MICHAEL KORS HOLDINGS LTD, 10-Q filed on 11/10/2016
Quarterly Report
Document and Entity Information
6 Months Ended
Oct. 1, 2016
Nov. 3, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Oct. 01, 2016 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Entity Registrant Name
MICHAEL KORS HOLDINGS LTD 
 
Entity Central Index Key
0001530721 
 
Current Fiscal Year End Date
--04-01 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
164,247,349 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Oct. 1, 2016
Apr. 2, 2016
Current assets
 
 
Cash and cash equivalents
$ 186.4 
$ 702.0 
Receivables, net
288.0 
307.9 
Inventories
695.7 
546.8 
Prepaid expenses and other current assets
146.0 
113.1 
Total current assets
1,316.1 
1,669.8 
Property and equipment, net
801.0 
758.2 
Intangible assets, net
463.4 
67.4 
Goodwill
119.7 
23.2 
Deferred tax assets
19.0 
24.5 
Other assets
36.1 
23.7 
Total assets
2,755.3 
2,566.8 
Current liabilities
 
 
Accounts payable
179.7 
131.4 
Accrued payroll and payroll related expenses
45.8 
59.7 
Accrued income taxes
45.5 
51.6 
Short-term debt
384.4 
Accrued expenses and other current liabilities
176.9 
192.8 
Total current liabilities
832.3 
435.5 
Deferred rent
126.2 
106.4 
Deferred tax liabilities
88.6 
3.5 
Long-term debt
2.3 
Other long-term liabilities
24.9 
19.6 
Total liabilities
1,072.0 
567.3 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Ordinary shares, no par value; 650,000,000 shares authorized; 209,020,770 shares issued and 164,233,915 outstanding at October 1, 2016; 208,084,175 shares issued and 176,441,891 outstanding at April 2, 2016
Treasury shares, at cost (44,786,855 shares at October 1, 2016 and 31,642,284 shares at April 2, 2016)
(2,304.8)
(1,650.1)
Additional paid-in capital
749.3 
718.9 
Accumulated other comprehensive loss
(79.8)
(80.9)
Retained earnings
3,315.8 
3,007.8 
Total shareholders’ equity of MKHL
1,680.5 
1,995.7 
Noncontrolling interest
2.8 
3.8 
Total equity
1,683.3 
1,999.5 
Total liabilities and shareholders’ equity
$ 2,755.3 
$ 2,566.8 
Consolidated Balance Sheets (Parenthetical) (USD $)
Oct. 1, 2016
Apr. 2, 2016
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)
209,020,770 
208,084,175 
Ordinary shares, shares outstanding (in shares)
164,233,915 
176,441,891 
Treasury shares (in shares)
44,786,855 
31,642,284 
Consolidated Statements of Operations and Comprehensive Income (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Oct. 1, 2016
Sep. 26, 2015
Oct. 1, 2016
Sep. 26, 2015
Income Statement [Abstract]
 
 
 
 
Net sales
$ 1,049.4 
$ 1,086.8 
$ 2,006.7 
$ 2,034.1 
Licensing revenue
38.8 
43.2 
69.4 
81.9 
Total revenue
1,088.2 
1,130.0 
2,076.1 
2,116.0 
Cost of goods sold
443.5 
465.5 
840.1 
847.9 
Gross profit
644.7 
664.5 
1,236.0 
1,268.1 
Selling, general and administrative expenses
379.7 
345.3 
733.7 
658.7 
Depreciation and amortization
56.4 
46.1 
106.8 
87.7 
Impairment of long-lived assets
 
4.9 
Total operating expenses
441.0 
391.4 
845.4 
746.4 
Income from operations
203.7 
273.1 
390.6 
521.7 
Other (income) expense, net
(0.3)
0.1 
(0.6)
0.9 
Interest expense, net
1.4 
0.4 
1.7 
0.5 
Foreign currency loss
1.4 
1.3 
2.1 
Income before provision for income taxes
202.6 
271.2 
388.2 
518.2 
Provision for income taxes
41.9 
78.4 
81.2 
151.0 
Net income
160.7 
192.8 
307.0 
367.2 
Less: Net loss attributable to noncontrolling interest
(0.2)
(0.3)
(1.0)
(0.3)
Net income attributable to MKHL
160.9 
193.1 
308.0 
367.5 
Weighted average ordinary shares outstanding:
 
 
 
 
Weighted average ordinary shares outstanding, basic (in shares)
166,695,631 
188,857,398 
170,427,101 
192,917,209 
Weighted average ordinary shares outstanding, diluted (in shares)
168,839,967 
191,524,156 
172,726,859 
195,789,325 
Net income per ordinary share attributable to MKHL:
 
