MICHAEL KORS HOLDINGS LTD, 10-Q filed on 8/8/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
3 Months Ended
Jun. 30, 2018
Jul. 31, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2018  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Entity Registrant Name MICHAEL KORS HOLDINGS LTD  
Entity Central Index Key 0001530721  
Current Fiscal Year End Date --03-30  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   149,321,694
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Millions
Jun. 30, 2018
Mar. 31, 2018
Current assets    
Cash and cash equivalents $ 169.9 $ 163.1
Receivables, net 262.5 290.5
Inventories 697.0 660.7
Prepaid expenses and other current assets 164.8 147.8
Total current assets 1,294.2 1,262.1
Property and equipment, net 560.7 583.2
Intangible assets, net 1,178.1 1,235.7
Goodwill 806.2 847.7
Deferred tax assets 46.2 56.2
Other assets 75.4 74.1
Total assets 3,960.8 4,059.0
Current liabilities    
Accounts payable 279.3 294.1
Accrued payroll and payroll related expenses 67.9 93.0
Accrued income taxes 33.1 77.6
Short-term debt 266.9 200.0
Accrued expenses and other current liabilities 298.5 295.6
Total current liabilities 945.7 960.3
Deferred rent 132.7 128.4
Deferred tax liabilities 182.5 186.3
Long-term debt 554.2 674.4
Other long-term liabilities 104.2 88.1
Total liabilities 1,919.3 2,037.5
Commitments and contingencies
Shareholders’ equity    
Ordinary shares, no par value; 650,000,000 shares authorized; 212,209,545 shares issued and 149,168,595 outstanding at June 30, 2018; 210,991,091 shares issued and 149,698,407 outstanding at March 31, 2018 0.0 0.0
Treasury shares, at cost (63,040,950 shares at June 30, 2018 and 61,292,684 shares at March 31, 2018) (3,121.8) (3,015.9)
Additional paid-in capital 850.1 831.1
Accumulated other comprehensive (loss) income (40.5) 50.5
Retained earnings 4,350.1 4,152.0
Total shareholders’ equity of MKHL 2,037.9 2,017.7
Noncontrolling interest 3.6 3.8
Total shareholders’ equity 2,041.5 2,021.5
Total liabilities and shareholders’ equity $ 3,960.8 $ 4,059.0
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
Jun. 30, 2018
Mar. 31, 2018
Statement of Financial Position [Abstract]    
Ordinary shares, par value (in dollars per share) $ 0 $ 0
Ordinary shares, shares authorized (in shares) 650,000,000 650,000,000
Ordinary shares, shares issued (in shares) 212,209,545 210,991,091
Ordinary shares, shares outstanding (in shares) 149,168,595 149,698,407
Treasury shares (in shares) 63,040,950 61,292,684
v3.10.0.1
Consolidated Statements of Operations and Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Jun. 30, 2018
Jul. 01, 2017
Income Statement [Abstract]    
Total revenue $ 1,202.5 $ 952.4
Cost of goods sold 451.7 377.7
Gross profit 750.8 574.7
Selling, general and administrative expenses 464.1 377.7
Depreciation and amortization 55.9 47.6
Impairment of long-lived assets 4.3 0.0
Restructuring charges [1] 11.3 0.0
Total operating expenses 535.6 425.3
Income from operations 215.2 149.4
Other income, net (0.8) (0.6)
Interest expense, net 7.5 1.1
Foreign currency loss (gain) 2.9 (1.2)
Income before provision for income taxes 205.6 150.1
Provision for income taxes 19.4 24.6
Net income 186.2 125.5
Less: Net loss attributable to noncontrolling interest (0.2) 0.0
Net income attributable to MKHL $ 186.4 $ 125.5
Weighted average ordinary shares outstanding:    
Weighted average ordinary shares outstanding, basic (in shares) 149,502,101 154,486,898
Weighted average ordinary shares outstanding, diluted (in shares) 152,399,655 156,871,518
Net income per ordinary share attributable to MKHL:    
Net income per ordinary share, basic (in dollars per share) $ 1.25 $ 0.81
Net income per ordinary share, diluted (in dollars per share) $ 1.22 $ 0.80
Statements of Comprehensive Income:    
Net income $ 186.2 $ 125.5
Foreign currency translation adjustments (103.0) 22.1
Net gain (loss) on derivatives 12.0 (9.7)
Comprehensive income 95.2 137.9
Less: Net loss attributable to noncontrolling interest (0.2) 0.0
Comprehensive income attributable to MKHL $ 95.4 $ 137.9
[1] Restructuring and other charges includes store closure costs recorded in connection with the Retail Fleet Optimization Plan and integration costs recorded in connection with the acquisition of Jimmy Choo Group Limited (see Note 4 and Note 9).
v3.10.0.1
Consolidated Statement of Shareholders' Equity - USD ($)
$ in Millions
Total
Ordinary Shares
Additional Paid-in Capital
Treasury Shares
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Total Equity of MKHL
Non-controlling Interests
Beginning balance at Apr. 01, 2017         $ (80.6)      
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income $ 125.5              
Other comprehensive loss         12.4      
Comprehensive income 137.9              
Ending balance at Jul. 01, 2017         (68.2)      
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Adoption of an accounting standards (See Note 2) 11.7         $ 11.7 $ 11.7  
Balance as of April 1, 2018 $ 2,033.2   $ 831.1 $ (3,015.9) 50.5 4,163.7 2,029.4 $ 3.8
Beginning balance (in shares) at Mar. 31, 2018 210,991,091 210,991,000            
Beginning balance (in shares) at Mar. 31, 2018 (61,292,684)     (61,293,000)        
Beginning balance at Mar. 31, 2018 $ 2,021.5 $ 0.0 831.1 $ (3,015.9) 50.5 4,152.0 2,017.7 3.8
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 186.2         186.4 186.4 (0.2)
Other comprehensive loss (91.0)       (91.0)   (91.0) 0.0
Comprehensive income 95.2           95.4 (0.2)
Vesting of restricted awards, net of forfeitures (in shares)   600,000            
Exercises of employee share options (in shares)   619,000            
Exercise of employee share options 6.2   6.2       6.2  
Equity compensation expense 12.8   12.8       12.8  
Purchase of treasury shares (in shares)       (1,748,000)        
Purchase of treasury shares $ (105.9)     $ (105.9)     (105.9)  
Ending balance (in shares) at Jun. 30, 2018 212,209,545 212,210,000            
Ending balance (in shares) at Jun. 30, 2018 (63,040,950)     (63,041,000)        
Ending balance at Jun. 30, 2018 $ 2,041.5 $ 0.0 $ 850.1 $ (3,121.8) $ (40.5) $ 4,350.1 $ 2,037.9 $ 3.6
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Jun. 30, 2018
Jul. 01, 2017
Cash flows from operating activities    
Net income $ 186.2 $ 125.5
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 55.9 47.6
Equity compensation expense 12.8 10.8
Deferred income taxes 12.7 7.1
Impairment of long-lived assets 4.3 0.0
Tax (benefit) deficit on exercise of share options (10.8) 4.9
Amortization of deferred financing costs 0.9 0.2
Foreign currency (gains) losses 2.9 (1.2)
Other non-cash charges 2.2 0.4
Change in assets and liabilities:    
Receivables, net 24.4 98.2
Inventories (52.4) (55.6)
Prepaid expenses and other current assets (20.8) (4.7)
Accounts payable (4.4) (23.7)
Accrued expenses and other current liabilities (32.1) (18.1)
Other long-term assets and liabilities 24.5 2.9
Net cash provided by operating activities 206.3 194.3
Cash flows from investing activities    
Capital expenditures (40.7) (14.8)
Cash paid for business acquisitions, net of cash acquired 0.0 (1.4)
Net cash used in investing activities (40.7) (16.2)
Cash flows from financing activities    
Debt borrowings 433.6 409.6
Debt repayments (487.2) (386.9)
Repurchase of treasury shares (105.9) (160.3)
Exercise of employee share options 6.2 0.1
Other financing activities 0.0 (0.2)
Net cash used in financing activities (153.3) (137.7)
Effect of exchange rate changes on cash and cash equivalents (5.5) 3.7
Net increase in cash and cash equivalents and restricted cash 6.8 44.1
Beginning of period (including restricted cash of $0.3 million at March 31, 2018 and $1.9 million at April 1, 2017) 163.4 229.6
End of period (including restricted cash of $0.3 million at June 30, 2018) 170.2 273.7
Supplemental disclosures of cash flow information    
Cash paid for interest 12.7 1.3
Cash paid for income taxes 23.8 11.9
Supplemental disclosure of non-cash investing and financing activities    
Accrued capital expenditures $ 27.9 $ 12.8
v3.10.0.1
Consolidated Statements of Cash Flows (Parenthetical) - USD ($)
$ in Millions
Jun. 30, 2018
Mar. 31, 2018
Apr. 01, 2017
Statement of Cash Flows [Abstract]      
Restricted cash $ 0.3 $ 0.3 $ 1.9
v3.10.0.1
Business and Basis of Presentation
3 Months Ended
Jun. 30, 2018
Accounting Policies [Abstract]  
Business and Basis of Presentation
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 holding company that owns brands that are leading designers, marketers, distributors and retailers of branded women’s and men’s accessories, apparel and footwear bearing the Michael Kors and Jimmy Choo tradenames and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” “JIMMY CHOO,” and various other related trademarks and logos. The Company’s business consists of four reportable segments: Michael Kors (“MK”) Retail, MK Wholesale, MK Licensing and Jimmy Choo. See Note 18 for additional information.
On November 1, 2017, the Company completed the acquisition of Jimmy Choo Group Limited (“Jimmy Choo”) for a total transaction value of $1.447 billion. As a result, the Company has consolidated Jimmy Choo into its operations beginning on November 1, 2017. Jimmy Choo is being reported as a separate reporting segment. See Note 4 and Note 18 for additional information.
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 or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of June 30, 2018 and for the three months ended June 30, 2018 and July 1, 2017 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 March 31, 2018, as filed with the Securities and Exchange Commission on May 30, 2018, 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.
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 June 30, 2018 and July 1, 2017, are based on 13-week periods.
v3.10.0.1
Summary of Significant Accounting Policies
3 Months Ended
Jun. 30, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
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 financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates related to the Company’s customer loyalty program and gift card breakage, 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 business. The Company’s MK Retail segment generally experiences greater sales during its third fiscal quarter as a result of holiday season sales. The MK Wholesale segment generally experiences the lowest sales in its first fiscal quarter. The Jimmy Choo segment generally experiences greater sales during its first and third fiscal quarters, primarily driven by the product launch calendar and holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences 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
Forward Foreign Currency Exchange Contracts
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 and the risk being hedged. The 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 affects 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. 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 forward foreign currency exchange contracts 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 Investment Hedges
The Company also uses fixed-to-fixed cross currency swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between our U.S. Dollars and these foreign currencies. The Company has elected the spot method of designating these contracts under ASU 2017-12, as defined below, and has designated these contracts as net investment hedges. The net gain or loss on net investment hedged is reported within foreign currency translation gains and losses (“CTA”), as a component of accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Interest accruals and coupon payments are recognized directly in interest expense in the Company’s statement of operations and comprehensive income. Upon discontinuation of a hedge, all previously recognized amounts remain in CTA until the hedged net investment is sold, diluted, or liquidated.
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 restricted share 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
 
