guaranteed minimum royalty amount. Payments are generally due quarterly and, depending on time of receipt, may be recorded as a liability until recognized as revenue. The Company recognizes revenue for its sales-based royalty arrangements (including those for which the royalty exceeds any contractually-guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually-guaranteed minimum royalty amount, the minimum is recognized as revenue ratably over the contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the consideration that the Company is entitled to in exchange for providing access to its trademarks. As of December 29, 2018, contractually-guaranteed minimum royalty amounts expected to be recognized as revenue during future periods were as follows:
 
 
Contractually-Guaranteed
Minimum Royalties(a)
 
 
(millions)
Remainder of Fiscal 2019
 
$
19.5

Fiscal 2020
 
91.1

Fiscal 2021
 
83.7

Fiscal 2022 and thereafter
 
70.3

Total
 
$
264.6

 
(a) 
Amounts presented do not contemplate anticipated contract renewals or royalties earned in excess of the contractually guaranteed minimums.
See Note 4 for discussion of the Company's adoption of the new revenue recognition accounting standard as of the beginning of the first quarter of Fiscal 2019 and the resulting impact to its consolidated financial statements.
Disaggregated Net Revenues
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors for the periods presented:
 
 
Three Months Ended
 
 
December 29, 2018
 
December 30, 2017
 
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
 
(millions)
Sales Channel(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
365.5

 
$
166.5

 
$
13.4

 
$
11.1

 
$
556.5

 
$
377.1

 
$
143.7

 
$
13.6

 
$
8.4

 
$
542.8

Retail
 
543.2

 
248.7

 
261.4

 
68.3

 
1,121.6

 
509.3

 
234.8

 
237.4

 
73.2

 
1,054.7

Licensing
 
—

 
—

 
—

 
47.7

 
47.7

 
—

 
—

 
—

 
44.3

 
44.3

Total
 
$
908.7

 
$
415.2

 
$
274.8

 
$
127.1

 
$
1,725.8

 
$
886.4

 
$
378.5

 
$
251.0

 
$
125.9

 
$
1,641.8


 
8
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Nine Months Ended
 
 
December 29, 2018
 
December 30, 2017
 
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
 
(millions)
Sales Channel(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
1,128.4

 
$
536.1

 
$
48.2

 
$
23.6

 
$
1,736.3

 
$
1,141.7

 
$
492.8

 
$
39.4

 
$
21.7

 
$
1,695.6

Retail
 
1,366.1

 
688.9

 
719.3

 
165.6

 
2,939.9

 
1,330.0

 
672.2

 
637.5

 
184.8

 
2,824.5

Licensing
 
—

 
—

 
—

 
131.1

 
131.1

 
—

 
—

 
—

 
133.0

 
133.0

Total
 
$
2,494.5

 
$
1,225.0

 
$
767.5

 
$
320.3

 
$
4,807.3

 
$
2,471.7

 
$
1,165.0

 
$
676.9

 
$
339.5

 
$
4,653.1

 
(a) 
Net revenues from the Company's wholesale and retail businesses are recognized at a point in time. Net revenues from the Company's licensing business are recognized over time.
Deferred Income
Deferred income represents cash payments received in advance of the Company's transfer of control of products or services to its customers and is generally comprised of unredeemed gift cards, net of breakage, and advance royalty payments from licensees. The Company's deferred income balances were $20.9 million and $31.7 million as of December 29, 2018 and March 31, 2018, respectively, and were primarily recorded within accrued expenses and other current liabilities within the consolidated balance sheets. During the three-month and nine-month periods ended December 29, 2018, the Company recognized $1.8 million and $16.7 million, respectively, of net revenues from amounts recorded as deferred income as of March 31, 2018. The change in deferred income during the nine months ended December 29, 2018 also reflected a reduction of $6.1 million related to the Company's initial adoption of ASU 2014-09 (see Note 4). The majority of the deferred income balance as of December 29, 2018 is expected to be recognized as revenue within the next twelve months.
Shipping and Handling Costs
The costs associated with shipping goods to customers are accounted for as fulfillment activities and reflected as a component of selling, general, and administrative ("SG&A") expenses in the consolidated statements of operations. The costs of preparing merchandise for sale, such as picking, packing, warehousing, and order charges ("handling costs") are also included in SG&A expenses. Shipping and handling costs billed to customers are included in revenue.
A summary of shipping and handling costs is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
Shipping costs
 
$
16.6

 
$
11.7

 
$
36.2

 
$
28.4

Handling costs
 
41.6

 
39.7

 
116.3

 
115.3

Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company's Class A and Class B common stock. Diluted net income (loss) per common share adjusts basic net income (loss) per common share for the dilutive effects of outstanding stock options, restricted stock units ("RSUs"), and any other potentially dilutive instruments, only in the periods in which such effects are dilutive.

 
9
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
Basic shares
 
80.2

 
81.7

 
81.1

 
81.7

Dilutive effect of stock options and RSUs
 
1.0

 
—

(a) 
1.2

 
0.8

Diluted shares
 
81.2

 
81.7

 
82.3

 
82.5

 
(a) 
Incremental shares of 0.9 million attributable to outstanding stock options and RSUs were excluded from the computation of diluted shares for the three months ended December 30, 2017, as such shares would not be dilutive as a result of the net loss incurred during the period.
All earnings per share amounts have been calculated using unrounded numbers. Options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income (loss) per common share. In addition, the Company has outstanding performance-based and market-based RSUs, which are included in the computation of diluted shares only to the extent that the underlying performance or market conditions (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. As of December 29, 2018 and December 30, 2017, there were 1.5 million and 2.0 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs that were excluded from the diluted shares calculations.
Accounts Receivable
In the normal course of business, the Company extends credit to wholesale customers that satisfy defined credit criteria. Payment is generally due within 30 to 120 days and does not include a significant financing component. 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
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
Beginning reserve balance
 
$
198.7

 
$
231.5

 
$
202.5

 
$
202.8

Amount charged against revenue to increase reserve
 
146.1

 
125.3

 
396.3

 
418.6

Amount credited against customer accounts to decrease reserve
 
(149.1
)
 
(155.6
)
 
(398.4
)
 
(427.8
)
Foreign currency translation
 
(1.1
)
 
0.4

 
(5.8
)
 
8.0

Ending reserve balance
 
$
194.6

 
$
201.6

 
$
194.6

 
$
201.6

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.

