NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Michael Kors Holdings Limited (“MKHL,” and together with its subsidiaries, the “Company”) was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002. The Company is a leading designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel and accessories bearing the Michael Kors tradename and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” and various other related trademarks and logos. The Company’s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores and lifestyle stores, including concessions, and outlet stores, located primarily in the Americas (United States, Canada and Latin America, excluding Brazil), Europe and Asia, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas, Europe and Asia, as well as from our geographic licensees. The Company licenses its trademarks on products such as fragrances, beauty, eyewear, belts, cold weather accessories, jewelry, watches, coats, men’s suits, swimwear, socks, furs and ties, as well as through geographic licenses.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of
July 1, 2017
and for the
three
months ended
July 1, 2017
and
July 2, 2016
are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended
April 1, 2017
, as filed with the Securities and Exchange Commission on May 31, 2017, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
On May 31, 2016, the Company acquired
100%
of the stock of its previously licensed business in the Greater China region, Michael Kors (HK) Limited and Subsidiaries ("MKHKL"), which has operations in China, Hong Kong, Macau and Taiwan. As a result, the Company began consolidating MKHKL into its operations beginning on June 1, 2016. See
Note 3
for additional information.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the
three
months ended
July 1, 2017
and
July 2, 2016
, are based on 13-week periods.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the consolidated financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
Seasonality
The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company’s wholesale segment generally experiences its greatest sales in our third and fourth fiscal quarters while its first fiscal quarter experiences the lowest sales. The Company’s retail segment generally experiences greater sales during our third fiscal quarter as a result of holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to the other three quarters.
Derivative Financial Instruments
The Company uses forward currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash flows from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than
12 months
. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Net Income per Share
The Company’s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and units (“RSUs”), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included in diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method.
The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in millions, except share and per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Numerator:
|
|
|
|
Net income attributable to MKHL
|
$
|
125.5
|
|
|
$
|
147.1
|
|
Denominator:
|
|
|
|
Basic weighted average shares
|
154,486,898
|
|
|
174,158,571
|
|
Weighted average dilutive share equivalents:
|
|
|
|
Share options, restricted shares/units, and performance restricted share units
|
2,384,620
|
|
|
2,455,180
|
|
Diluted weighted average shares
|
156,871,518
|
|
|
176,613,751
|
|
|
|
|
|
Basic net income per share
|
$
|
0.81
|
|
|
$
|
0.84
|
|
Diluted net income per share
|
$
|
0.80
|
|
|
$
|
0.83
|
|
Share equivalents of
2,485,827
shares and
2,099,182
shares for the
three
months ended
July 1, 2017
and
July 2, 2016
, respectively, have been excluded from the above calculations due to their anti-dilutive effect.
Please refer to Note 2 in the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2017 for a complete disclosure of the Company's significant accounting policies.
Recently Adopted Accounting Pronouncements
Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "
Improvements to Employee Share-Based Payment Accounting
," which simplifies accounting and presentation of share-based payments, primarily relating to the recognition and classification of excess tax benefits, accounting for forfeitures and tax withholding requirements. The Company adopted ASU 2016-09 during the first quarter of Fiscal 2018, as required. Upon adoption, an excess tax deficit of
$4.9 million
, which would have been previously reflected within additional paid-in capital, was recognized within the Company's provision of income taxes for the
three
months ended
July 1, 2017
. In addition, the Company eliminated windfall tax benefits from the treasury stock method calculation used to compute its diluted earnings per share. Both of the above changes have been adopted on a prospective basis, whereas cash flows related to excess tax benefits, previously reflected within financing activities, have been presented within operating activities within the Company's consolidated statements of cash flows on a retrospective basis. Cash flows related to excess tax benefits were
$0.8 million
during the three months ended
July 2, 2016
. The Company continues to reflect estimated forfeitures in its share-based compensation expense.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers
,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
" which deferred the effective date of ASU 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s Fiscal 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU No. 2016-20, "
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
" issued in December 2016, ASU No. 2016-12, "
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
"
issued in May 2016, ASU No. 2016-10, "
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
issued in April 2016, and ASU No. 2016-08, "
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)"
issued in March 2016 . The Company will consider this guidance in evaluating the impact of ASU 2014-09.
Most of our business is comprised of retail and wholesale operations, where revenue is recognized at a point of time. The Company has completed the initial assessment of the new standard and is currently progressing in its implementation. While the evaluation process is not complete, based on our assessment to date, the Company believes that some of the potential impacts of implementing this standard will include the timing of revenue recognition for its licensing royalties, recognition of breakage revenue for unredeemed gift cards, as well as expanded financial statement disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The Company currently anticipates adopting this standard using the modified retrospective method with the cumulative adjustment to retained earnings recorded during the first quarter of Fiscal 2019.
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "
Leases (Topic 842),"
which requires lessees to recognize a lease liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is effective beginning with the Company's Fiscal 2020, with early adoption permitted, and must be implemented using a modified retrospective approach for all leases existing at, or entered into after the beginning of the earliest comparative period that is presented in the financial statements. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements but expects that the adoption of this standard will result in a significant increase in assets and liabilities on its consolidated balance sheets.