June 30,
2018
 
July 1,
2017
Numerator:
 
 
 
Net income attributable to MKHL
$
186.4

 
$
125.5

Denominator:
 
 
 
Basic weighted average shares
149,502,101

 
154,486,898

Weighted average dilutive share equivalents:
 
 
 
Share options and restricted shares/units, and performance restricted share units
2,897,554

 
2,384,620

Diluted weighted average shares
152,399,655

 
156,871,518

 
 
 
 
Basic net income per share
$
1.25

 
$
0.81

Diluted net income per share
$
1.22

 
$
0.80


Share equivalents of 648,398 shares and 2,485,827 shares for the three months ended June 30, 2018 and July 1, 2017, respectively, have been excluded from the above calculations due to their anti-dilutive effect.
See Note 2 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018 for a complete disclosure of the Company’s significant accounting policies.
Recently Adopted Accounting Pronouncements
Hedge Accounting
On August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The new standard is intended to improve and simplify rules relating to hedge accounting, including the elimination of periodic hedge ineffectiveness, recognition and presentation of components excluded from hedge effectiveness assessment, the ability to elect to perform subsequent effectiveness assessments qualitatively, and other provisions designed to provide more transparency around the economics of a company’s hedging strategy. ASU 2017-12 is effective for the Company in Fiscal 2020, with early adoption permitted. The Company adopted ASU 2017-12 during the three months ended June 30, 2018, which resulted in a net increase to opening retained earnings of less than $0.1 million as of April 1, 2018, due to the elimination of ineffectiveness for cash flow hedges in effect as of the date of adoption. The Company has applied the spot method of designating its net investment hedges, which were executed during the three months ended June 30, 2018.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides new guidance for revenues recognized from contracts with customers, requiring 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, ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” deferred the effective date of ASU 2014-09 by one year, to interim reporting periods within the annual reporting period beginning after December 15, 2017, or the first quarter of 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 (“modified retrospective method”).
The FASB has issued several additional ASUs to provide implementation guidance on ASU 2014-09, including ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” in December 2016; ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients in May 2016; ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016; and ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016. The Company has considered this guidance in evaluating the impact of ASU 2014-09 (collectively, “ASC 606”).
On April 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the $6.7 million (net of a tax of $1.7 million) cumulative effect of adoption as an adjustment to the opening balance of retained earnings. The below table details the components of the cumulative adjustment recorded on April 1, 2018 (in millions):
 