 
 
 
Net income per ordinary share, basic (in dollars per share)
$ 0.97 
$ 1.02 
$ 1.81 
$ 1.90 
Net income per ordinary share, diluted (in dollars per share)
$ 0.95 
$ 1.01 
$ 1.78 
$ 1.88 
Statements of Comprehensive Income:
 
 
 
 
Net income
160.7 
192.8 
307.0 
367.2 
Foreign currency translation adjustments
(0.3)
(5.6)
(0.7)
4.2 
Net gain (loss) on derivatives
(1.3)
(7.9)
1.8 
(18.6)
Comprehensive income
159.1 
179.3 
308.1 
352.8 
Less: Net loss attributable to noncontrolling interest
(0.2)
(0.3)
(1.0)
(0.3)
Less: Other comprehensive income attributable to noncontrolling interest
(0.1)
Comprehensive income attributable to MKHL
$ 159.4 
$ 179.6 
$ 309.1 
$ 353.1 
Consolidated Statement of Shareholders' Equity (USD $)
In Millions, except Share data, unless otherwise specified
Total
Ordinary Shares
Additional Paid-in Capital
Treasury Shares
Accumulated Other Comprehensive Loss
Retained Earnings
Total Equity of MKHL
Non-controlling Interest
Beginning balance at Apr. 02, 2016
$ 1,999.5 
$ 0 
$ 718.9 
$ (1,650.1)
$ (80.9)
$ 3,007.8 
$ 1,995.7 
$ 3.8 
Beginning balance (in shares) at Apr. 02, 2016
208,084,175 
208,084,000 
 
 
 
 
 
 
Beginning balance (in shares) at Apr. 02, 2016
(31,642,284)
 
 
(31,642,000)
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income (loss)
307.0 
 
 
 
 
308.0 
308.0 
(1.0)
Other comprehensive income
1.1 
 
 
 
1.1 
 
1.1 
Comprehensive income
308.1 
 
 
 
 
 
309.1 
(1.0)
Vesting of restricted awards, net of forfeitures (in shares)
 
454,000 
 
 
 
 
 
 
Exercises of employee share options (in shares)
 
483,000 
 
 
 
 
 
 
Exercises of employee share options
6.2 
 
6.2 
 
 
 
6.2 
 
Equity compensation expense
21.4 
 
21.4 
 
 
 
21.4 
 
Tax benefits on exercise of share options
2.8 
 
2.8 
 
 
 
2.8 
 
Purchase of treasury shares (in shares)
 
 
 
(13,145,000)
 
 
 
 
Purchase of treasury shares
(654.7)
 
 
(654.7)
 
 
(654.7)
 
Ending balance at Oct. 01, 2016
$ 1,683.3 
$ 0 
$ 749.3 
$ (2,304.8)
$ (79.8)
$ 3,315.8 
$ 1,680.5 
$ 2.8 
Ending balance (in shares) at Oct. 01, 2016
209,020,770 
209,021,000 
 
 
 
 
 
 
Ending balance (in shares) at Oct. 01, 2016
(44,786,855)
 
 
(44,787,000)
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Oct. 1, 2016
Sep. 26, 2015
Cash flows from operating activities
 
 
Net income
$ 307.0 
$ 367.2 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
106.8 
87.7 
Equity compensation expense
21.4 
25.9 
Deferred income taxes
5.5 
(0.9)
Amortization of deferred rent
2.1 
1.7 
Loss on disposal of fixed assets
0.8 
1.5 
Impairment of long-lived assets
4.9 
Amortization of deferred financing costs
0.4 
0.4 
Tax benefits on exercise of share options
(2.8)
(9.1)
Foreign currency losses
1.4 
(0.7)
Loss on joint venture
0.9 
Change in assets and liabilities:
 
 
Receivables, net
45.2 
14.5 
Inventories
(120.2)
(180.0)
Prepaid expenses and other current assets
(29.4)
2.5 
Other assets
(4.0)
2.0 
Accounts payable
38.3 
58.7 
Accrued expenses and other current liabilities
(47.4)
10.5 
Other long-term liabilities
15.0 
10.1 
Net cash provided by operating activities
345.0 
392.9 
Cash flows from investing activities
 
 
Capital expenditures
(99.2)
(193.4)
Purchase of intangible assets
(5.7)
(9.3)
Cash paid for business acquisition, net of cash acquired
(480.6)
1.1 
Equity method investments
(0.9)
Net cash used in investing activities
(585.5)
(202.5)
Cash flows from financing activities
 