 
10
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A rollforward of the activity in the Company's allowance for doubtful accounts is presented below:
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
Beginning reserve balance
 
$
17.2

 
$
17.3

 
$
19.7

 
$
11.6

Amount recorded to expense to increase reserve(a)
 
1.7

 
0.1

 
1.2

 
6.4

Amount written-off against customer accounts to decrease reserve
 
(0.4
)
 
(0.4
)
 
(1.8
)
 
(1.8
)
Foreign currency translation
 
(0.2
)
 
—

 
(0.8
)
 
0.8

Ending reserve balance
 
$
18.3

 
$
17.0

 
$
18.3

 
$
17.0

 
(a) 
Amounts recorded to bad debt expense are included within SG&A expenses in the consolidated statements of operations.
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 2018, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately 8% of total net revenues, and the Company's sales to its three largest wholesale customers, including Macy's, accounted for approximately 19% of total net revenues. Substantially all of the Company's sales to its three largest wholesale customers related to its North America segment. As of December 29, 2018, 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 digital 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 determined on a weighted-average cost basis. Inventory held by the Company totaled $914.5 million, $761.3 million, and $825.4 million as of December 29, 2018, March 31, 2018, and December 30, 2017, respectively.
Derivative Financial Instruments
The Company records all derivative financial instruments on its consolidated balance sheets at fair value. Changes in the fair value of derivative instruments that qualify for hedge accounting are 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,

 
11
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 uses 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 the settlement of foreign currency-denominated balances. To the extent forward foreign currency exchange contracts are designated as qualifying cash flow hedges, 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/Settlement of Foreign Currency Balances — recognized within other income (expense), net during the period that the hedged balance is remeasured through earnings, generally through its settlement when the related payment occurs.
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 other income (expense), net. Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the originally-documented hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings within other income (expense), net.
Hedges of Net Investments in Foreign Operations
The Company periodically uses cross-currency swap contracts and forward foreign currency exchange contracts to reduce risk associated with exchange rate fluctuations on certain of its net investments in foreign subsidiaries. Changes in the fair values of such derivative instruments that are designated as qualifying hedges of net investments in foreign operations are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments. In assessing the effectiveness of such hedges, the Company uses a method based on changes in spot rates to measure the impact of foreign currency exchange rate fluctuations on both its foreign subsidiary net investment and the related derivative hedging instrument. Under this method, changes in the fair value of the hedging instrument other than those due to changes in the spot rate are initially recorded in AOCI as a translation adjustment, and are amortized into earnings as interest expense using a systematic and rational method over the instrument's term. Changes in fair value associated with the effective portion (i.e., those due to changes in the spot rate) are recorded in AOCI as a translation adjustment and are released and recognized in earnings only upon the sale or liquidation of the hedged net investment.
Fair Value Hedges
Changes in the fair value of a derivative instrument that is designated as a fair value hedge, along with offsetting changes in the fair value of the related hedged item attributable to the hedged risk, are recorded in earnings. To the extent that the change in the fair value of the hedged item does not fully offset the change in the fair value of the hedging instrument, the resulting net impact is reflected in earnings within the income statement line item associated with the hedged item.

 
12
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Undesignated Hedges
All of the Company's undesignated hedges are entered into to hedge specific economic risks, particularly foreign currency exchange rate risk related to foreign currency-denominated balances. Changes in the fair value of undesignated derivative instruments are immediately recognized in earnings within other income (expense), net.
See Note 12 for further discussion of the Company's derivative financial instruments.
Refer to Note 3 of the Fiscal 2018 10-K for a summary of all of the Company's significant accounting policies.
4.
Recently Issued Accounting Standards
Implementation Costs in Cloud Computing Arrangements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). ASU 2018-15 addresses diversity in practice surrounding the accounting for costs incurred to implement a cloud computing hosting arrangement that is a service contract by establishing a model for capitalizing or expensing such costs, depending on their nature and the stage of the implementation project during which they are incurred. Any capitalized costs are to be amortized over the reasonably certain term of the hosting arrangement and presented in the same line as the service arrangement's fees within the statement of operations. ASU 2018-15 also requires enhanced qualitative and quantitative disclosures surrounding hosting arrangements that are service contracts. ASU 2018-15 is effective for the Company beginning in its fiscal year ending March 27, 2021, with early adoption permitted, and may be adopted on either a retrospective or prospective basis. The Company is currently in the process of evaluating the impact that ASU 2018-15 will have on its consolidated financial statements and related disclosures.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 amends existing hedge accounting guidance by better aligning an entity's financial reporting with its risk management activities and by simplifying its application. Among its provisions, ASU 2017-12 eliminates the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting, and generally requires that the entire change in fair value of such instruments ultimately be presented in the same income statement line as the respective hedged item. Additionally, the updated guidance reduces the overall complexity of the hedge accounting model, including easing documentation and effectiveness assessment requirements and modifying the treatment of components excluded from the assessment of hedge effectiveness. The new guidance also broadens the scope of risks eligible to qualify for hedge accounting and enhances the understandability of hedge results through amended disclosure requirements. ASU 2017-12 is to be applied using a modified retrospective transition approach, except for the amended presentation and disclosure requirements, which are to be applied prospectively.
The Company early-adopted ASU 2017-12 as of the beginning of the first quarter of Fiscal 2019, which resulted in a cumulative adjustment of $0.7 million, net of tax, to increase its opening retained earnings balance. Overall, the adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"). ASU 2016-16 requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to a third party. The Company adopted ASU 2016-16 as of the beginning of the first quarter of Fiscal 2019 using the modified retrospective method, which resulted in a cumulative adjustment of $0.6 million to reduce its opening retained earnings balance. Overall, the adoption of ASU 2016-16 did not have a material impact on the Company's consolidated financial statements.