March 31, 2018
As Reported under ASC 605
 
ASC 606 Adjustments
 
April 1, 2018
As Reported Under ASC 606
Receivables, net
$
290.5

 
$
3.8

(1) 
$
294.3

Accrued expenses and other current liabilities
295.6

 
(4.6
)
(2) 
291.0

Deferred tax liabilities
186.3

 
1.7

(3) 
188.0

Retained earnings
4,152.0

 
6.7

 
4,158.7

_________________________
(1) 
Includes a $3.5 million adjustment related to product licensing revenue, which was previously recorded on a one-month lag and $0.3 million of guaranteed advertising minimums recognized by product licensees on a straight-line basis over the contract year.
(2) 
Relates to recognition of breakage revenue associated with gift card liabilities not subject to escheatment.
(3) 
Relates to income tax effect of the above adjustments.
In addition, while the Company has previously recorded the right of return asset and liability on a gross basis, in connection with its adoption of ASC 606, it has reclassified the return liability of $17.5 million from receivables, net to accrued expenses and other current liabilities in its consolidated balance sheets as of June 30, 2018. Otherwise, the adoption of this standard did not have a material impact on the Company's consolidated financial statements as of and for the three months ended June 30, 2018, or any individual line items therein.
See Note 3 for additional disclosures related to the Company’s revenue recognition accounting policy.
Share-Based Compensation
In May 2017, the FASB issued ASU 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 was adopted during the three months ended June 30, 2018, on a prospective basis. The adoption of this standard did not have an impact on the Company's consolidated financial statements. The Company will apply ASU 2017-09 to any future changes to the terms and conditions of its share-based compensation awards.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, which requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted ASU 2016-16 in the beginning of Fiscal 2019, as required, using the modified retrospective method. On April 1, 2018, the Company recorded the $4.9 million cumulative effect of adoption as an adjustment to the opening balance of retained earnings.
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.
Lease Accounting
In February 2016, the FASB issued ASU 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 in the process of analyzing its lease portfolio and evaluating the impact of ASU 2016-02 on its consolidated financial statements. The Company expects that the adoption of this standard will result in a significant increase in assets and liabilities on its consolidated balance sheets.
v3.10.0.1
Revenue Recognition
3 Months Ended
Jun. 30, 2018
Revenue from Contract with Customer [Abstract]  
Revenue Recognition
Revenue Recognition
The Company accounts for contracts with its customers when there is approval and commitment from both parties, the rights of the parties and payment terms have been identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the promised goods or services is transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services.
The Company sells its products through three primary channels of distribution: retail, wholesale and licensing. Within the retail and wholesale channels, substantially all of the Company’s revenues consist of sales of products that represent a single performance obligation, where control transfers at a point in time to the customer. For licensing arrangements, royalty and advertising revenue is recognized over time based on access provided to Michael Kors and Jimmy Choo trademarks.
The Company has chosen to apply the practical expedient allowing it not to disclose the amount of the transaction price allocated to the remaining performance obligations that have an expected duration of twelve months or less.
Retail
Michael Kors generates sales through four primary retail store formats: “Collection” stores, “Lifestyle” stores, outlet stores and e-commerce. Michael Kors sells its own products and licensed products bearing the Michael Kors name, directly to the end consumer throughout the Americas (U.S., Canada and Latin America, excluding Brazil), Europe and certain parts of Asia. Jimmy Choo generates sales through directly operated stores and e-commerce throughout North America (United States and Canada), EMEA and certain parts of Asia. In addition to these retail formats, the Company operates concessions in a select number of department stores.
Retail revenue is recognized when control of the product is transferred at the point of sale at Company owned stores, including concessions. For e-commerce transactions, control is transferred when products are delivered to the customer, net of estimated returns. To arrive at net sales for retail, gross sales are reduced by actual customer returns, as well as by a provision for estimated future customer returns.
Sales taxes collected from retail customers are presented on a net basis and, as such, are excluded from revenue. Shipping and handling costs that are billed to customers are included in net sales, with the related costs recorded in cost of goods sold. Shipping and handling costs that are not billed to customers are accounted for as fulfillment costs.
Gift Cards. The Company sells gift cards that can be redeemed for merchandise, resulting in a contract liability recorded upon issuance. Revenue is recognized when the gift card is redeemed or upon “breakage” for the estimated portion of gift cards that are not expected to be redeemed. “Breakage” revenue is calculated under the proportional redemption methodology, which considers the historical patterns of redemption in jurisdictions where the Company is not required to remit the value of the unredeemed gift cards as unclaimed property. The Company anticipates that substantially all of its outstanding gift cards will be redeemed within the next twelve months. The contract liability related to gift cards, net of estimated “breakage,” was $11.2 million as of June 30, 2018, and is included in accrued expenses and other current liabilities in the Company’s consolidated balance sheet.
Loyalty Program. The Company offers a loyalty program, which allows its Michael Kors customers to earn points on qualifying purchases toward monetary and non-monetary rewards, which may be redeemed for purchases at Michael Kors retail stores and e-commerce sites. The Company defers a portion of the initial sales transaction based on the estimated relative fair value of the benefits based on projected timing of future redemptions and historical activity. These amounts include estimated “breakage” for points that are not expected to be redeemed. The contract liability, net of an estimated “breakage,” of $4.7 million as of June 30, 2018 is recorded as a reduction to revenue in the consolidated statements of income and comprehensive income and within accrued expenses and other current liabilities in the Company’s consolidated balance sheet and is expected to be recognized within the next twelve months.
Wholesale
Michael Kors products are sold primarily to major department stores, specialty stores and travel retail shops throughout the Americas, EMEA (Europe, Middle East, and Africa) and Asia. Jimmy Choo luxury products are sold throughout North America, EMEA, and certain parts of Asia. The Company also has arrangements where Michael Kors and Jimmy Choo products are sold to our geographic licensees in certain parts of EMEA and Asia, as well as in Brazil. Products sold through the wholesale channel include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel.
Wholesale revenue is recognized net of estimates for sales returns, discounts, markdowns and allowances, after merchandise is shipped and control of the underlying product is transferred to the Company’s wholesale customers. To arrive at net sales for wholesale, gross sales are reduced by provisions for estimated future returns, as well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses. These estimates are developed based on the most likely amount using historical trends, actual and forecasted performance and market conditions, and are reviewed by management on a quarterly basis. Unfulfilled, noncancelable purchase orders for products from wholesale customers (including the Company’s geographic licensees) are expected to be fulfilled within the next twelve months.
Licensing
The Company provides its third-party licensees with the right to access its Michael Kors and Jimmy Choo trademarks under product and geographic licensing arrangements. Under product licensing arrangements, the Company allows third parties to manufacture and sell luxury goods, including fragrances, sunglasses and eyewear, using the Company’s trademarks. Under geographic licensing arrangements, third party licensees receive the right to distribute and sell products bearing the Company's trademarks in retail and/or wholesale channels within certain geographical areas, including Brazil, the Middle East, Eastern Europe, South Africa, Brazil, certain parts of Asia and Australia.
The Company recognizes royalty revenue and advertising contributions based on the percentage of sales made by the licensees. Advertising contributions are received to support the Company’s branded advertising and marketing campaigns and are viewed as part of a single performance obligation with the right to access the Company’s trademarks. Royalty revenue generated from licenses, which includes contributions for advertising, may be subject to contractual minimum levels, as defined in the contract. Such minimums are generally fixed annually, based on the previous year’s sales. Licensing revenue is based on reported current period sales of licensed products at rates that are specified in the license agreements for contracts that are expected to exceed the related guaranteed minimums. If the Company expects the minimum guaranteed amounts to exceed amounts calculated based on actual sales, the guaranteed minimums are recognized ratably over the contractual year to which they relate. As of June 30, 2018, guaranteed minimum royalty amounts due from licensees that relate to contractual periods do not exceed twelve months.
Sales Returns
For the sale of goods with a right of return, the Company recognizes revenue for the consideration to which it expects to be entitled and a refund liability for the amount it expects to refund to its customers within accrued expenses and other current liabilities. The refund liability is determined based on the most likely amount and is based on management’s review of historical and current customer returns for its retail and wholesale customers, estimated future returns, adjusted for non-resalable products. The Company also considers its product strategies, as well as the financial condition of its customers, store closings by wholesale customers, changes in the retail environment and other macroeconomic factors. The Company recognizes an asset included in inventories with a corresponding adjustment to cost of sales for the right to recover the products from its retail and wholesale customers, net of any costs to resell. The refund liability recorded as of June 30, 2018 was $28.5 million and the related asset for the right to recover returned product as of June 30, 2018 was $5.3 million.
Contract Balances
The Company’s contract liabilities, which are recorded within accrued expenses and other current liabilities in its consolidated balance sheets, primarily consist of gift card liabilities, loyalty program liabilities and advanced payments from product licensees. Total contract liabilities were $19.0 million and $23.3 million as of June 30, 2018 and March 31, 2018, respectively. Contract liabilities decreased $4.6 million as a result of the adoption of ASC 606 on April 1, 2018, due to recognition of gift card breakage revenue (see Note 2). The Company recognized $8.1 million in revenue for the three months ended June 30, 2018, which related to contract liabilities that existed at March 31, 2018. There were no contract assets recorded as of June 30, 2018 and April 1, 2018.
There were no changes in historical variable consideration estimates that were materially different from actual results.
Disaggregation of Revenue
The following table presents the Company’s segment revenues disaggregated by geographic location (in millions):
 