Goodwill
In January 2017, the FASB issued ASU No. 2017-04, “
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
,” which simplifies the test for goodwill impairment by eliminating Step 2 of the goodwill impairment analysis, while retaining the option to perform an initial qualitative assessment for a reporting unit to determine if a quantitative impairment test is required. ASU 2017-04 is effective in the Company’s Fiscal 2021 with early adoption permitted and should be applied on a prospective basis. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements.
Share-Based Compensation
In May 2017, the FASB issued ASU No. 2017-09,
"Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting"
, which simplifies modification accounting for entities that change the terms or conditions of share-based awards. ASU 2017-09 is effective for the Company’s Fiscal 2019 with early adoption permitted and is required to be applied on a prospective basis. The Company will evaluate the impact of ASU 2017-09 on any future changes to the terms and conditions of its share-based compensation awards.
3. Acquisitions
Acquisition of Michael Kors (HK) Limited
On May 31, 2016, the Company acquired
100%
of the stock of Michael Kors (HK) Limited and its subsidiaries, its licensees in the Greater China region, which includes China, Hong Kong, Macau and Taiwan. The Company believes that having direct control of this business will allow it to better manage opportunities and capitalize on the growth potential in the region. This acquisition was funded by a cash payment of
$500.0 million
, subject to certain purchase price adjustments. The Company accounted for the acquisition as a business combination. The following table summarized the fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
|
|
|
|
|
|
May 31, 2016
|
Cash and cash equivalents
|
$
|
19.4
|
|
Accounts receivable
|
22.3
|
|
Inventory
|
36.1
|
|
Other current assets
|
5.5
|
|
Current assets
|
83.3
|
|
Property and equipment
|
46.6
|
|
Goodwill
|
96.5
|
|
Reacquired rights
|
400.4
|
|
Favorable lease assets
|
1.8
|
|
Customer relationships
|
0.7
|
|
Deferred tax assets
|
7.8
|
|
Other assets
|
6.6
|
|
Total assets acquired
|
$
|
643.7
|
|
|
|
Accounts payable
|
$
|
8.9
|
|
Short-term debt
|
5.8
|
|
Other current liabilities
|
27.8
|
|
Current liabilities
|
42.5
|
|
Unfavorable lease liabilities
|
4.8
|
|
Deferred tax liabilities
|
92.3
|
|
Other liabilities
|
4.1
|
|
Total liabilities assumed
|
$
|
143.7
|
|
|
|
Fair value of net assets acquired
|
$
|
500.0
|
|
Fair value of acquisition consideration
|
$
|
500.0
|
|
The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, with the
$96.5 million
difference between the purchase price over the net identifiable tangible and intangible assets acquired allocated to goodwill, which is not deductible for tax purposes. As part of this acquisition, the Company reacquired the rights to use its trademarks and to import, sell, advertise and promote certain of its products in the licensed territories, which were previously granted to its licensees in the Greater China region. As such, the Company recognized reacquired rights as a separate intangible asset from goodwill, which will be amortized through March 31, 2041, the original expiration date of its license agreement in the Greater China region. In addition, the Company recognized customer relationship intangible assets associated with wholesale customers, which will be amortized over
ten years
. The favorable lease assets and unfavorable lease liabilities have been separately recorded in the Company's financial statements and are recognized as rent expense and a reduction in rent expense, respectively, over the remaining term of the related lease agreements.
MKHKL's results of operations have been included in our consolidated financial statements beginning on June 1, 2016. MKHKL contributed total revenue of $
69.8 million
and net income of $
2.4 million
during the three months ended
July 1, 2017
, and total revenue of $
20.6 million
and net loss of $
2.2 million
for the period from the date of acquisition through
July 2, 2016
(after amortization of non-cash valuation adjustments and integration costs).
The following table summarizes the unaudited pro-forma consolidated results of operations for the
three
months ended
July 2, 2016
as if the acquisition had occurred on March 29, 2015, the beginning of Fiscal 2016 (in millions):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 2, 2016
|
Pro-forma total revenue
|
|
$
|
1,014.3
|
|
Pro-forma net income
|
|
155.2
|
|
Pro-forma net income per ordinary share attributable to MKHL:
|
|
|
Basic
|
|
$
|
0.89
|
|
Diluted
|
|
$
|
0.88
|
|
The unaudited pro-forma consolidated results above are based on the historical financial statements of the Company and MKHKL and are not necessarily indicative of the results of operations that would have been achieved if the acquisition was completed at the beginning of Fiscal 2016 and are not indicative of the future operating results of the combined company. The pro-forma consolidated results of operations reflect the elimination of intercompany transactions and include the effects of purchase accounting adjustments, including amortization charges related to the finite-lived intangible assets acquired (reacquired rights and customer relationships), fair value adjustments relating to leases, fixed assets and inventory, and the related tax effects assuming that the business combination occurred on March 29, 2015. The pro-forma consolidated results of operations for the
three
months ended
July 2, 2016
also reflect the elimination of transaction costs of approximately $
11.3 million
, which have been recorded within selling, general and administrative expenses in the Company's consolidated statements of operations and comprehensive income for the
three
months ended
July 2, 2016
.