 
13
 

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 a lessee's rights and fixed payment obligations under most leases be recognized as right-of-use ("ROU") assets and lease liabilities on the consolidated balance sheet. ASU 2016-02 retains a dual model for classifying leases as either finance or operating, which governs the pattern of expense recognition to be reflected in the consolidated statement of operations. Variable lease payments based on performance, such as percentage-of-sales-based payments, will not be included in the measurement of right-of-use assets and lease liabilities. Rather, consistent with current practice, such amounts will be recognized as an expense in the period incurred. After its original issuance, the FASB issued several additional related ASUs to address implementation concerns and further amend and clarify certain guidance within ASU 2016-02.
The Company is currently in the process of evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures. The Company's assessment efforts to date have included reviewing the standard's provisions and gathering information to evaluate the landscape of its real estate, personal property, and other arrangements that may meet the definition of a lease. Based on these efforts, the Company currently anticipates that the adoption of ASU 2016-02 will result in a significant increase to its long-term assets and liabilities as, at a minimum, most of its current operating lease commitments will be subject to balance sheet recognition. The standard also requires enhanced quantitative and qualitative lease-related disclosures. Recognition of lease expense in the consolidated statement of operations is not anticipated to significantly change.
The Company is also assessing the impact that transitioning to ASU 2016-02 will have on a certain lease arrangement for which it is currently deemed the owner of the related leased asset for accounting purposes (commonly referred to as a "build-to-suit" lease arrangement), but no longer actively uses the related space. Although the Company no longer generates revenue from the leased asset, it is not currently considered impaired under existing lease accounting guidance as the related asset's fair value from an ownership perspective exceeds its carrying value. However, if the Company is unsuccessful in its ongoing attempts to legally assign this lease agreement to a third party (see Note 8), then upon transition to ASU 2016-02, it would derecognize the remaining lease asset and liability balances that had been recognized solely as a result of the arrangement's build-to-suit designation, as the related construction activities that gave rise to such designation have ended, and establish a ROU asset and related lease liability based upon the Company's related remaining minimum lease commitments. The ROU asset would then be assessed for impairment considering the estimated cash flows to be generated during the remaining term of the lease, most notably sublease income, which may be lower than the aggregate remaining minimum lease payments used to establish the initial ROU asset. In this case, an impairment to write down the ROU asset to fair value would be recorded as an adjustment to reduce the Company's opening retained earnings upon adoption, which could be material.
The Company will adopt ASU 2016-02 in the first quarter of its fiscal year ending March 28, 2020 ("Fiscal 2020") using a modified retrospective approach under which the cumulative effect of initially applying the standard will be recognized as an adjustment to opening Fiscal 2020 retained earnings, with no restatement of prior year amounts. In connection therewith, the Company anticipates it will apply an optional package of practical expedients intended to ease transition to the standard by, among its provisions, allowing the Company to carryforward its original lease classification conclusions (i.e., finance or operating) without reassessment. The Company is also evaluating which, if any, of certain other expedients it will elect upon adoption, including the use of hindsight in assessing factors that impact determination of the lease term, such as the likelihood that any renewal or purchase options are exercised.
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 supersedes most previously existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue, representing the amount that an entity expects to be entitled to in exchange for providing promised goods or services (i.e., performance obligations), is recognized upon control of promised goods or services transferring to a customer. ASU 2014-09 also requires enhanced qualitative and quantitative revenue-related disclosures. After its original issuance, the FASB issued several additional related ASUs to address implementation concerns and further amend and clarify certain guidance within ASU 2014-09.
The Company adopted ASU 2014-09 as of the beginning of the first quarter of Fiscal 2019 using the modified retrospective method and applied the standard to all contracts as of the adoption date. The adoption of ASU 2014-09 did not have a material impact on the Company's consolidated financial statements, as the performance obligations underlying its core revenue streams (i.e., its retail and wholesale businesses) and the timing of recognition thereof, remain substantially unchanged. Revenues for these

 
14
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

businesses are generated through the sale of finished products, and continue to be recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated returns, end-of-season markdowns, and other allowances that are variable in nature. For its licensing business, the Company continues to recognize revenue, including any contractually-guaranteed minimum royalty amounts, over time consistent with historical practice.
The Company's adoption of ASU 2014-09 did have an impact on its accounting for certain ancillary items. Specifically, certain costs associated with the marketing of merchandise to wholesale customers for a particular selling season are now expensed as incurred, rather than deferred and expensed over the course of the season. Additionally, revenue related to gift card breakage is now recognized in proportion to the pattern of actual customer redemptions, rather than when the likelihood of redemption becomes remote. As a result of applying these changes and in order to transition to ASU 2014-09, the Company reduced (i) prepaid expenses and other current assets by $12.1 million related to certain previously deferred wholesale marketing costs and (ii) accrued expenses and other current liabilities by $6.1 million related to outstanding gift cards, which together resulted in a net cumulative adjustment to reduce opening retained earnings by $5.2 million, net of tax, as of the beginning of the first quarter of Fiscal 2019. In addition to these changes, inventory amounts associated with estimated sales returns, which were $23.7 million as of December 29, 2018, are now presented within prepaid expenses and other current assets in the consolidated balance sheet, rather than within inventories. Other than these changes, the Company's adoption of ASU 2014-09 did not have a material impact on its consolidated balance sheet as of December 29, 2018 or its consolidated statements of operations, comprehensive income (loss), and cash flows for the nine months ended December 29, 2018. Prior periods have not been restated and continue to be reported under the accounting standards in effect during those periods.
See Note 3 for a detailed discussion regarding the Company's revenue recognition accounting policy.
5.
Property and Equipment
Property and equipment, net consists of the following:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
Land and improvements
 