Three Months Ended
 
June 30,
2018
 
July 1,
2017
MK Retail revenue - the Americas
$
402.2

 
$
392.1

MK Retail revenue - Europe
119.5

 
122.1

MK Retail revenue - Asia
117.8

 
105.7

 Total MK Retail
639.5

 
619.9

MK Wholesale revenue - the Americas
275.1

 
227.2

MK Wholesale revenue - EMEA (1)
68.4

 
65.0

MK Wholesale revenue - Asia
19.3

 
11.4

 Total MK Wholesale
362.8

 
303.6

MK Licensing revenue - the Americas
15.3

 
14.8

MK Licensing revenue - EMEA (1)
12.2

 
14.1

 Total MK Licensing
27.5

 
28.9

Total Michael Kors
1,029.8

 
952.4

 
 
 
 
Jimmy Choo revenue - the Americas
25.6

 

Jimmy Choo revenue - EMEA (1)
101.7

 

Jimmy Choo revenue - Asia
45.4

 

Total Jimmy Choo
172.7

 

 
 
 
 
Total revenue - the Americas
718.2

 
634.1

Total revenue - EMEA (1)
301.8

 
201.2

Total revenue - Asia
182.5

 
117.1

Total revenue
$
1,202.5

 
$
952.4

 
 
 
 
 
(1) 
EMEA is comprised of Europe, the Middle East and Africa.
v3.10.0.1
Acquisitions
3 Months Ended
Jun. 30, 2018
Business Combinations [Abstract]  
Acquisitions
Acquisitions
Acquisition of Jimmy Choo Group Limited
On November 1, 2017, the Company completed the acquisition of Jimmy Choo, whereby the Company’s wholly-owned subsidiary acquired all of Jimmy Choo’s issued and to be issued shares at a purchase price of 230 pence per share in cash, for a total transaction value of $1.447 billion, including the repayment of existing debt obligations, which was funded through a combination of borrowings under the Company’s new $1.0 billion term loan facility, the issuance of the Senior Notes and cash on hand.
Jimmy Choo’s results of operations have been included in our consolidated financial statements beginning on November 1, 2017. Jimmy Choo contributed revenue of $172.7 million and net income of $13.2 million (after amortization of non-cash purchase accounting adjustments and integration costs) for the three months ended June 30, 2018.
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. The Company has a 75% ownership interest in MK Panama.
See Note 3 in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018 for additional disclosures relating to the Company's acquisitions.
v3.10.0.1
Receivables, net
3 Months Ended
Jun. 30, 2018
Receivables [Abstract]  
Receivables, net
Receivables, net
Receivables, net consist of (in millions):
 
June 30,
2018
 
March 31,
2018
Trade receivables (1)
$
329.3

 
$
383.3

Receivables due from licensees
16.2

 
15.8

 
345.5

 
399.1

Less: allowances
(83.0
)
 
(108.6
)
 
$
262.5

 
$
290.5


 
 
 
 