Other Acquisitions
During the three months ended
July 1, 2017
, the Company repurchased a portion of the non-controlling interest in its Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries ("MK Panama") for approximately
$0.5 million
. As of
July 1, 2017
, the Company has a
75%
ownership interest in MK Panama.
Please refer to
Note 19
for information regarding the Company's agreement related to the acquisition of Jimmy Choo PLC.
4. Receivables, net
Receivables, net consist of (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
April 1,
2017
|
Trade receivables:
|
|
|
|
Credit risk assumed by insured
|
$
|
207.2
|
|
|
$
|
294.0
|
|
Credit risk retained by Company
|
49.9
|
|
|
63.8
|
|
Receivables due from licensees
|
8.1
|
|
|
11.9
|
|
|
265.2
|
|
|
369.7
|
|
Less: allowances
|
(93.9
|
)
|
|
(103.9
|
)
|
|
$
|
171.3
|
|
|
$
|
265.8
|
|
Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on wholesale customers' sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in net sales.
The Company's allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for doubtful accounts as of
July 1, 2017
and
April 1, 2017
was
$0.9 million
.
5. Property and Equipment, net
Property and equipment, net consist of (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
April 1,
2017
|
Leasehold improvements
|
$
|
525.8
|
|
|
$
|
507.9
|
|
In-store shops
|
261.2
|
|
|
256.0
|
|
Furniture and fixtures
|
251.6
|
|
|
244.1
|
|
Computer equipment and software
|
236.8
|
|
|
226.2
|
|
Equipment
|
107.3
|
|
|
104.4
|
|
Building
|
43.6
|
|
|
40.6
|
|
Land
|
15.0
|
|
|
14.0
|
|
|
1,441.3
|
|
|
1,393.2
|
|
Less: accumulated depreciation and amortization
|
(885.4
|
)
|
|
(833.9
|
)
|
|
555.9
|
|
|
559.3
|
|
Construction-in-progress
|
29.6
|
|
|
32.2
|
|
|
$
|
585.5
|
|
|
$
|
591.5
|
|
Depreciation and amortization of property and equipment for the
three
months ended
July 1, 2017
and
July 2, 2016
was
$42.5 million
and
$46.9 million
, respectively.
6. Intangible Assets and Goodwill
The following table details the carrying values of the Company's intangible assets that are subject to amortization (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
April 1,
2017
|
Reacquired Rights
|
$
|
400.4
|
|
|
$
|
400.4
|
|
Trademarks
|
23.0
|
|
|
23.0
|
|
Lease Rights
|
78.8
|
|
|
74.2
|
|
Customer Relationships
|
5.0
|
|
|
5.0
|
|
|
$
|
507.2
|
|
|
$
|
502.6
|
|
Less: accumulated amortization
|
$
|
(92.9
|
)
|
|
$
|
(84.5
|
)
|
|
$
|
414.3
|
|
|
$
|
418.1
|
|
Amortization expense for the Company's finite-lived intangibles assets was
$5.1 million
as of
July 1, 2017
and
$3.5 million
as of
July 2, 2016
.
The Company's goodwill balance as of
July 1, 2017
and
April 1, 2017
was
$119.7 million
. There were
no
impairment charges recorded during the three months ended
July 1, 2017
and
July 2, 2016
for any of the Company's intangible assets.
7. Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
April 1,
2017
|
Prepaid taxes
|
$
|
61.8
|
|
|
$
|
56.6
|
|
Prepaid rent
|
20.0
|
|
|
21.7
|
|
Leasehold incentive receivable
|
11.0
|
|
|
12.0
|
|
Prepaid insurance
|
5.1
|
|
|
3.2
|
|
Unrealized gains on forward foreign exchange contracts
|
0.1
|
|
|
4.7
|
|
Restricted cash
|
—
|
|
|
1.9
|
|
Other
|
25.9
|
|
|
21.8
|
|
|
$
|
123.9
|
|
|
$
|
121.9
|
|
Accrued expenses and other current liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
April 1,
2017
|
Accrued capital expenditures
|
$
|
12.8
|
|
|
$
|
20.5
|
|
Other taxes payable
|
40.0
|
|
|
29.2
|
|
Accrued rent
|
23.5
|
|
|
21.5
|
|
Accrued advertising and marketing
|
17.0
|
|
|
10.7
|
|
Gift cards and retail store credits
|
12.8
|
|
|
12.9
|
|
Professional services
|
9.8
|
|
|
7.1
|
|
Advance royalties
|
8.5
|
|
|
5.0
|
|
Unrealized loss on forward foreign currency exchange contracts
|
7.8
|
|
|
0.4
|
|
Other
|
29.7
|
|
|
27.7
|
|
|
$
|
161.9
|
|
|
$
|
135.0
|
|
8. Restructuring and Other Charges
On May 31, 2017, the Company announced that it plans to close between
100
and
125
of its full-price retail stores over the next
two
years, in order to improve the profitability of its retail store fleet ("Retail Fleet Optimization Plan"). Over this time period, the Company expects to incur approximately
$100
-
$125
million of one-time costs associated with these store closures. Collectively, the Company anticipates ongoing annual savings of approximately
$60 million
as a result of store closures and the lower depreciation and amortization expense as a result of the impairment charges recorded during Fiscal 2017.