$
15.3

 
$
16.8

Buildings and improvements
 
390.3

 
460.5

Furniture and fixtures
 
665.9

 
671.0

Machinery and equipment
 
412.1

 
430.4

Capitalized software
 
580.6

 
578.4

Leasehold improvements
 
1,224.6

 
1,181.2

Construction in progress
 
37.3

 
41.5

 
 
3,326.1

 
3,379.8

Less: accumulated depreciation
 
(2,246.8
)
 
(2,193.5
)
Property and equipment, net
 
$
1,079.3

 
$
1,186.3

Depreciation expense was $66.0 million and $194.3 million during the three-month and nine-month periods ended December 29, 2018, respectively, and $66.7 million and $201.4 million during the three-month and nine-month periods ended December 30, 2017, respectively, and is recorded primarily within SG&A expenses in the consolidated statements of operations.

 
15
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.
Other Assets and Liabilities
Prepaid expenses and other current assets consist of the following:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
Other taxes receivable
 
$
176.7

 
$
171.4

Prepaid rent expense
 
40.0

 
37.0

Non-trade receivables
 
35.8

 
16.6

Inventory return asset (see Note 4)
 
23.7

 
—

Derivative financial instruments
 
16.0

 
12.3

Prepaid advertising and marketing
 
16.0

 
6.8

Restricted cash
 
12.6

 
15.5

Prepaid software maintenance
 
11.5

 
8.7

Tenant allowances receivable
 
6.6

 
4.3

Other prepaid expenses and current assets
 
41.6

 
51.1

Total prepaid expenses and other current assets
 
$
380.5

 
$
323.7

Other non-current assets consist of the following:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
Non-current investments
 
$
45.7

 
$
86.2

Restricted cash
 
30.4

 
35.4

Security deposits
 
24.8

 
27.3

Derivative financial instruments
 
5.2

 
—

Other non-current assets
 
39.4

 
34.6

Total other non-current assets
 
$
145.5

 
$
183.5

Accrued expenses and other current liabilities consist of the following:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
Accrued operating expenses
 
$
253.1

 
$
225.8

Other taxes payable
 
219.9

 
194.2

Accrued payroll and benefits
 
214.3

 
227.8

Accrued inventory
 
152.5

 
174.0

Restructuring reserve
 
53.3

 
69.6

Dividends payable
 
49.1

 
40.6

Accrued capital expenditures
 
35.9

 
37.0

Capital lease obligations
 
21.9

 
19.5

Deferred income
 
20.1

 
30.4

Derivative financial instruments
 
4.3

 
60.8

Other accrued expenses and current liabilities
 
12.6

 
3.7

Total accrued expenses and other current liabilities
 
$
1,037.0

 
$
1,083.4


 
16
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other non-current liabilities consist of the following:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
Capital lease obligations
 
$
217.9

 
$
236.4

Deferred rent obligations
 
199.4

 
212.2

Deferred tax liabilities
 
47.9

 
36.5

Derivative financial instruments
 
20.2

 
49.2

Restructuring reserve
 
13.4

 
27.9

Other non-current liabilities
 
38.1

 
44.5

Total other non-current liabilities
 
$
536.9

 
$
606.7

7.
Impairment of Assets
The Company recorded non-cash impairment charges of $1.7 million and $7.5 million during the three-month and nine-month periods ended December 29, 2018, respectively, and $2.2 million and $14.0 million during the three-month and nine-month periods ended December 30, 2017, respectively, to write off certain fixed assets related to its domestic and international stores, shop-within-shops, and corporate offices in connection with its restructuring plans (see Note 8).
Additionally, the Company recorded non-cash impairment charges of $0.5 million and $5.8 million during the three-month and nine-month periods ended December 29, 2018, respectively, and $1.7 million and $10.8 million during the three-month and nine-month periods ended December 30, 2017, respectively, to write off certain fixed assets related to underperforming stores as a result of its on-going store portfolio evaluation.
See Note 11 for further discussion of the non-cash impairment charges recorded by the Company during the fiscal periods presented.
8.
Restructuring and Other Charges
A description of significant restructuring and other activities and related costs is included below.
Fiscal 2019 Restructuring Plan
On June 4, 2018, the Company's Board of Directors approved a restructuring plan associated with the Company's strategic objective of operating with discipline to drive sustainable growth (the "Fiscal 2019 Restructuring Plan"). The Fiscal 2019 Restructuring Plan includes the following restructuring-related activities: (i) the rightsizing and consolidation of the Company's global distribution network and corporate offices; (ii) targeted severance-related actions; and (iii) closure of certain of its stores and shop-within-shops. The majority of the actions associated with the Fiscal 2019 Restructuring Plan are expected to be completed by the end of Fiscal 2019, with certain activities shifting into Fiscal 2020.
In connection with the Fiscal 2019 Restructuring Plan, the Company expects to incur total estimated charges of approximately $100 million to $150 million, comprised of cash-related charges of approximately $70 million to $110 million and non-cash charges of approximately $30 million to $40 million.