 
(1) 
As of June 30, 2018 and March 31, 2018, $226.9 million and $296.2 million, respectively, of trade receivables were insured.
Receivables are presented net of allowances for discounts, markdowns, operational chargebacks and doubtful accounts. Discounts are based on open invoices where trade discounts have been extended to customers. Allowances 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 revenues.
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 condition 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 was $5.2 million and $5.1 million as of June 30, 2018 and March 31, 2018, respectively. The Company had provisions for bad debt of $0.6 million in each of the periods ending June 30, 2018 and July 1, 2017.
v3.10.0.1
Property and Equipment, net
3 Months Ended
Jun. 30, 2018
Property, Plant and Equipment [Abstract]  
Property and Equipment, net
Property and Equipment, Net
Property and equipment, net, consists of (in millions):
 
June 30,
2018
 
March 31,
2018
Leasehold improvements
$
546.6

 
$
551.0

Furniture and fixtures
266.4

 
270.9

In-store shops
265.4

 
273.9

Computer equipment and software
264.1

 
266.3

Equipment
117.3

 
116.7

Building
50.4

 
51.6

Land
15.4

 
16.2

 
1,525.6

 
1,546.6

Less: accumulated depreciation and amortization
(1,007.6
)
 
(1,001.6
)
 
518.0

 
545.0

Construction-in-progress
42.7

 
38.2

 
$
560.7

 
$
583.2


Depreciation and amortization of property and equipment for the three months ended June 30, 2018 and July 1, 2017 was $47.4 million and $42.5 million, respectively. During the three months ended June 30, 2018, the Company recorded fixed asset impairment charges of $3.7 million, which were related to underperforming Michael Kors full-price retail store locations, some of which will be closed as part of the Company’s previously announced Retail Fleet Optimization Plan, as defined in Note 9.
v3.10.0.1
Intangible Assets and Goodwill
3 Months Ended
Jun. 30, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets and Goodwill
Intangible Assets and Goodwill
The following table details the carrying values of the Company’s intangible assets other than goodwill (in millions):
 
June 30,
2018
 
March 31,
2018
Definite-lived intangible assets:
 
 
 
Reacquired Rights
$
400.4

 
$
400.4

Trademarks
23.0

 
23.0

Lease Rights
71.2

 
80.1

Customer Relationships
218.3

 
231.3

Total definite-lived intangible assets
712.9

 
734.8

Less: accumulated amortization
(114.0
)
 
(113.2
)
Net definite-lived intangible assets
598.9

 
621.6

 
 
 
 
Indefinite-lived intangible assets:
 
 
 
Jimmy Choo brand
579.2

 
614.1

 
 
 
 
Total intangible assets, excluding goodwill
$
1,178.1

 
$
1,235.7


Amortization expense for the Company’s definite-lived intangibles assets for the three months ended June 30, 2018 and July 1, 2017 was $8.5 million and $5.1 million, respectively. During the three months ended June 30, 2018, the Company recorded impairment charges of $0.6 million relating to its intangible assets (See Note 12 for further information).
The Company’s goodwill balance as of June 30, 2018 and March 31, 2018 was $806.2 million and $847.7 million, respectively. There were no goodwill impairment charges recorded during the three months ended June 30, 2018 and July 1, 2017.
v3.10.0.1
Current Assets and Current Liabilities
3 Months Ended
Jun. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Current Assets and Current Liabilities
Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):    
 
June 30,
2018
 
March 31,
2018
Prepaid taxes
$
80.0

 
$
78.5

Prepaid rent
22.8

 
22.7

Leasehold incentive receivable
11.1

 
9.4

Prepaid insurance
5.8

 
1.5

Unrealized gains on forward foreign exchange contracts
3.8

 

Prepaid duties
7.0

 
7.0

Other
34.3

 
28.7

 
$
164.8

 
$
147.8


Accrued expenses and other current liabilities consist of the following (in millions):
 
June 30,
2018
 
March 31,
2018
Other taxes payable
$
64.0

 
$
54.3

Restructuring liability
38.8

 
44.8

Accrued rent
35.7

 
34.5

Return liabilities
28.5

 
12.1

Accrued capital expenditures
27.9

 
26.4

Accrued advertising and marketing
20.5

 
22.6

Professional services
12.5

 
14.1

Gift cards and retail store credits
11.2

 
16.0

Deferred loyalty program liabilities
4.7

 
2.2

Accrued interest
3.8

 
8.7

Deferred income
3.2

 
4.3

Advance royalties
3.1

 
4.1

Unrealized loss on forward foreign currency exchange contracts
0.1

 
7.7

Other
44.5

 
43.8

 
$
298.5

 
$
295.6

v3.10.0.1
Restructuring and Other Charges
3 Months Ended
Jun. 30, 2018
Restructuring and Related Activities [Abstract]  
Restructuring and Other Charges
Restructuring and Other Charges
On May 31, 2017, the Company announced that it plans to close between 100 and 125 of its Michael Kors 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 lower depreciation and amortization expense as a result of the impairment charges recorded during Fiscal 2017 and Fiscal 2018.
During the three months ended June 30, 2018, the Company closed 12 of its Michael Kors full-price retail stores under the Retail Fleet Optimization Plan and recorded restructuring costs of $4.2 million, for a total of 59 stores closed to date as of June 30, 2018. The Company anticipates finalizing the remainder of the planned store closures under the Retail Fleet Optimization Plan over the next two fiscal years. The below table presents a summary of charges recorded in connection with this plan for the MK Retail segment and the Company’s remaining restructuring liability (in millions):
 
Severance and benefit costs
 
Lease-related costs
 
Total
Balance at March 31, 2018
$
0.2

 
$
44.6

 
$
44.8

Additions charged to expense
0.1

 
4.1

 
4.2

Balance sheet reclassifications (1)

 
0.4

 
0.4

Payments

 
(10.6
)
 
(10.6
)
Balance at June 30, 2018
$
0.3

 
$
38.5

 
$
38.8

 
 
 
 
 
(1) 
Primarily consists of reclassification of deferred rent for locations subject to closure to a restructuring liability.
Other Charges
During the three months ended June 30, 2018, the Company recorded integration costs $7.1 million in connection with the Jimmy Choo acquisition.
v3.10.0.1
Debt Obligations
3 Months Ended
Jun. 30, 2018
Debt Disclosure [Abstract]  
Debt Obligations
Debt Obligations
The following table presents the Company’s debt obligations (in millions):
 