During the
three months ended
July 1, 2017
, the Company finalized plans to close
ten
of its retail stores under the Retail Fleet Optimization Plan. The related charges during the
three months ended
July 1, 2017
were not material.
9. Debt Obligations
Senior Unsecured Revolving Credit Facility
On
October 29, 2015
, the Company entered into an amended and restated senior unsecured revolving credit facility ("2015 Credit Facility") with, among others, JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), as administrative agent, which replaced its prior 2013 senior unsecured revolving credit facility ("2013 Credit Facility"). The Company and its U.S., Canadian, Dutch and Swiss subsidiaries are the borrowers under the 2015 Credit Facility. The borrowers and certain material subsidiaries of the Company provide unsecured guarantees of the 2015 Credit Facility. The 2015 Credit Facility provides for up to
$1.0 billion
in borrowings, which may be denominated in U.S. Dollars and other currencies, including Euros, Canadian Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The 2015 Credit Facility also provides for the issuance of letters of credit of up to
$75.0 million
and swing line loans of up to
$50.0 million
. The Company has the ability to expand its borrowing availability under the 2015 Credit Facility by up to an additional
$500.0 million
, subject to the agreement of the participating lenders and certain other customary conditions. The 2015 Credit Facility expires on
October 29, 2020
.
Borrowings under the 2015 Credit Facility bear interest, at the Company's option, at (i) for loans denominated in U.S. Dollars, an alternative base rate, which is the greater of the prime rate publicly announced from time to time by JPMorgan Chase, the greater of the federal funds effective rate or Federal Reserve Bank of New York overnight bank funding rate plus 50 basis points or the one-month London Interbank Offered Rate adjusted for statutory reserve requirements for Eurocurrency liabilities ("Adjusted LIBOR") plus 100 basis points, in each case, plus an applicable margin based on the Company's leverage ratio; (ii) Adjusted LIBOR for the applicable interest period, plus an applicable margin based on the Company's leverage ratio; (iii) for Canadian borrowings, the Canadian prime rate, which is the greater of the PRIMCAN Index rate or the rate applicable to one-month Canadian Dollar banker's acceptances quoted on Reuters ("CDOR") plus 100 basis points, plus an applicable margin based on the Company's leverage ratio; or (iv) for Canadian borrowings, the average CDOR rate for the applicable interest period, plus an applicable margin based on the Company's leverage ratio.
The 2015 Credit Facility requires the Company to maintain a leverage ratio at the end of each fiscal quarter of no greater than
3.5
to 1. Such leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus
6.0
times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus income tax expense, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash charges, subject to certain deductions. The 2015 Credit Facility also includes covenants that limit additional indebtedness, guarantees, liens, acquisitions and other investments and cash dividends that are customary for financings of this type. As of
July 1, 2017
, the Company was in compliance with all covenants related to this agreement.
As of
July 1, 2017
, the Company had
$150.0 million
in borrowings outstanding under the 2015 Credit Facility, which were recorded within short-term debt in its consolidated balance sheet as of
July 1, 2017
. In addition, stand-by letters of credit of
$10.7 million
were outstanding as of
July 1, 2017
. There were
$127.3 million
borrowings outstanding under the 2015 Credit Facility as of April 1, 2017. At
July 1, 2017
, the amount available for future borrowings was
$839.3 million
.
Please refer to Note 9 in the Company's Fiscal 2017 Annual Report on Form 10-K for additional information about the Company's 2015 Credit Facility.
Hong Kong Credit Facility
In December 2016, the Company's Hong Kong subsidiary, MKHKL, renewed its uncommitted credit facility ("HK Credit Facility") with HSBC (the "Bank"), which may be used to fund general working capital needs of MKHKL through
November 30, 2017
, subject to the Bank's discretion. The HK Credit Facility provides MKHKL with a revolving line of credit of up to
100.0 million
Hong Kong Dollars (approximately
$12.8 million
), and may be used to support bank guarantees. In addition, this credit facility provides for a business card facility of up to
0.4 million
Hong Kong Dollars (less than
$0.1 million
). Borrowings under the HK Credit Facility must be made in increments of at least
5.0 million
Hong Kong Dollars and bear interest at the Hong Kong Interbank Offered Rate ("HIBOR") plus 150 basis points. As of
July 1, 2017
, borrowings outstanding under the HK Credit Facility were
45.0 million
Hong Kong Dollars (approximately $
5.8 million
), which were recorded within short-term debt in the Company's consolidated balance sheet as of
July 1, 2017
. In addition, as of
July 1, 2017
, bank guarantees supported by this facility were
11.8 million
Hong Kong Dollars (approximately $
1.5 million
). At
July 1, 2017
, the amount available for future borrowings under the Hong Kong Credit Facility was
43.2 million
Hong Kong Dollars (approximately $
5.5 million
).