 
17
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the charges recorded in connection with the Fiscal 2019 Restructuring Plan during the three-month and nine-month periods ended December 29, 2018 is as follows:
 
 
December 29, 2018
 
 
Three Months Ended
 
Nine Months Ended
 
 
(millions)
Cash-related restructuring charges:
 
 
 
 
Severance and benefit costs
 
$
17.1

 
$
34.3

Lease termination and store closure costs
 
1.2

 
1.2

Other cash charges
 
1.9

 
3.5

Total cash-related restructuring charges
 
20.2

 
39.0

Non-cash charges:
 
 
 
 
Impairment of assets (see Note 7)
 
1.3

 
7.1

Inventory-related charges(a)
 
1.9

 
1.9

Loss on sale of property(b)
 
11.6

 
11.6

Total non-cash charges
 
14.8

 
20.6

Total charges
 
$
35.0

 
$
59.6

 
 
(a) 
Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
(b) 
Loss on sale of property, which is recorded within restructuring and other charges in the consolidated statements of operations, was recorded in connection with the sale of one of the Company's distribution centers in North America. Total cash proceeds from the sale were $20 million.
A summary of current period activity in the restructuring reserve related to the Fiscal 2019 Restructuring Plan is as follows:
 
 
Severance and Benefit Costs
 
Lease Termination
and Store
Closure Costs
 
Other Cash Charges
 
Total
 
 
(millions)
Balance at March 31, 2018
 
$
—

 
$
—

 
$
—

 
$
—

Additions charged to expense
 
34.3

 
1.2

 
3.5

 
39.0

Cash payments charged against reserve
 
(11.4
)
 
(0.4
)
 
(3.5
)
 
(15.3
)
Non-cash adjustments
 
(0.2
)
 
0.1

 
—

 
(0.1
)
Balance at December 29, 2018
 
$
22.7

 
$
0.9

 
$
—

 
$
23.6

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 is refocusing on its core brands and evolving its product, marketing, and shopping experience to increase desirability and relevance. It is also evolving its operating model to enable sustainable, profitable sales growth by significantly improving quality of sales, reducing supply chain lead times, improving its sourcing, and executing a disciplined multi-channel distribution and expansion strategy. As part of the Way Forward Plan, the Company is rightsizing its cost structure and implementing a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Way Forward Plan included strengthening the Company's leadership team and creating a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan also included the discontinuance of the Company's Denim & Supply brand and the integration of its denim product offerings into its Polo Ralph Lauren brand. Collectively, these actions, which were substantially completed during the Company's fiscal year ended April 1, 2017 ("Fiscal 2017"), resulted in a reduction in workforce and the closure of certain stores and shop-within-shops.

 
18
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On March 30, 2017, the Company's Board of Directors approved the following additional restructuring-related activities associated with the Way Forward Plan: (i) the restructuring of its in-house global digital commerce platform which was in development and shifting to a more cost-effective, flexible platform through a new agreement with Salesforce's Commerce Cloud, formerly known as Demandware; (ii) the closure of its Polo store at 711 Fifth Avenue in New York City; and (iii) the further streamlining of the organization and the execution of other key corporate actions in line with the Company's Way Forward Plan. These actions are an important part of the Company's efforts to achieve its stated objective to return to sustainable, profitable growth and invest in the future. These additional restructuring-related activities were largely completed during Fiscal 2018 and resulted in a further reduction in workforce and the closure of certain corporate office and store locations. The remaining activities are primarily lease-related, as discussed below.
In connection with the Way Forward Plan, the Company currently expects to incur total estimated charges of approximately $790 million, comprised of cash-related restructuring charges of approximately $485 million and non-cash charges of approximately $305 million. Cumulative charges incurred since inception were $683.9 million. If the Company is successful in its ongoing attempts to legally assign a certain lease agreement for which it is the deemed owner of the leased asset for accounting purposes prior to the end of Fiscal 2019, it will incur the remaining estimated charges of approximately $105 million during the fourth quarter of Fiscal 2019. However, to the extent that a lease assignment is not executed prior to the end of Fiscal 2019, an impairment may instead be recorded as an adjustment to reduce the Company's opening retained earnings as of the beginning of Fiscal 2020 in connection with its adoption of ASU 2016-02, which could be material (see Note 4). In addition to these charges, the Company also incurred an additional non-cash charge of $155.2 million during Fiscal 2017 associated with the destruction of inventory out of current liquidation channels in line with its Way Forward Plan.
A summary of the charges recorded in connection with the Way Forward Plan during the three-month and nine-month periods ended December 29, 2018 and December 30, 2017, as well as the cumulative charges recorded since its inception, is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
Cumulative Charges
 
 
(millions)
Cash-related restructuring charges:
 
 
 
 
 
 
 
 
 
 
Severance and benefit costs
 
$
0.1

 
$
7.4

 
$
6.6

 
$
25.3

 
$
228.3

Lease termination and store closure costs
 
2.1

 
10.9

 
3.7

 
28.5

 
124.2

Other cash charges
 
0.6

 
0.8

 
0.8

 
9.2

 
26.2

Total cash-related restructuring charges
 
2.8

 
19.1

 
11.1

 
63.0

 
378.7

Non-cash charges:
 
 
 
 
 
 
 
 
 
 
Impairment of assets (see Note 7)
 
0.4

 
2.2

 
0.4

 
14.0

 
251.0

Inventory-related charges(a)
 
1.2

 
—

 
1.2

 
1.3

 
206.7

Accelerated stock-based compensation expense(b)
 
—

 
0.7

 
—

 
0.7

 
0.7

Other non-cash charges
 
2.0

 
—

 
2.0

 
—

 
2.0

Total non-cash charges
 
3.6

 
2.9

 
3.6

 
16.0

 
460.4

Total charges
 
$
6.4

 
$
22.0

 
$
14.7

 
$
79.0

 
$
839.1

 
 
(a) 
Cumulative inventory-related charges include $155.2 million associated with the destruction of inventory out of current liquidation channels. Inventory-related charges are recorded within cost of goods sold in the consolidated statements of operations.
(b) 
Accelerated stock-based compensation expense, which is recorded within restructuring and other charges in the consolidated statements of operations, was recorded in connection with vesting provisions associated with certain separation agreements.