June 30,
2018
 
March 31,
2018
Term Loan
$
109.0

 
$
229.8

4.000% Senior Notes due 2024
450.0

 
450.0

Revolving Credit Facilities
266.9

 
200.0

Other
0.9

 
0.9

Total debt
826.8

 
880.7

Less: Unamortized debt issuance costs
3.7

 
4.2

Less: Unamortized discount on long-term debt
2.0

 
2.1

Total carrying value of debt
821.1

 
874.4

Less: Short-term debt
266.9

 
200.0

Total long-term debt
$
554.2

 
$
674.4


Senior Unsecured Revolving Credit Facility
The 2017 Credit Facility requires the Company to maintain a leverage ratio as of 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 six times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR (as defined below) 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 additions and deductions. The 2017 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 June 30, 2018, the Company was in compliance with all covenants related to this agreement.
As of June 30, 2018 and March 31, 2018, the Company had borrowings of $266.9 million and $200.0 million, respectively, outstanding under the 2017 Revolving Credit Facility, which were recorded within short-term debt in its consolidated balance sheets. Stand-by letters of credit of $16.3 million were outstanding as of June 30, 2018. At June 30, 2018, the amount available for future borrowings under the 2017 Revolving Credit Facility was $716.8 million.
See Note 10 to the Company’s Fiscal 2018 Annual Report on Form 10-K for additional information regarding the Company’s credit facilities and debt obligations.
v3.10.0.1
Commitments and Contingencies
3 Months Ended
Jun. 30, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
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 March 31, 2018 for a detailed disclosure of other commitments and contractual obligations as of March 31, 2018.
v3.10.0.1
Fair Value Measurements
3 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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-based (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 June 30, 2018 and March 31, 2018, the fair values of the Company’s foreign currency forward contracts and net investment hedges 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. The fair values of net investment hedges are included in other assets, as detailed in Note 13.
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):
 
Fair value at June 30, 2018 using:
 
Fair value at March 31, 2018 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)
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Forward foreign currency exchange contracts
$

 
$
3.8

 
$

 
$

 
$

 
$

Net investment hedges

 
4.8

 

 

 

 

Total derivative assets
$

 
$
8.6

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward foreign currency exchange contracts
$

 
$
0.1

 
$

 
$

 
$
7.7

 
$


The Company’s long-term debt obligations are recorded in its consolidated balance sheets at carrying values, which may differ from the related fair values. The fair value of the Company’s long-term debt is estimated using external pricing data, including any available quoted market prices and based on other debt instruments with similar characteristics. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which approximates fair value due to the short-term nature of such borrowings. See Note 10 for detailed information relating to carrying values of the Company’s outstanding debt. The following table summarizes the carrying values and estimated fair values of the Company’s short- and long-term debt, based on Level 2 measurements (in millions):
 
 
June 30, 2018
 
March 31, 2018
 
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
4.000% Senior Notes
 
$
444.7

 
$
437.4

 
$
444.5

 
$
448.1

Term Loan
 
$
108.6

 
$
109.7

 
$
229.0

 
$
231.2

Revolving Credit Facilities
 
$
266.9

 
$
266.9

 
$
200.0

 
$
200.0


The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value.
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 and its indefinite-lived intangible asset (Jimmy Choo brand) are assessed for impairment at least annually during the fourth quarter of each fiscal year, while its other long-lived assets, including fixed assets and definite-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 were determined based on Level 3 measurements using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations.
During the three months ended June 30, 2018, the Company recorded impairment charges of $4.3 million within the MK Retail segment. The following table details the carrying values and fair values of the Company’s long-lived assets that have been impaired (in millions):
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
Fixed Assets
$
5.4

 
$
1.7

 
$
3.7

Lease Rights
1.4

 
0.8

 
0.6

Total
$
6.8

 
$
2.5

 
$
4.3


The Company did not record impairment charges during the three months ended July 1, 2017.
v3.10.0.1
Derivative Financial Instruments
3 Months Ended
Jun. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments
During the three months ended June 30, 2018, the Company early-adopted the new hedge accounting guidance prescribed by ASU 2017-12. The cumulative impact of adoption, which related to elimination of ineffectiveness for the Company’s designated forward foreign currency exchange contracts, was recorded within retained earnings as of the beginning of Fiscal 2019. See Note 2 for additional information.
Forward Foreign Currency Exchange Contracts
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.
Net Investment Hedges
During the three months ended June 30, 2018, the Company entered into fixed-to-fixed cross-currency swap agreements with notional amounts of $290.0 million and $44.0 million to hedge its net investments in Euro-denominated and Japanese Yen-denominated subsidiaries, respectively, against future volatility in the exchange rates between U.S. Dollar and these currencies. Under the terms of these contracts, which mature in November 2024, the Company will exchange the quarterly fixed rate payments made under its Senior Notes for fixed rate payments of 1.585% in Euros and 0.89% in Japanese Yen. These contracts have been designated as net investment hedges.
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 June 30, 2018 and March 31, 2018 (in millions):
 
 
 
 
 
Fair Values
 
 
Notional Amounts
 
Assets
 
Liabilities
 
 
June 30,
2018
 
March 31,
2018
 
June 30,
2018
 
March 31,
2018
 
June 30,
2018
 
March 31,
2018
 
Designated forward currency exchange contracts
$
132.1

 
$
161.7

 
$
3.5

(1) 
$

 
$
0.1

(2) 
$
7.7

(2) 
Designated net investment hedge
334.0

 

 
4.8

(3) 

 

 

 
Total designated hedges
$
466.1

 
$
161.7

 
$
8.3

 
$

 
$
0.1

 
$
7.7

 
Undesignated forward currency exchange contracts
21.3

 

 
0.3

(1) 

 

 

 
Total
$
487.4

 
$
161.7

 
$
8.6

 
$

 
$
0.1

 
$
7.7

 
____________________________________ 
(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.
(3) 
Recorded within other assets 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 sheets on a gross basis, as shown in the above table. However, 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, the resulting impact as of June 30, 2018 and March 31, 2018 would be as follows (in millions):
 
Forward Currency Exchange Contracts
 
Net Investment Hedges
 
June 30,
2018
 
March 31,
2018
 
June 30,
2018
 
March 31,
2018
Assets subject to master netting arrangements
$
3.8

 
$

 
$
4.8

 
$

Liabilities subject to master netting arrangements
$
0.1

 
$
7.7

 
$

 
$

Derivative assets, net
$
3.7

 
$

 
$
4.8

 
$

Derivative liabilities, net
$

 
$
7.7

 
$

 
$


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 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 (loss), 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 (loss). The net gain or loss on net investment hedges are reported within foreign currency translation gains and losses (“CTA”) as a component of accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Upon discontinuation of the hedge, such amounts remain in CTA until the related investment is sold or liquidated.
The following table summarizes the pre-tax impact of the gains and losses on the Company’s designated forward foreign currency exchange contracts and net investment hedges (in millions):
 