 
Proceeds from debt borrowings
377.9 
Repayments of debt borrowings
(2.2)
Repurchases of treasury shares
(654.7)
(751.1)
Exercises of employee share options
6.2 
6.0 
Tax benefits on exercise of share options
2.8 
9.1 
Other financing activities
Net cash used in financing activities
(270.0)
(736.0)
Effect of exchange rate changes on cash and cash equivalents
(5.1)
(1.8)
Net decrease in cash and cash equivalents
(515.6)
(547.4)
Beginning of period
702.0 
978.9 
End of period
186.4 
431.5 
Supplemental disclosures of cash flow information
 
 
Cash paid for interest
1.7 
0.4 
Cash paid for income taxes
103.0 
133.7 
Supplemental disclosure of non-cash investing and financing activities
 
 
Accrued capital expenditures
$ 31.7 
$ 28.2 
Business and Basis of Presentation
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 leading designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel 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), Europe and Asia, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas and Europe, as well as certain of our licensees in Asia. The Company licenses its trademarks on products such as fragrances, beauty, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, 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 consolidated financial statements as of October 1, 2016 and for the three and six months ended October 1, 2016 and September 26, 2015 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 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 financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended April 2, 2016, as filed with the Securities and Exchange Commission on June 1, 2016, 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 and six months ended October 1, 2016 and September 26, 2015, are based on 13-week and 26-week periods, respectively.
Summary of Significant Accounting Policies
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 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 foreign 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 foreign currency exchange 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. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash 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
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Numerator:
 
 
 
 
 
 
 
Net income attributable to MKHL
$
160.9

 
$
193.1

 
$
308.0

 
$
367.5

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
166,695,631

 
188,857,398

 
170,427,101

 
192,917,209

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options, restricted shares/units, and performance restricted share units
2,144,336

 
2,666,758

 
2,299,758

 
2,872,116

Diluted weighted average shares
168,839,967

 
191,524,156

 
172,726,859

 
195,789,325

 
 
 
 
 
 
 
 
Basic net income per share
$
0.97

 
$
1.02

 
$
1.81

 
$
1.90

Diluted net income per share
$
0.95

 
$
1.01

 
$
1.78

 
$
1.88


During the three and six months ended October 1, 2016, share equivalents of 2,000,778 shares and 2,049,980 shares, respectively, have been excluded from the above calculations due to their anti-dilutive effect. Share equivalents of 3,058,665 shares and 4,870,045 shares, respectively, have been excluded from the above calculations during the three and six months ended September 26, 2015.
Please refer to Note 2 in the Company's Annual Report on Form 10-K for the fiscal year ended April 2, 2016, for a complete disclosure of the Company's significant accounting policies.
Recently Adopted Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," which simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments and requiring such adjustments to be recognized in the reporting period in which they are determined. ASU 2015-16 requires disclosures of any amounts that would have been recorded in previous reporting periods if the adjustment was recognized as of the acquisition date. ASU 2015-16 is effective beginning with the Company's fiscal year 2017, with earlier application permitted, and should be applied prospectively. The adoption of ASU 2015-16 did not have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target under stock-based compensation arrangements that could be achieved after the service period is treated as a performance condition and not reflected in the grant-date fair value of the award. Rather, the related compensation cost should be recognized when it becomes probable that the performance targets will be achieved. ASU 2014-12 is effective beginning with the Company’s fiscal year 2018, with early adoption and retrospective application permitted. The Company adopted ASU 2014-12 during the first quarter of Fiscal 2017, which did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, and have concluded that there are no new pronouncements that 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 No. 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 No. 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 year 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 Company is currently evaluating the adoption method and the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" issued in March 2016 and ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" issued in April 2016 and ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" issued in May 2016. The Company will consider this guidance in evaluating the impact of ASU 2014-09.
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 year 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.
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. ASU 2016-09 is effective beginning with the Company's fiscal year 2018, with early adoption permitted and different permitted adoption methods for each provision of the standard. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.
Inventory Valuation
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." The new guidance requires inventory accounted for using the average cost or first-in first-out method ("FIFO") to be measured at the lower of cost or net realizable value, replacing the current requirement to value inventory at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective beginning with the Company's fiscal year 2018 and should be applied prospectively, with earlier application permitted. The Company does not expect that ASU No. 2015-11 will have a material impact on its financial statements.
Acquisitions
Acquisitions
Acquisitions
Fiscal 2017 Acquisition
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, which may be subject to certain purchase price adjustments. The Company accounted for the acquisition as a business combination. The following table summarized the preliminary estimated 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 $51.4 million and net loss of $3.8 million during the three months ended October 1, 2016, and total revenue of $72.0 million and net loss of $6.0 million for the period from the date of acquisition through October 1, 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 and six months ended October 1, 2016 and September 26, 2015 as if the acquisition had occurred on March 29, 2015, the beginning of Fiscal 2016 (in millions):
 