 
19
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of current period 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 March 31, 2018
 
$
37.6

 
$
53.5

 
$
1.8

 
$
92.9

Additions charged to expense
 
6.6

 
3.7

 
0.8

 
11.1

Cash payments charged against reserve
 
(32.2
)
 
(28.6
)
 
(1.8
)
 
(62.6
)
Non-cash adjustments
 
(0.3
)
 
0.6

 
—

 
0.3

Balance at December 29, 2018
 
$
11.7

 
$
29.2

 
$
0.8

 
$
41.7

Other Restructuring Plans
As of December 29, 2018, the remaining restructuring reserve related to the Company's restructuring plan initiated during its fiscal year ended April 2, 2016 ("Fiscal 2016") was $1.4 million, reflecting $3.2 million of cash payments made during the nine months ended December 29, 2018. No other activity occurred in connection with this restructuring plan during the nine months ended December 29, 2018. Refer to Note 9 of the Fiscal 2018 10-K for additional discussion regarding this restructuring plan.
Other Charges
The Company recorded other charges of $3.5 million during each of the three-month periods ended December 29, 2018 and December 30, 2017 and $10.5 million during each of the nine-month periods ended December 29, 2018 and December 30, 2017 related to depreciation expense associated with the Company's former Polo store at 711 Fifth Avenue in New York City, recorded after the store closed during the first quarter of Fiscal 2018 in connection with the Way Forward Plan. Although the Company is no longer generating revenue or has any other economic activity associated with its former Polo store, it continues to incur depreciation expense due to its involvement at the time of construction.
During the nine months ended December 29, 2018, the Company also recorded other charges of $4.2 million, primarily related to its customs audit (see Note 13).
Additionally, during the nine months ended December 30, 2017, the Company recorded other charges of $6.7 million (inclusive of accelerated stock-based compensation expense of $2.1 million), primarily related to the departure of Mr. Stefan Larsson as the Company's President and Chief Executive Officer and as a member of its Board of Directors, effective as of May 1, 2017. Refer to the Form 8-K filed on February 2, 2017 for additional discussion regarding the departure of Mr. Larsson.
These other charges were partially offset by the favorable impact of $2.2 million related to the reversal of reserves associated with the settlement of certain non-income tax issues during the second quarter of Fiscal 2018.
9.
Income Taxes
U.S. Tax Reform
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effective January 1, 2018. The TCJA significantly revised U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21%, creating a territorial tax system that includes a one-time mandatory transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.
ASC Topic 740, "Income Taxes," requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which allowed companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited

 
20
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

measurement period as additional information became available and further analyses were completed. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, not to extend beyond one year from enactment.
During the third quarter of Fiscal 2018, the Company recorded charges of $231.3 million within its income tax provision in connection with the TCJA, of which $215.5 million related to the mandatory transition tax and $15.8 million related to the revaluation of the Company's deferred tax assets and liabilities. These charges, which were recorded on a provisional basis, increased the Company's effective tax rate by 12,410 basis points and 4,980 basis points during the three-month and nine-month periods ended December 30, 2017, respectively. Subsequently, as a result of finalizing its full Fiscal 2018 operating results, the issuance of new interpretive guidance, and other analyses performed, the Company recorded measurement period adjustments during the fourth quarter of Fiscal 2018, whereby it reversed $6.2 million of the charges related to the mandatory transition tax and $5.5 million related to the revaluation of its deferred taxes. These reversals were partially offset by an incremental charge of $1.8 million related to the expected future remittance of certain previously deferred foreign earnings.
During the second quarter of Fiscal 2019, the Company recorded an additional measurement period adjustment as a result of the issuance of new interpretive guidance related to stock-based compensation for certain executives, whereby it recorded an income tax benefit and corresponding deferred tax asset of $4.7 million. Subsequently, during the third quarter of Fiscal 2019, the Company completed its analyses and recorded its final measurement period adjustments, whereby it recorded incremental charges of $32.3 million within its income tax provision, substantially all of which related to the mandatory transition tax. These measurement period adjustments increased the Company's effective tax rate by 1,610 basis points and 500 basis points during the three-month and nine-month periods ended December 29, 2018, respectively.
Additionally, the Company has decided to account for the minimum tax on global intangible low-taxed income ("GILTI") in the period in which it is incurred and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the nine months ended December 29, 2018.
Effective Tax Rate
The Company's effective tax rate, which is calculated by dividing each fiscal period's income tax provision by pretax income, was 39.8% and 27.0% during the three-month and nine-month periods ended December 29, 2018, respectively, and 143.9% and 73.8% during the three-month and nine-month periods ended December 30, 2017, respectively.

The effective tax rates for the three-month and nine-month periods ended December 29, 2018 were higher than the U.S. federal statutory income tax rate of 21% primarily due to the SAB 118 measurement period adjustments recorded, as previously discussed. The effective tax rates for the three-month and nine-month periods ended December 30, 2017 were higher than the U.S. federal statutory income tax rate of 35% primarily due to the TCJA enactment-related charges recorded, as previously discussed, partially offset by the favorable impact of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S. Additionally, the effective tax rate for the nine months ended December 30, 2017 reflected the negative impact of the Company's adoption of ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), as well as the unfavorable impact of additional income tax reserves associated with certain income tax audits. Refer to Note 4 of the Fiscal 2018 10-K for further discussion of the Company's adoption of ASU 2016-09.
Uncertain Income Tax Benefits
The Company classifies interest and penalties related to unrecognized tax benefits as part of its income tax provision. The total amount of unrecognized tax benefits, including interest and penalties, was $88.5 million and $79.2 million as of December 29, 2018 and March 31, 2018, respectively, and is included within non-current liability for unrecognized tax benefits in the consolidated balance sheets.
The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was $79.2 million and $68.4 million as of December 29, 2018 and March 31, 2018, respectively.