10. Commitments and Contingencies
In the ordinary course of business, the Company is party to various legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, the Company’s management does not believe that the outcome of all pending legal proceedings in the aggregate will have a material adverse effect on its cash flow, results of operations or financial position.
Please refer to the
Contractual Obligations and Commercial Commitments
disclosure within the
Liquidity
section of the Company's Annual Report on Form 10-K for the fiscal year ended
April 1, 2017
for a detailed disclosure of other commitments and contractual obligations as of
April 1, 2017
.
Please refer to Note 19 for information regarding the Company's agreement related to the acquisition of Jimmy Choo PLC.
11. Fair Value Measurements
Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-base (observable)or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability
to access at the measurement date.
Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the
asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
At
July 1, 2017
and
April 1, 2017
, the fair values of the Company’s foreign currency forward contracts, the Company’s only derivative instruments, were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or (liabilities) to the Company, as detailed in
Note 12
.
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at July 1, 2017 using:
|
|
Fair value at April 1, 2017 using:
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant
other observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant
other observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Forward foreign currency exchange contracts - assets
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.7
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts - liabilities
|
$
|
—
|
|
|
$
|
7.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which resembles fair value due to the short-term nature of such borrowings.
Non-Financial Assets and Liabilities
The Company's non-financial assets include goodwill, intangible assets and property and equipment. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. The Company's goodwill is assessed for impairment at least annually during the fourth quarter of each fiscal year, while its other long-lived assets, including fixed assets and finite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The fair values of these assets are determined based on Level 3 measurements using the Company's best estimates of the amount and timing of future cash flows, based on historical experience, market conditions, current trends and performance expectations. The Company did not record any impairment charges during the
three
month periods ended
July 1, 2017
and
July 2, 2016
.
12. Derivative Financial Instruments
The Company uses forward foreign currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company in its normal course of business enters into transactions with foreign suppliers and seeks to minimize risks related to certain forecasted inventory purchases by using forward foreign currency exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company does not enter into derivative contracts for trading or speculative purposes.
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of
July 1, 2017
and
April 1, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values
|
|
Notional Amounts
|
|
Current Assets
(1)
|
|
Current Liabilities
(2)
|
|
July 1,
2017
|
|
April 1,
2017
|
|
July 1,
2017
|
|
April 1,
2017
|
|
July 1,
2017
|
|
April 1,
2017
|
Designated forward foreign currency exchange contracts
|
$
|
179.5
|
|
|
$
|
167.5
|
|
|
$
|
0.1
|
|
|
$
|
4.7
|
|
|
$
|
7.6
|
|
|
$
|
0.4
|
|
Undesignated forward foreign currency exchange contracts
|
16.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Total
|
$
|
196.1
|
|
|
$
|
167.5
|
|
|
$
|
0.1
|
|
|
$
|
4.7
|
|
|
$
|
7.8
|
|
|
$
|
0.4
|
|
|
|
(1)
|
Recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
|
|
|
(2)
|
Recorded within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
|
The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheet on a gross basis as shown in the above table. However, as of
July 1, 2017
and
April 1, 2017
, the Company had derivative assets of $
0.1 million
and
$4.7 million
, respectively, and derivative liabilities of $
7.5 million
and
$0.3 million
, respectively, that were subject to master netting arrangements. If the Company were to offset and record the asset and liability balances for its derivative instruments on a net basis in accordance with the terms of its master netting arrangements, which provide for the right to setoff amounts for similar transactions denominated in the same currencies, its net derivative liabilities as of
July 1, 2017
and
April 1, 2017
would be $
7.7 million
and $
0.2 million
, respectively, and it would have derivative net assets of
$4.5 million
as of April 1, 2017. The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties.
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income (loss) into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations and comprehensive income. The following table summarizes the impact of the effective portion of gains and losses on the forward contracts designated as hedges (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
|
|
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
|
|
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
|
|
Pre-Tax Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
|
Forward foreign currency exchange contracts
|
$
|
(9.3
|
)
|
|
$
|
1.9
|
|
|
$
|
3.3
|
|
|
$
|
(0.1
|
)
|
Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive loss will be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turnover. These amounts are subject to fluctuations in the applicable currency exchange rates.
During the
three
months ended
July 1, 2017
and
July 2, 2016
, the Company recognized net losses of
$1.4 million
and net gains of
$0.2 million
, respectively, related to changes in the fair value of undesignated forward currency exchange contracts within foreign currency (income) loss in the Company’s consolidated statement of operations.