Three Months Ended
Six Months Ended
 
October 1,
2016
 
September 26,
2015
October 1,
2016
 
September 26,
2015
Pro-forma total revenue
$
1,088.2

 
$
1,155.9

$
2,102.5

 
$
2,171.3

Pro-forma net income
157.8

 
189.4

313.0

 
363.0

Pro-forma net income per ordinary share attributable to MKHL:
 
 
 
 
 
 
Basic
$
0.95

 
$
1.00

1.84

 
1.88

Diluted
$
0.93

 
$
0.99

1.81

 
1.85


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 and six months ended October 1, 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 six months ended October 1, 2016.
The Company is in the process of finalizing the purchase accounting adjustments related to MKHKL, which could result in measurement period adjustments in future periods.
Fiscal 2016 Acquisitions
On January 1, 2016, the Company acquired direct control of its previously licensed business in South Korea ("MK Korea") upon the related license expiration in exchange for cash consideration of approximately $3.6 million. The Company accounted for this acquisition as a business combination and began consolidating the South Korean business into its operations beginning with the fourth quarter of Fiscal 2016.
During the second quarter of Fiscal 2016, the Company made contributions to its Latin American joint venture, MK (Panama) Holdings S.A. and subsidiaries ("MK Panama") totaling $18.5 million, consisting of cash consideration of $3.0 million and the elimination of liabilities owed to the Company of $15.5 million, which increased the Company's ownership interest to 75%. As a result of obtaining controlling interest in MK Panama, which was previously accounted for under the equity method of accounting, the Company began consolidating MK Panama into its operations during the second quarter of Fiscal 2016. The Company accounted for its acquisition of controlling interest in MK Panama as a business combination.
Please refer to Note 3 in the Company's Annual Report on Form 10-K for the fiscal year ended April 2, 2016, for detailed information relating to the Company's acquisitions of MK Korea and MK Panama businesses.
Receivables, net
Receivables, net
Receivables, net
Receivables, net consist of (in millions):
 
October 1,
2016
 
April 2,
2016
Trade receivables:
 
 
 
Credit risk insured/factored
$
316.2

 
$
353.7

Credit risk retained by Company
63.5

 
61.8

Receivables due from licensees
20.8

 
9.5

 
400.5

 
425.0

Less: allowances
(112.5
)
 
(117.1
)
 
$
288.0

 
$
307.9


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 has assumed responsibility for most of the previously factored accounts receivable balances, but a large percentage of its trade receivables as of October 1, 2016 and April 2, 2016 are insured. 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 October 1, 2016 and April 2, 2016 was $1.6 million and $0.7 million, respectively.
Property and Equipment, net
Property and Equipment, net
Property and Equipment, net
Property and equipment, net consist of (in millions):
 
October 1,
2016
 
April 2,
2016
Leasehold improvements
$
479.3

 
$
414.6

In-store shops
250.7

 
242.9

Furniture and fixtures
231.9

 
212.7

Computer equipment and software
211.1

 
167.9

Equipment
100.5

 
79.1

Building
42.2

 

Land
14.8

 
15.1

 
1,330.5

 
1,132.3

Less: accumulated depreciation and amortization
(585.1
)
 
(490.9
)
 
745.4

 
641.4

Construction-in-progress
55.6

 
116.8

 
$
801.0

 
$
758.2


Depreciation and amortization of property and equipment for the three and six months ended October 1, 2016 was $50.2 million and $97.1 million, respectively. Depreciation and amortization of property for the three and six months ended September 26, 2015 was $43.9 million and $83.6 million, respectively. During the three months ended October 1, 2016, the Company recorded fixed asset impairment charges of $4.9 million, which were related to 10 retail locations still in operation.
Intangible Assets and Goodwill
Intangible Assets and Goodwill
Intangible Assets and Goodwill
The following table details the carrying values of the Company's intangible assets that are subject to amortization (in millions):
 
October 1, 2016
 
April 2, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Reacquired rights
$
400.3