 
21
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended April 3, 2010.
10.
Debt
Debt consists of the following:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
$300 million 2.125% Senior Notes(a)
 
$
—

 
$
298.1

$300 million 2.625% Senior Notes(b)
 
291.2

 
288.0

$400 million 3.750% Senior Notes(c)
 
395.6

 
—

Borrowings outstanding under credit facilities
 
—

 
10.1

Total debt
 
686.8

 
596.2

Less: short-term debt and current portion of long-term debt
 
—

 
308.2

Long-term debt
 
$
686.8

 
$
288.0

 
 
(a) 
The carrying value of the 2.125% Senior Notes as of March 31, 2018 reflects adjustments of $1.6 million associated with the Company's related interest rate swap contract (see Note 12), and is also presented net of unamortized debt issuance costs and discount of $0.3 million.
(b) 
The carrying value of the 2.625% Senior Notes as of December 29, 2018 and March 31, 2018 reflects adjustments of $8.0 million and $10.8 million, respectively, associated with the Company's related interest rate swap contract (see Note 12). The carrying value of the 2.625% Senior Notes is also presented net of unamortized debt issuance costs and discount of $0.8 million and $1.2 million as of December 29, 2018 and March 31, 2018, respectively.
(c) 
The carrying value of the 3.750% Senior Notes is presented net of unamortized debt issuance costs and discount of $4.4 million as of December 29, 2018.
Senior Notes
In August 2015, the Company completed a registered public debt offering and issued $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.
In August 2018, the Company completed another registered public debt offering and issued an additional $400 million aggregate principal amount of unsecured senior notes due September 15, 2025, which bear interest at a fixed rate of 3.750%, payable semi-annually (the "3.750% Senior Notes"). The 3.750% Senior Notes were issued at a price equal to 99.521% of their principal amount. The proceeds from this offering were used for general corporate purposes, including repayment of the Company's previously outstanding $300 million principal amount of unsecured 2.125% senior notes that matured September 26, 2018 (the "2.125% Senior Notes").

 
22
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company has the option to redeem the 2.625% Senior Notes and 3.750% 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 December 29, 2018, there were no borrowings outstanding under the Commercial Paper Program.
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 reductions in borrowing ability throughout the term of the Global Credit Facility. As of December 29, 2018, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $10.2 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 December 29, 2018, 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

 
23
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 50 million Chinese Renminbi (approximately $7 million) through April 3, 2019, which is also able to be used to support bank guarantees.
•
South Korea Credit Facility — provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to 30 billion South Korean Won (approximately $27 million) through October 31, 2019.
During the first quarter of Fiscal 2019, the Company repaid approximately $10 million in borrowings that were previously outstanding under its Pan-Asia Credit Facilities. As of December 29, 2018, there were no borrowings outstanding under the Pan-Asia Credit Facilities.
Refer to Note 11 of the Fiscal 2018 10-K for additional discussion 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.
•
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:
 
 
December 29,
2018
 
March 31,
2018
 
 
(millions)
Investments in commercial paper(a)(b)
 
$
262.1

 
$
234.2

Derivative assets(a)
 
21.2

 
12.3

Derivative liabilities(a)
 
24.5

 
110.0

 
(a) 
Based on Level 2 measurements.
(b) 
As of December 29, 2018, $64.7 million was included within cash and cash equivalents and $197.4 million was included within short-term investments in the consolidated balance sheet. As of March 31, 2018, $15.0 million was included within cash and cash equivalents and $219.2 million was included within short-term investments in the consolidated balance sheet.

 
24
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company's investments in commercial paper are classified as available-for-sale and recorded at fair value in its consolidated balance sheets using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's investments. To the extent the Company invests in bonds, such investments are also classified as available-for-sale and recorded at fair value in its consolidated balance sheets based on quoted prices in active markets.
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 generally 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, if any, are estimated using external pricing data, based on interest rates and credit ratings for similar issuances with the same remaining term as the Company's outstanding borrowings. Due to their short-term nature, the fair values of the Company's commercial paper notes and borrowings outstanding under its credit facilities, if any, generally approximate their carrying values.
The following table summarizes the carrying values and the estimated fair values of the Company's debt instruments:
 
 
December 29, 2018
 
March 31, 2018
 
 
Carrying Value(a)
 
Fair Value(b)
 
Carrying Value(a)
 
Fair Value(b)
 
 
(millions)
$300 million 2.125% Senior Notes
 
$
—

 
$
—

 
$
298.1

 
$
299.4

$300 million 2.625% Senior Notes
 
291.2

 
296.8

 
288.0

 
298.7

$400 million 3.750% Senior Notes
 
395.6

 
395.7

 
—

 
—

Borrowings outstanding under credit facilities
 
—

 
—

 
10.1

 
10.1

 
 
(a) 
See Note 10 for discussion of the carrying values of the Company's senior notes.
(b) 
Based on Level 2 measurements.
Unrealized gains or losses resulting from changes in the fair value of the Company's debt 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 assets are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions.
During the nine-month periods ended December 29, 2018 and December 30, 2017, the Company recorded non-cash impairment charges of $13.3 million and $24.8 million, respectively, to fully write off the carrying values of certain long-lived assets based upon their assumed fair values of zero. 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 assets' net future discounted cash flows based on historical experience, current trends, and market conditions. See Note 7 for further discussion of the non-cash impairment charges recorded by the Company during the fiscal periods presented.