Three Months Ended
 
June 30, 2018
 
July 1, 2017
 
Pre-Tax Gains Recognized in OCI
 
Pre-Tax Losses Recognized in OCI
Designated forward foreign currency exchange contracts
$
8.7

 
$
(9.3
)
Designated net investment hedges
$
4.8

 
$


The following table summarizes the impact of the gains and losses within the consolidated statements of operations and comprehensive income related to the designated forward foreign currency exchange contracts for the three months ended June 30, 2018 and July 1, 2017 (in millions):
 
Pre-Tax (Gain) Loss Reclassified from
Accumulated OCI
 
Location of (Gain) Loss recognized
 
Total Cost of Sales
 
June 30, 2018
 
July 1, 2017
 
 
June 30, 2018
 
July 1, 2017
Designated forward currency exchange contracts
$
4.9

 
$
(1.9
)
 
Cost of Sales
 
$
451.7

 
$
377.7

The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive income (loss) for its forward currency exchange contracts will be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turnover.
During the three months ended June 30, 2018 and July 1, 2017, the Company recognized a net gain of $1.1 million and a net loss of $1.4 million, respectively, related to changes in the fair value of undesignated forward currency exchange contracts within foreign currency loss (gain) in the Company’s consolidated statement of operations and comprehensive income.
When a cross-currency swap is used as a hedging instrument in a net investment hedge assessed under the spot method, the cross-currency basis spread is excluded from the assessment of hedge effectiveness and is recognized as a reduction in interest expense in the Company’s consolidated statements of operations and comprehensive income. Accordingly, the Company recorded a $1.4 million reduction in interest expense during the three months ended June 30, 2018.
v3.10.0.1
Shareholders' Equity
3 Months Ended
Jun. 30, 2018
Equity [Abstract]  
Shareholders' Equity
Shareholders’ Equity
Share Repurchase Program
During the three months ended June 30, 2018 and July 1, 2017, the Company repurchased 1,659,941 shares and 4,543,500 shares, respectively, at a cost of $100.0 million and $157.8 million, respectively, under its $1.0 billion share-repurchase programs through open market transactions. As of June 30, 2018, the remaining availability under the Company’s share repurchase program was $542.2 million. Share repurchases may be made in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, trading transactions under the Company’s insider trading policy and other relevant factors. The program may be suspended or discontinued at any time.
The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary shares from certain executive officers and directors to satisfy minimum tax withholding obligations relating to the vesting of their restricted share unit awards. During the three month periods ended June 30, 2018 and July 1, 2017, the Company withheld 88,325 shares and 77,155 shares, respectively, with a fair value of $5.9 million and $2.5 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share unit awards.
v3.10.0.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Jun. 30, 2018
Equity [Abstract]  
Accumulated Other Comprehensive Income (Loss)
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 June 30, 2018 and July 1, 2017, respectively (in millions):
 
Foreign
Currency
Translation
(Losses) Gains
(1)
 
Net Gains (Losses) on
Derivatives
(2)
 
Other Comprehensive (Loss) Income Attributable to MKHL
 
Other Comprehensive (Loss) Income Attributable to Noncontrolling Interest
 
Total Accumulated Other Comprehensive (Loss) Income
Balance at April 1, 2017
$
(86.1
)
 
$
5.5

 
$
(80.6
)
 
$
(0.3
)
 
$
(80.9
)
Other comprehensive income (loss) before reclassifications
22.1

 
(8.0
)
 
14.1

 

 
14.1

Less: amounts reclassified from AOCI to earnings 

 
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
)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
$
61.2

 
$
(10.7
)
 
$
50.5

 
$
(0.2
)
 
$
50.3

Other comprehensive (loss) income before reclassifications
(103.0
)
 
7.8

 
(95.2
)
 

 
(95.2
)
Less: amounts reclassified from AOCI to earnings

 
(4.2
)
 
(4.2
)
 

 
(4.2
)
Other comprehensive (loss) income net of tax
(103.0
)
 
12.0

 
(91.0
)
 

 
(91.0
)
Balance at June 30, 2018
$
(41.8
)
 
$
1.3

 
$
(40.5
)
 
$
(0.2
)
 
$
(40.7
)
_________________________
(1) 
Foreign currency translation gains and losses for the three months ended June 30, 2018 and July 1, 2017 include net gains of $5.2 million and net losses of $1.4 million, respectively, on intra-entity transactions that are of a long-term investment nature. Foreign currency translation losses for the three months ended June 30, 2018 include an $85.7 million translation loss relating to the newly acquired Jimmy Choo business and a $4.0 million gain, net of taxes of $0.8 million relating to the Company's net investment hedges.
(2) 
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 and comprehensive income. Accumulated other comprehensive income related to net gains (losses) on derivative financial instruments is net of a tax benefit of $1.4 million as of March 31, 2018. Other comprehensive income (loss) before reclassifications related to derivative financial instruments for the three months ended June 30, 2018 and July 1, 2017 is net of a tax provision of $0.9 million and tax benefit of $1.3 million, respectively. All other tax effects were not material for the periods presented.
v3.10.0.1
Share-Based Compensation
3 Months Ended
Jun. 30, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-Based Compensation
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 June 30, 2018, 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 June 30, 2018, there were 6,200,855 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 June 30, 2018:
 
Options
 
Restricted Shares
 
Service-Based RSUs
 
Performance-Based RSUs
Outstanding/Unvested at March 31, 2018
3,796,620

 
64,148

 
2,127,517

 
657,532

Granted
224,582

 

 
757,231

 
166,617

Exercised/Vested
(619,465
)
 
(52,786
)
 
(493,541
)
 
(105,900
)
Decrease due to performance condition

 

 

 
(101,744
)
Canceled/forfeited
(4,600
)
 
(344
)
 
(45,437
)
 
(3,397
)
Outstanding/Unvested at June 30, 2018
3,397,137

 
11,018

 
2,345,770

 
613,108


The weighted average grant date fair value for options granted during the three months ended June 30, 2018 and July 1, 2017 was $24.49 and $11.62, respectively. The weighted average grant date fair value of service-based and performance-based RSUs granted during the three months ended June 30, 2018 was $67.47 and $67.52, respectively and $34.84 and $34.68, respectively, during the three months ended July 1, 2017.
The Company uses the Black-Scholes valuation model to estimate the grant date fair value of its share option awards. The following table presents assumptions used to estimate the fair value of options granted during the three months ended June 30, 2018 and July 1, 2017:
 