 
$
5.4

 
$
394.9

 
$

 
$

 
$

Lease rights
77.7

 
21.0

 
56.7

 
73.3

 
17.8

 
55.5

Trademarks
23.0

 
15.7

 
7.3

 
23.0

 
15.1

 
7.9

Customer relationships
5.1

 
0.6

 
4.5

 
4.2

 
0.2

 
4.0

 
$
506.1

 
$
42.7

 
$
463.4

 
$
100.5

 
$
33.1

 
$
67.4


Reacquired rights relate to the Company's reacquisition of the rights to use its trademarks and to import, sell, advertise and promote certain of its products in the previously licensed territories in the Greater China region and are being amortized through March 31, 2041, the expiration date of the related license agreement. Lease rights are amortized over the respective terms of the underlying lease, including highly probable renewal periods. Trademarks relate to the Company’s brand name and are amortized over twenty years. Customer relationships are amortized over five to ten years. Amortization expense for the three months ended October 1, 2016 and September 26, 2015 was $6.2 million and $2.2 million, respectively, and was $9.7 million and $4.1 million, respectively, for the six months ended October 1, 2016 and September 26, 2015, respectively.
Estimated amortization expense for each of the next five years is as follows (in millions):
Remainder of Fiscal 2017
$
12.5

Fiscal 2018
25.0

Fiscal 2019
25.0

Fiscal 2020
25.0

Fiscal 2021
24.7

Thereafter
351.2

 
$
463.4


The following table details the changes in goodwill for each of the Company's reportable segments (in millions):
 
Retail
 
Wholesale
 
Licensing
 
Total
Balance at April 2, 2016
$
8.0

 
$
13.3

 
$
1.9

 
$
23.2

Acquisition of MKHKL
83.9

 
12.6

 

 
96.5

Balance at October 1, 2016
$
91.9

 
$
25.9

 
$
1.9

 
$
119.7


Goodwill is not amortized but will be evaluated for impairment in the fourth quarter of Fiscal 2017, or whenever impairment indicators exist. There were no impairment charges recorded for any of the Company's intangible assets during the fiscal periods presented.
Other Current Liabilities
Other Current Liabilities
Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in millions):
 
October 1,
2016
 
April 2,
2016
Accrued capital expenditures
$
31.1

 
$
33.6

Other taxes payable
36.5

 
38.2

Accrued rent
29.6

 
30.5

Gift cards and retail store credits
12.6

 
13.1

Accrued advertising
12.3

 
5.2

Professional services
7.7

 
7.0

Advance royalties
5.6

 
30.2

Unrealized loss on forward foreign currency exchange contracts
2.4

 
5.5

Other
39.1

 
29.5

 
$
176.9

 
$
192.8

Debt Obligations
Debt Obligations
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 a U.S., Canadian, Dutch and Swiss subsidiary 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 October 1, 2016, the Company was in compliance with all covenants related to this agreement.
As of October 1, 2016, the Company had €337.0 million (approximately $378.6 million) in borrowings outstanding under the 2015 Credit Facility, which were recorded within short-term debt in its consolidated balance sheet as of October 1, 2016. In addition, stand-by letters of credit of $10.3 million were outstanding as of October 1, 2016. There were no borrowings outstanding under the 2015 Credit Facility as of April 2, 2016. At October 1, 2016, the amount available for future borrowings was $609.9 million. Please refer to Note 9 in the Company's Fiscal 2016 Annual Report on Form 10-K for additional information about the Company's 2015 Credit Facility.
Hong Kong Credit Facility
The Company's subsidiary in Hong Kong, Michael Kors (HK) Limited, has an uncommitted credit facility ("HK Credit Facility") with HSBC (the "Bank"), which may be used to fund general working capital needs of Michael Kors (HK) Limited through November 30, 2016, subject to the Bank's discretion. The HK Credit Facility provides Michael Kors (HK) Limited with a revolving line of credit of up to 100.0 million Hong Kong Dollars (approximately $12.9 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 October 1, 2016, 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 October 1, 2016. In addition, as of October 1, 2016, bank guarantees supported by this facility were 8.8 million Hong Kong Dollars (approximately $1.1 million). At October 1, 2016, the amount available for future borrowings under the Hong Kong Credit Facility was 46.2 million Hong Kong Dollars (approximately $6.0 million).
Debt Obligations of MK Panama
The Company's consolidated balance sheet as of April 2, 2016 included $2.3 million in debt related to MK Panama, which was no longer outstanding as of October 1, 2016.
Commitments and Contingencies
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 Fiscal 2016 Form 10-K for a detailed disclosure of other commitments and contractual obligations as of April 2, 2016.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
Fair Value of Financial Instruments
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 for similar assets and liabilities.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
At October 1, 2016 and April 2, 2016, the fair values of the Company’s forward foreign currency exchange 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.
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 October 1, 2016 using:
 
Fair value at April 2, 2016 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
$