 
25
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

No goodwill impairment charges were recorded during either of the nine-month periods ended December 29, 2018 or December 30, 2017. The Company performed its annual goodwill impairment assessment using a qualitative approach as of the beginning of the second quarter of Fiscal 2019. In performing the assessment, the Company identified and considered the significance of relevant key factors, events, and circumstances that affected the fair values and/or carrying amounts of its reporting units with allocated goodwill. These factors included external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as the Company's actual and expected financial performance. Additionally, the results of the Company's most recent quantitative goodwill impairment test indicated that the fair values of these reporting units significantly exceeded their respective carrying values. Based on the results of its qualitative goodwill impairment assessment, the Company concluded that it is not more likely than not that the fair values of its reporting units are less than their respective carrying values, and there were no reporting units at risk of impairment.
12.
Financial Instruments
Derivative Financial Instruments
The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows and the value of the reported net assets of its international operations, as well as changes in the fair value of its fixed-rate debt obligations attributed to changes in a 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 December 29, 2018 and March 31, 2018:
 
 
Notional Amounts
 
Derivative Assets
 
Derivative Liabilities
Derivative Instrument(a)
 
December 29,
2018
 
March 31,
2018
 
December 29,
2018
 
March 31,
2018
 
December 29,
2018
 
March 31,
2018
 
 
 
 
 
 
Balance
Sheet
Line(b)
 
Fair
Value
 
Balance
Sheet
Line(b)
 
Fair
Value
 
Balance
Sheet
Line(b)
 
Fair
Value
 
Balance
Sheet
Line(b)
 
Fair
Value
 
 
(millions)
Designated Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Cash flow hedges
 
$
637.6

 
$
514.5

 
(e) 
 
$
17.8

 
PP
 
$
1.1

 
AE
 
$
2.7

 
(f) 
 
$
13.5

IRS — Fixed-rate debt
 
300.0

 
600.0

 
 
 
—

 
 
 
—

 
ONCL
 
8.0

 
(g) 
 
12.4

Net investment hedges(c)
 
708.4

 
1,081.2

 
ONCA
 
3.1

 
PP
 
0.1

 
ONCL
 
12.2

 
(h) 
 
82.6

Total Designated Hedges
 
1,646.0

 
2,195.7

 
 
 
20.9

 
 
 
1.2

 
 
 
22.9

 
 
 
108.5

Undesignated Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Undesignated hedges(d)
 
168.2

 
459.2

 
PP
 
0.3

 
PP
 
11.1

 
AE
 
1.6

 
AE
 
1.5

Total Hedges
 
$
1,814.2

 
$
2,654.9

 
 
 
$
21.2

 
 
 
$
12.3

 
 
 
$
24.5

 
 
 
$
110.0

 
(a) 
FC = Forward foreign currency exchange contracts; IRS = Interest rate swap contracts
(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) 
Includes cross-currency swaps and forward foreign currency exchange contracts designated as hedges of the Company's net investment in certain foreign operations.
(d) 
Primarily includes undesignated hedges of foreign currency-denominated intercompany loans and other intercompany balances.
(e) 
$15.7 million included within prepaid expenses and other current assets and $2.1 million included within other non-current assets.
(f) 
$12.9 million included within accrued expenses and other current liabilities and $0.6 million included within other non-current liabilities.
(g) 
$1.6 million included within accrued expenses and other current liabilities and $10.8 million included within other non-current liabilities.

 
26
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(h) 
$44.8 million included within accrued expenses and other current liabilities and $37.8 million included within other non-current liabilities.
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 when they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its derivative instruments on a net basis in accordance with the terms of each of its master netting arrangements, spread across eight separate counterparties, the amounts presented in the consolidated balance sheets as of December 29, 2018 and March 31, 2018 would be adjusted from the current gross presentation as detailed in the following table:
 
 
December 29, 2018
 
March 31, 2018
 
 
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
 
$
21.2

 
$
(3.6
)
 
$
17.6

 
$
12.3

 
$
(10.7
)
 
$
1.6

Derivative liabilities
 
24.5

 
(3.6
)
 
20.9

 
110.0

 
(10.7
)
 
99.3

The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. See Note 3 for further discussion of the Company's master netting arrangements.
The following tables summarize the pretax impact of gains and losses from the Company's designated derivative instruments on its consolidated financial statements for the three-month and nine-month periods ended December 29, 2018 and December 30, 2017:
 
 
Gains (Losses)
Recognized in OCI
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
(millions)
Designated Hedges:
 
 
 
 
 
 
 
 
FC — Cash flow hedges
 
$
11.1

 
$
(2.9
)
 
$
38.5

 
$
(28.8
)
Net investment hedges — effective portion
 
10.6

 
(10.4
)
 
50.8

 
(73.1
)
Net investment hedges — portion excluded from assessment of hedge effectiveness
 
6.8

 
—

 
0.1

 
—

Total Designated Hedges
 
$
28.5

 
$
(13.3
)
 
$
89.4

 
$
(101.9
)
 
 
Location and Amount of Gains (Losses)
from Cash Flow Hedges Reclassified from AOCI to Earnings
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
Cost of goods sold
 
Other income (expense), net
 
Cost of goods sold
 
Other income (expense), net
 
Cost of goods sold
 
Other income (expense), net
 
Cost of goods sold
 
Other income (expense), net
 
 
(millions)
Total amounts presented in the consolidated statements of operations in which the effects of related cash flow hedges are recorded
 
$
(666.3
)
 
$
1.0

 
$
(645.6
)
 
$
(1.4
)
 
$
(1,822.8
)
 
$
(0.6
)
 
$
(1,809.9
)
 
$
(1.7
)
Effects of cash flow hedging:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Cash flow hedges
 
4.3

 
(0.4
)
 
(5.9
)
 
0.6

 
(1.2
)
 
1.7

 
(4.3
)
 
(0.4
)

 
27
 

RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Gains (Losses) from Net Investment Hedges
Recognized in Earnings
 
Location of Gains (Losses)
Recognized in Earnings
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
 
 
(millions)
 
 
Net Investment Hedges
 
 
 
 
 
 
 
 
 
 
Net investment hedges — portion excluded from assessment of hedge effectiveness(a)
 
$
4.8

 
$
3.2