13. Shareholders’ Equity
Share Repurchase Program
On May 25, 2017, the Company's Board of Directors authorized a
$1.0 billion
share repurchase program. During the
three
months ended
July 1, 2017
and
July 2, 2016
, the Company repurchased
4,543,500
shares and
8,025,749
shares, respectively, at a cost of
$157.8 million
and
$400.0 million
, respectively, under its share-repurchase programs through open market transactions. As of
July 1, 2017
, the remaining availability under the Company’s new share repurchase program was
$842.2 million
. Share repurchases are subject to market conditions and the Company's business priorities.
The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary shares from certain executive officers to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards. During the
three
month periods ended
July 1, 2017
and
July 2, 2016
, the Company withheld
77,155
shares and
94,151
shares, respectively, at a cost of
$2.5 million
and
$4.4 million
, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
14. Accumulated Other Comprehensive Income (Loss)
The following table details changes in the components of accumulated other comprehensive income (loss) ("AOCI"), net of taxes for the
three
months ended
July 1, 2017
and
July 2, 2016
, respectively (in millions):
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
(Losses) Gains
|
|
Net (Losses) Gains on
Derivatives
(1)
|
|
Other Comprehensive (Loss) Income Attributable to MKHL
|
|
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
|
|
Total Accumulated Other Comprehensive (Loss) Income
|
Balance at April 2, 2016
|
$
|
(77.7
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(80.9
|
)
|
|
$
|
0.1
|
|
|
$
|
(80.8
|
)
|
Other comprehensive (loss) income before reclassifications
(2)
|
(0.5
|
)
|
|
3.0
|
|
|
2.5
|
|
|
0.1
|
|
|
2.6
|
|
Less: amounts reclassified from AOCI to earnings
(3)
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Other comprehensive (loss) income net of tax
|
(0.5
|
)
|
|
3.1
|
|
|
2.6
|
|
|
0.1
|
|
|
2.7
|
|
Balance at July 2, 2016
|
$
|
(78.2
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(78.3
|
)
|
|
$
|
0.2
|
|
|
$
|
(78.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
$
|
(86.1
|
)
|
|
$
|
5.5
|
|
|
$
|
(80.6
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(80.9
|
)
|
Other comprehensive income (loss) before reclassifications
(2)
|
22.1
|
|
|
(8.0
|
)
|
|
14.1
|
|
|
—
|
|
|
14.1
|
|
Less: amounts reclassified from AOCI to earnings
(3)
|
—
|
|
|
1.7
|
|
|
1.7
|
|
|
—
|
|
|
1.7
|
|
Other comprehensive income (loss) net of tax
|
22.1
|
|
|
(9.7
|
)
|
|
12.4
|
|
|
—
|
|
|
12.4
|
|
Balance at July 1, 2017
|
$
|
(64.0
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(68.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(68.5
|
)
|
_________________________
|
|
(1)
|
Accumulated other comprehensive income balance related to net gains on derivative financial instruments as of
July 1, 2017
and
April 1, 2017
is net of tax (benefit) provision of
$(0.7) million
and
$0.8 million
, respectively. Other comprehensive income (loss) before reclassifications related to derivative financial instruments for the
three
months ended
July 1, 2017
and
July 2, 2016
is net of tax benefits of
$1.3 million
and
$1.0 million
, respectively. All other tax effect were not material for the periods presented.
|
|
|
(2)
|
Foreign currency translation losses for the
three
months ended
July 1, 2017
include net losses of
$1.4 million
on intra-entity transactions that are of a long-term investment nature.
|
|
|
(3)
|
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within cost of goods sold in the Company’s consolidated statements of operations.
|
15. Share-Based Compensation
The Company issues equity grants to certain employees and directors of the Company at the discretion of the Company’s Compensation and Talent Committee. The Company has
two
equity plans,
one
adopted in Fiscal 2008, the Michael Kors (USA), Inc. Stock Option Plan (as amended and restated, the “2008 Plan”), and the other adopted in the third fiscal quarter of Fiscal 2012 and amended and restated with shareholder approval in May 2015, the Michael Kors Holdings Limited Amended and Restated Omnibus Incentive Plan (the “Incentive Plan”). The 2008 Plan only provided for grants of share options and was authorized to issue up to
23,980,823
ordinary shares. As of
July 1, 2017
, there were
no
shares available to grant equity awards under the 2008 Plan. The Incentive Plan allows for grants of share options, restricted shares and restricted share units, and other equity awards, and authorizes a total issuance of up to
15,246,000
ordinary shares. At
July 1, 2017
, there were
7,414,751
ordinary shares available for future grants of equity awards under the Incentive Plan. Option grants issued from the 2008 Plan generally expire
ten years
from the date of the grant, and those issued under the Incentive Plan generally expire
seven years
from the date of the grant.