 
$
0.5

 
$

 
$

 
$
0.1

 
$

Forward foreign currency exchange contracts - liabilities
$

 
$
2.4

 
$

 
$

 
$
5.5

 
$


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 are recorded at carrying value, which approximates 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. During the three months ended October 1, 2016, the Company recorded impairment charges of $4.9 million to impair retail store fixed assets with a book value of $5.4 million and a fair value of $0.5 million (see Note 5 for additional information). The fair values of these assets were determined based on Level 3 measurements, based on the Company's best estimates of the amount and timing of the related stores' future discounted cash flows, based on historical experience and current market conditions.
Derivative Financial Instruments
Derivative Financial Instruments
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’s derivative financial instruments are not currently subject to master netting arrangements. 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 October 1, 2016 and April 2, 2016 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
October 1,
2016
 
April 2,
2016
 
October 1,
2016
 
April 2,
2016
 
October 1,
2016
 
April 2,
2016
Designated forward foreign currency exchange contracts
$
173.5

 
$
174.1

 
$
0.5

 
$
0.1

 
$
2.4

 
$
5.1

Undesignated forward foreign currency exchange contracts

 
30.0

 

 

 

 
0.4

Total
$
173.5

 
$
204.1

 
$
0.5

 
$
0.1

 
$
2.4

 
$
5.5

 
 
(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.
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 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. The following tables summarize the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three and six months ended October 1, 2016 and September 26, 2015 (in millions):
 
Three Months Ended
 
October 1, 2016
 
September 26, 2015
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward foreign currency exchange contracts
$
(1.2
)
 
$
0.3

 
$
(6.6
)
 
$
2.4

 
Six Months Ended
 
October 1, 2016
 
September 26, 2015
 
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward foreign currency exchange contracts
$
2.1

 
$
0.2

 
$
(18.3
)
 
$
2.4


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 turns. These amounts are subject to fluctuations in the applicable currency exchange rates.
During the three and six months ended October 1, 2016, the Company recognized gains of $0.1 million and $0.3 million, respectively, related to changes in the fair value of undesignated forward currency exchange contracts within foreign currency gains (losses) in the Company’s consolidated statement of operations. During the three and six months ended September 26, 2015, the Company recognized losses related to changes in the fair value of undesignated forward foreign currency exchange contracts of $0.4 million and $1.4 million, respectively.
Shareholders' Equity
Shareholders' Equity
Shareholders’ Equity
Share Repurchase Program
On May 25, 2016, the Company's Board of Directors authorized a $1.0 billion share repurchase program, which replaced the remaining balance of the previous share repurchase program authorized on October 30, 2014. During the six months ended October 1, 2016 and September 26, 2015, the Company repurchased 13,044,832 shares and 16,384,737 shares, respectively, at a cost of $650.0 million and $750.0 million, respectively, under its share-repurchase programs through open market transactions. As of October 1, 2016, the remaining availability under the Company’s new share repurchase program was $350.0 million.
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 six month periods ended October 1, 2016 and September 26, 2015, the Company withheld 99,739 shares and 22,540 shares, respectively, at a cost of $4.7 million and $1.1 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
The following table details changes in the components of accumulated other comprehensive income, net of taxes for the six months ended October 1, 2016 and September 26, 2015, respectively (in millions):
 
Foreign Currency
Translation
(Losses) Gains
 
Net Gains
(Losses) on
Derivatives (1) 
 
Total
Accumulated Other
Comprehensive
(Loss) Income
Balance at March 28, 2015
$
(96.1
)
 
$
29.3

 
$
(66.8
)
Other comprehensive income (loss) before reclassifications
4.3

 
(16.4
)
 
(12.1
)
Less: net gains reclassified from AOCI to earnings 

 
2.2

 
2.2

Other comprehensive income (loss), net of tax
4.3

 
(18.6
)
 
(14.3
)
Balance at September 26, 2015
$
(91.8
)
 
$
10.7

 
$
(81.1
)
 
 
 
 
 
 
Balance at April 2, 2016
$
(77.6
)
 
$
(3.2
)
 
$
(80.8
)
Other comprehensive (loss) income before reclassifications
(0.7
)
 
1.9

 
1.2

Less: net gains reclassified from AOCI to earnings 

 
0.1

 
0.1

Other comprehensive (loss) income, net of tax
(0.7
)
 
1.8

 
1.1

Balance at October 1, 2016
$
(78.3
)
 
$
(1.4
)
 
$
(79.7
)
Less: other comprehensive income attributable to noncontrolling interest
0.1

 

 
0.1

Other comprehensive loss attributable to MKHL at October 1, 2016
$
(78.4
)
 
$
(1.4
)
 
$
(79.8
)
_________________________
(1) 
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. All tax effects were not material for the periods presented.
Share-Based Compensation
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 October 1, 2016, 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 October 1, 2016, there were 8,400,234 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.