Three Months Ended
 
June 30,
2018
 
July 1,
2017
Expected dividend yield
0.0
%
 
0.0
%
Volatility factor
36.9
%
 
36.3
%
Weighted average risk-free interest rate
2.8
%
 
1.8
%
Expected life of option
4.85 years

 
4.69 years


Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for the three months ended June 30, 2018 and July 1, 2017 (in millions):
 
Three Months Ended
 
June 30,
2018
 
July 1,
2017
Share-based compensation expense
$
12.8

 
$
10.8

Tax benefit related to share-based compensation expense
$
2.2

 
$
3.6


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 June 30, 2018 is approximately $15.4 million.
See Note 16 in the Company’s Fiscal 2018 Annual Report on Form 10-K for additional information relating to the Company’s share-based compensation awards.
v3.10.0.1
Income Taxes
3 Months Ended
Jun. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The Company’s effective tax rate for the three months ended June 30, 2018 is 9.4%. Such rate differs from the United Kingdom (“U.K.”) federal statutory rate of 19% primarily due to the favorable effects of global financing arrangements and tax benefits of share-based compensation. The global financing activities are related to the Company’s 2014 move of its principal executive office from Hong Kong to the U.K. and decision to become a U.K. tax resident. In connection with this decision, the Company funded its international growth strategy through intercompany debt financing arrangements between our U.S., U.K. and Switzerland subsidiaries in December 2015. Due to the difference in the statutory income tax rates between these jurisdictions, the Company realized a lower effective tax rate. The Company’s effective tax rate for the three months ended July 1, 2017 was 16.4%.
As of June 30, 2018 and March 31, 2018, the Company has liabilities related to its uncertain tax positions, including accrued interest, of approximately $123.2 million and $107.4 million, respectively, which are included in other long-term liabilities in the Company’s consolidated balance sheets. The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will be reduced by approximately $34.4 million during the next twelve months, primarily due to an anticipated tax ruling regarding the deductibility of certain capital losses and anticipated audit closures. The outcomes and timing of such events are highly uncertain and changes in the occurrence, expected outcomes and timing of such events could cause the Company’s current estimate to change materially in the future.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, lowering U.S. statutory federal tax rate and implementing a territorial tax system. The U.S. statutory federal tax rate has been decreased to 21% for Fiscal 2019 and thereafter. The Tax Act also added many new provisions, including changes to bonus depreciation, limits on the deductions for executive compensation and interest expense, a tax on global intangible low-taxed income, the base erosion anti-abuse tax and a deduction for foreign derived intangible income.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance for companies that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, or any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. The Company’s estimates were provisional and subject to adjustment in Fiscal 2019 under the measurement period allowed by the SEC. The Company expects to finalize its accounting related to the impacts of the Tax Act on deferred taxes, valuation allowances, state tax considerations, and any remaining basis differences in its foreign subsidiaries when its income tax returns are finalized during the third quarter of Fiscal 2019. As the Company completes its analysis of the Tax Act, collects and prepares necessary data and interprets any additional guidance issued by the United States Department of the Treasury, the Internal Revenue Service and other standard-setting bodies, it may make adjustments during Fiscal 2019 to the provisional amounts recorded in Fiscal 2018.
v3.10.0.1
Segment Information
3 Months Ended
Jun. 30, 2018
Segment Reporting [Abstract]  
Segment Information
Segment Information
The Company operates its business through four operating segments—MK Retail, MK Wholesale, MK Licensing and Jimmy Choo—which are based on its business activities and organization. The reportable 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 revenue 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 four reportable segments are as follows:
MK Retail — segment includes sales through Michael Kors operated stores, including “Collection,” “Lifestyle” including “concessions,” and outlet stores located throughout the Americas (U.S., Canada and Latin America, excluding Brazil), Europe and certain parts of Asia, as well as Michael Kors e-commerce sales. Products sold through the MK 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.
MK Wholesale — segment includes sales primarily to major department stores and specialty shops throughout the Americas, Europe and Asia. Products sold through the MK Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. The Company also has wholesale arrangements pursuant to which it sells products to Michael Kors geographic licensees in certain parts of EMEA and Asia, as well as in Brazil.
MK Licensing — segment includes royalties and other contributions 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, South Africa, Eastern Europe, certain parts of Asia and Australia.
Jimmy Choo — segment includes revenue generated from sales of luxury footwear, handbags and small leather goods through directly operated Jimmy Choo stores throughout North America (United States and Canada), EMEA and certain parts of Asia, as well as through Jimmy Choo e-commerce sites. In addition, revenue is generated through wholesale sales to distribution partners (including geographic licensing arrangements), multi-brand department stores and specialty stores worldwide, as well as through product license agreements in connection with the manufacturing and sale of fragrance, sunglasses and eyewear.
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 revenue or other allocation methods.
The following table presents the key performance information of the Company’s reportable segments (in millions):
 
Three Months Ended
 
June 30,
2018
 
July 1,
2017
Total revenue:
 
 
 
MK Retail
$
639.5

 
$
619.9

MK Wholesale
362.8

 
303.6

MK Licensing
27.5

 
28.9

Michael Kors
1,029.8

 
952.4

Jimmy Choo
172.7

 

Total revenue
$
1,202.5

 
$
952.4

 
 
 
 
Income from operations:
 
 
 
MK Retail
$
92.5

 
$
92.2

MK Wholesale
97.5

 
43.5

MK Licensing
9.1

 
13.7

Michael Kors
199.1

 
149.4

Jimmy Choo
16.1

 

Income from operations
$
215.2

 
$
149.4


Depreciation and amortization expense for each segment are as follows (in millions):
 
Three Months Ended
 
June 30,
2018
 
July 1,
2017
Depreciation and amortization:
 
 
 
MK Retail
$
33.3

 
$
32.0

MK Wholesale
13.8

 
15.0

MK Licensing
0.6

 
0.6

Michael Kors
47.7

 
47.6

Jimmy Choo
8.2

 

Total depreciation and amortization
$
55.9

 
$
47.6


During the three months ended June 30, 2018, the Company recorded impairment charges relating to Michael Kors full-price retail operations of $4.3 million, and restructuring and other charges of $11.3 million. See Note 9 and 12 for additional information.
Total revenue (based on country of origin), and long-lived assets by geographic location are as follows (in millions):
 
Three Months Ended
 
June 30,
2018
 
July 1,
2017
Total revenue:
 
 
 
The Americas (U.S., Canada and Latin America) (1)
$
718.2

 
$
634.1

EMEA
301.8

 
201.2

Asia
182.5

 
117.1

Total revenue
$
1,202.5

 
$
952.4