The following table summarizes the Company's share-based compensation activity during the
three
months ended
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Restricted Shares
|
|
Service-Based RSUs
|
|
Performance-Based RSUs
|
Outstanding/Unvested at April 1, 2017
|
4,791,045
|
|
|
185,425
|
|
|
1,470,767
|
|
|
401,777
|
|
Granted
|
208,264
|
|
|
—
|
|
|
1,039,943
|
|
|
139,562
|
|
Exercised/Vested
|
(4,551
|
)
|
|
(100,230
|
)
|
|
(296,363
|
)
|
|
(81,212
|
)
|
Decrease due to performance condition
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,891
|
)
|
Canceled/forfeited
|
(6,866
|
)
|
|
(1,187
|
)
|
|
(11,135
|
)
|
|
—
|
|
Outstanding/Unvested at July 1, 2017
|
4,987,892
|
|
|
84,008
|
|
|
2,203,212
|
|
|
447,236
|
|
The weighted average grant date fair value for options granted during the
three
months ended
July 1, 2017
and
July 2, 2016
was
$11.62
and
$13.79
respectively. The weighted average grant date fair value of service-based and performance-based RSUs granted during the
three
months ended
July 1, 2017
was
$34.84
and $
34.68
, respectively and
$49.87
and $
49.88
, respectively, during the three months ended
July 2, 2016
.
The Company uses the Black-Scholes valuation model to estimate the grant date fair value of its share option awards. During the
three
months ended
July 1, 2017
, the Company began using its own historical experience in determining the expected holding period and volatility of its time-based share option awards. In prior periods, the Company used the simplified method for determining the expected life of its options and average volatility rates of similar actively traded companies over the estimated holding period, due to insufficient historical option exercise experience as a public company. The following table presents assumptions used to estimate the fair value of options granted during the three months ended
July 1, 2017
and
July 2, 2016
:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1
2017
|
|
July 2
2016
|
Expected dividend yield
|
0.0
|
%
|
|
0.0
|
%
|
Volatility factor
|
36.3
|
%
|
|
30.1
|
%
|
Weighted average risk-free interest rate
|
1.8
|
%
|
|
1.1
|
%
|
Expected life of option
|
4.69 years
|
|
|
4.75 years
|
|
Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for the
three
months ended
July 1, 2017
and
July 2, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Share-based compensation expense
|
$
|
10.8
|
|
|
$
|
9.8
|
|
Tax benefits related to share-based compensation expense
|
$
|
3.6
|
|
|
$
|
3.7
|
|
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rate to date. The estimated value of future forfeitures for equity grants as of
July 1, 2017
is approximately
$10.4 million
.
Please refer to Note 15 in the Company's Fiscal 2017 Annual Report on Form 10-K for additional information relating to the Company's share-based compensation awards.
16. Segment Information
The Company operates its business through
three
operating segments—Retail, Wholesale and Licensing—which are based on its business activities and organization. The operating segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are net sales or revenue (in the case of Licensing) and operating income for each segment. The Company’s reportable segments represent channels of distribution that offer similar merchandise, customer experience and sales/marketing strategies. The Company’s Retail segment includes sales through the Company owned stores, including “Collection,” “Lifestyle” including “concessions,” and outlet stores located throughout the Americas (U.S., Canada and Latin America, excluding Brazil), Europe, and Asia, as well as the Company’s e-commerce sales. Products sold through the Retail segment include women’s apparel, accessories (which include handbags and small leather goods such as wallets), men's apparel, footwear and licensed products, such as watches, jewelry, fragrances and beauty, and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout the Americas, Europe and Asia. Products sold through the Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. We also have wholesale arrangements pursuant to which we sell products to our geographic licensees. The Licensing segment includes royalties earned on licensed products and use of the Company’s trademarks, and rights granted to third parties for the right to operate retail stores and/or sell the Company’s products in certain geographic regions such as Brazil, the Middle East, Eastern Europe, certain parts of Asia and Australia. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Corporate overhead expenses are allocated to the segments based upon specific usage or other allocation methods.
As of
July 1, 2017
and
April 1, 2017
, the Company's goodwill balance of
$119.7 million
was allocated
$91.9 million
,
$25.9 million
and
$1.9 million
to the Company's Retail, Wholesale and Licensing segments, respectively. The Company does not have identifiable assets separated by segment.