Share Options
Share options are generally exercisable at no less than the fair market value on the date of grant. The Company has issued two types of option grants, those that vest based on the attainment of a performance target and those that vest based on the passage of time. Under the 2008 Plan, performance-based share options may vest based upon the attainment of one of two performance measures. One performance measure is an individual performance target, which is based upon certain performance targets unique to the individual grantee, and the other measure is a company-wide performance target, which is based on a cumulative minimum growth requirement in consolidated net equity. The individual performance target vests 20% of the total option grant each year the target is satisfied. The individual has ten years in which to achieve five individual performance vesting tranches. The company-wide performance target must be achieved over the ten-year term. Performance is measured at the end of the term, and any unvested options vest if the target is achieved. The Company-wide performance target is established at the time of the grant. The target metrics underlying individual performance vesting requirements are established for each recipient each year up until such time as the grant is fully vested. Under the Incentive Plan, options subject to time-based vesting requirements become vested in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such options were awarded.
The following table summarizes the share option activity during the six months ended October 1, 2016:
 
Number of
Options
 
Weighted
Average
Exercise Price
Outstanding at April 2, 2016
5,820,413

 
$
28.41

Granted
177,666

 
$
49.88

Exercised
(483,260
)
 
$
12.89

Canceled/forfeited
(147,769
)
 
$
73.57

Outstanding at October 1, 2016
5,367,050

 
$
29.28


The weighted average grant date fair value for options granted during the six months ended October 1, 2016 and September 26, 2015 was $13.79 and $14.36 respectively.
The following table represents assumptions used to estimate the fair value of options:
 
Six Months Ended
 
October 1
2016
 
September 26
2015
Expected dividend yield
0.0
%
 
0.0
%
Volatility factor
30.1
%
 
31.1
%
Weighted average risk-free interest rate
1.1
%
 
1.6
%
Expected life of option
4.75 years

 
4.75 years


Restricted Shares and Restricted Share Units
The Company grants restricted shares and restricted share units at the fair market value on the date of the grant. Expense for restricted share awards is based on the closing market price of the Company’s shares on the date of grant and is recognized ratably over the vesting period net of expected forfeitures.
Restricted share grants generally vest in equal increments on each of the four anniversaries of the date of grant. In addition, the Company grants two types of restricted share unit (“RSU”) awards: time-based RSUs and performance-based RSUs. Time-based RSUs generally vest in full either on the first anniversary of the date of the grant, or in equal increments on each of the four anniversaries of the date of grant. Performance-based RSUs vest in full on the three-year anniversary of the date of grant, subject to the employee’s continued employment during the vesting period and only if certain pre-established cumulative performance targets are met at the end of the three-year performance period. Expense related to performance-based RSUs is recognized ratably over the three-year performance period, net of forfeitures, based on the probability of attainment of the related performance targets. The potential number of shares that may be earned ranges between 0%, if the minimum level of performance is not attained, and 150%, if the level of performance is at or above the pre-determined maximum achievement level.
The following table summarizes restricted share activity during the six months ended October 1, 2016:
 
Restricted Shares
 
Number of  Unvested
Restricted Shares
 
Weighted
Average Grant
Date Fair Value
Unvested at April 2, 2016
390,229

 
$
82.38

Granted

 
$

Vested
(131,672
)
 
$
80.00

Canceled/forfeited
(38,466
)
 
$
83.06

Unvested at October 1, 2016
220,091

 
$
83.69

The following table summarizes the RSU activity during the six months ended October 1, 2016:
 
Service-based
 
Performance-based
 
Number of
Restricted
Share Units
 
Weighted
Average Grant
Date Fair Value
 
Number of
Restricted
Share Units
 
Weighted
Average Grant
Date Fair Value
Unvested at April 2, 2016
1,071,058

 
$
47.13

 
579,774

 
$
61.84

Granted
768,336

 
$
50.24

 
98,237

 
$
49.88

Achievement of performance condition

 
$

 
80,093

 
$
62.24

Vested
(251,630
)
 
$
47.10

 
(240,278
)
 
$
62.24

Canceled/forfeited
(103,761
)
 
$
45.97

 
(23,427
)
 
$
74.28

Unvested at October 1, 2016
1,484,003

 
$
48.83

 
494,399

 
$
58.75


Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for the three and six months ended October 1, 2016 and September 26, 2015 (in millions):
 
Three Months Ended
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Share-based compensation expense
$
11.6