The following table presents the key performance information of the Company’s reportable segments (in millions):
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|
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Three Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Revenue:
|
|
|
|
Net sales: Retail
|
$
|
619.9
|
|
|
$
|
562.9
|
|
Wholesale
|
303.6
|
|
|
394.4
|
|
Licensing
|
28.9
|
|
|
30.6
|
|
Total revenue
|
$
|
952.4
|
|
|
$
|
987.9
|
|
|
|
|
|
Income from operations:
|
|
|
|
Retail
|
$
|
92.2
|
|
|
$
|
66.6
|
|
Wholesale
|
43.5
|
|
|
105.0
|
|
Licensing
|
13.7
|
|
|
15.3
|
|
Income from operations
|
$
|
149.4
|
|
|
$
|
186.9
|
|
Depreciation and amortization expense for each segment are as follows (in millions):
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|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Depreciation and amortization:
|
|
|
|
Retail
|
$
|
32.0
|
|
|
$
|
34.0
|
|
Wholesale
|
15.0
|
|
|
15.9
|
|
Licensing
|
0.6
|
|
|
0.5
|
|
Total depreciation and amortization
|
$
|
47.6
|
|
|
$
|
50.4
|
|
Total revenue (as recognized based on country of origin), and long-lived assets by geographic location are as follows (in millions):
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|
|
|
|
|
|
|
|
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Three Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Revenue:
|
|
|
|
The Americas (U.S., Canada and Latin America)
(1)
|
$
|
634.1
|
|
|
$
|
690.8
|
|
Europe
|
201.2
|
|
|
224.0
|
|
Asia
|
117.1
|
|
|
73.1
|
|
Total revenue
|
$
|
952.4
|
|
|
$
|
987.9
|
|
|
|
|
|
|
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|
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As of
|
|
July 1,
2017
|
|
April 1,
2017
|
Long-lived assets:
|
|
|
|
The Americas (U.S., Canada and Latin America)
(1)
|
$
|
340.5
|
|
|
$
|
356.1
|
|
Europe
|
206.1
|
|
|
197.7
|
|
Asia
|
453.2
|
|
|
455.8
|
|
Total Long-lived assets
|
$
|
999.8
|
|
|
$
|
1,009.6
|
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(1)
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Total revenues earned in the U.S. were
$587.1 million
and
$641.4 million
, respectively, for the
three
months ended
July 1, 2017
and
July 2, 2016
. Long-lived assets located in the U.S. as of
July 1, 2017
and
April 1, 2017
were
$313.8 million
and
$328.8 million
, respectively.
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17. Related Party Transactions
The Company’s Chief Creative Officer, Michael Kors, and the Company’s Chief Executive Officer, John Idol, and certain of the Company’s former shareholders, including Sportswear Holdings Limited, jointly owned Michael Kors Far East Holdings Limited, a BVI company, prior to the Company's acquisition of MKHKL on May 31, 2016, which eliminated their ownership interests. On April 1, 2011, the Company entered into certain licensing agreements with certain subsidiaries of Michael Kors Far East Holdings Limited, including MKHKL, (the “Licensees”), which provided the Licensees with certain exclusive rights for use of the Company’s trademarks within China, Hong Kong, Macau and Taiwan, and to import, sell, advertise and promote certain of the Company’s products in these regions, as well as to own and operate stores bearing the Company’s tradenames. The agreements between the Company and the Licensees were scheduled to expire on
March 31, 2041
and could be terminated by the Company at certain intervals if minimum sales benchmarks were not met. Royalties earned under these agreements were approximately
$1.2 million
during the two months ended May 31, 2016 preceding the acquisition. These royalties were driven by Licensee sales (of the Company’s goods) to their customers of approximately
$28.9 million
during the two months ended May 31, 2016 preceding the acquisition. In addition, the Company sold certain inventory items to the Licensees through its wholesale segment at terms consistent with those of similar licensees in the region. During the two-month period ended May 31, 2016 preceding the acquisition, amounts recognized as net sales in the Company’s consolidated statements of operations and comprehensive income related to these sales were approximately
$7.9 million
. Please refer to Note 3 for information relating to the Company's acquisition of MKHKL on May 31, 2016.
A former executive officer of the Company (who is no longer a related party as of October 31, 2016) is married to a former employee of one of the Company's suppliers of fixtures for its shop-in-shops, retail stores and showrooms. During the
three
months ended
July 2, 2016
, purchases from this supplier reflected in the Company's consolidated financial statements were $
0.3 million
.
18. Non-cash Investing Activities
Significant non-cash investing activities during the
three
months ended
July 2, 2016
included the non-cash allocations of the fair values of the net assets acquired in connection with the Company's acquisition of the Greater China business on May 31, 2016. See
Note 3
for additional information.
There were no other significant non-cash investing or financing activities during the fiscal periods presented.
19. Subsequent Events
On July 25, 2017, the Company entered into an agreement with Jimmy Choo PLC ("Jimmy Choo"), whereby JAB Acquisitions (UK) Limited ("Michael Kors Bidco"), the Company's wholly-owned subsidiary, will acquire all of Jimmy Choo's outstanding shares at a purchase price of
230
pence in cash per share, or approximately
£896 million
. The total purchase price is estimated to be approximately
$1.35 billion
, including the refinancing of existing debt obligations. The transaction is subject to customary closing conditions and is expected to close during the third quarter of Fiscal 2018.
In connection with the acquisition agreement, on July 25, 2017, the Company entered into a forward foreign currency exchange derivative contract with a notional amount of
£1.115 billion
to mitigate its foreign currency exchange risk through the expected closing date of the acquisition. This derivative contract was not designated as a hedge. Therefore, changes in the fair value will be recorded to foreign currency income (loss) in the Company's consolidated statements of operations.
On July 25, 2017, the Company and its subsidiaries entered into a bridge credit agreement providing for a term loan facility in the principal amount of
£1.115 billion
with, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, among others. The proceeds of this facility will be used to fund the cash consideration payable by Michael Kors Bidco in connection with the acquisition. The term loan facility will mature
364
days from the initial borrowing date. The commitments under the bridge credit agreement are expected to be reduced or refinanced with permanent financing.
ITEM 2.