 
$
13.4

 
$
21.4

 
$
25.9

Tax benefits related to share-based compensation expense
$
3.8

 
$
4.4

 
$
7.5

 
$
8.8


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 October 1, 2016 is approximately $3.3 million.
Income Taxes
Income Taxes
Income Taxes
On October 29, 2014, the Company’s Board of Directors approved a proposal to move the Company’s principal executive office from Hong Kong to the United Kingdom ("U.K.") and to become a U.K. tax resident. The Company remains incorporated in the British Virgin Islands. Due to substantial international growth and expansion over the past several years and the Company being a U.K. tax resident for both of the fiscal periods presented, the Company believes that it is most appropriate to reconcile its effective tax rate to the UK Statutory tax rate.
The following table summarizes the significant differences between the U.K. federal statutory tax rate and the Company's effective tax rate for financial statement purposes.
 
Three Months Ended
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
U.K. statutory tax rate
20.0
 %
 
20.0
 %
 
20.0
 %
 
20.0
 %
Effect of operations in non-U.K. jurisdictions
7.6
 %
 
8.6
 %
 
7.4
 %
 
8.5
 %
Global financing activities
(10.0
)%
 
(2.4
)%
 
(9.6
)%
 
(2.2
)%
State and local income taxes, net of federal benefit
1.1
 %
 
1.4
 %
 
1.1
 %
 
1.8
 %
Other
2.0
 %
 
1.3
 %
 
2.0
 %
 
1.0
 %
Effective tax rate
20.7
 %
 
28.9
 %
 
20.9
 %
 
29.1
 %
Segment Information
Segment Information
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), 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 certain of our licensees, including our licensees in Asia. 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 sell the Company’s products in certain geographic regions such as 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.
The Company has allocated $25.9 million, $91.9 million and $1.9 million of its recorded $119.7 million goodwill as of October 1, 2016 to its Wholesale, Retail and Licensing segments, respectively. Please refer to Note 3 and Note 6 for goodwill recorded upon the Company's acquisition of MKHKL on May 31, 2016. As of April 2, 2016, the Company's goodwill balance of $23.2 million was allocated $13.3 million, $8.0 million and $1.9 million to the Company's Wholesale, Retail 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):
 
Three Months Ended
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Revenue:
 
 
 
 
 
 
 
Net sales: Retail
$
597.2

 
$
532.8

 
$
1,160.1

 
$
1,056.1

Wholesale
452.2

 
554.0

 
846.6

 
978.0

Licensing
38.8

 
43.2

 
69.4

 
81.9

Total revenue
$
1,088.2

 
$
1,130.0

 
$
2,076.1

 
$
2,116.0

 
 
 
 
 
 
 
 
Income from operations:
 
 
 
 
 
 
 
Retail
$
69.6

 
$
99.9

 
$
136.2

 
$
220.8

Wholesale
122.0

 
156.9

 
227.0

 
263.2

Licensing
12.1

 
16.3

 
27.4

 
37.7

Income from operations
$
203.7

 
$
273.1

 
$
390.6

 
$
521.7


Depreciation and amortization expense for each segment are as follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Depreciation and amortization:
 
 
 
 
 
 
 
Retail
$
40.5

 
$
28.4

 
$
74.5

 
$
53.5

Wholesale
15.3

 
17.4

 
31.2

 
33.5

Licensing
0.6

 
0.3

 
1.1

 
0.7

Total depreciation and amortization
$
56.4

 
$
46.1

 
$
106.8

 
$
87.7


Total revenue (as recognized based on country of origin), and long-lived assets by geographic location of the consolidated Company are as follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Revenue:
 
 
 
 
 
 
 
       The Americas (U.S., Canada and L. America)(1)
$
745.1

 
$
838.2

 
$
1,435.9

 
$
1,565.5

Europe
248.0

 
243.4

 
472.0

 
460.2

Asia
95.1

 
48.4

 
168.2

 
90.3

Total revenue
$
1,088.2

 
$
1,130.0

 
$
2,076.1

 
$
2,116.0


 
As of
 
October 1,
2016
 
April 2,
2016
Long-lived assets:
 
 
 
       The Americas (U.S., Canada and Latin America)(1)
$
485.5

 
$
507.7

Europe
297.6

 
284.2

Asia
481.3

 
33.7

Total Long-lived assets
$
1,264.4

 
$
825.6

 
 
(1) 
Net revenues earned in the U.S. were $693.7 million and $1.335 billion, respectively, during the three and six months ended October 1, 2016, and were $786.5 million and $1.471 billion, respectively for the three and six months ended September 26, 2015. Long-lived assets located in the U.S. as of October 1, 2016 and April 2, 2016 were $451.4 million and $472.2 million, respectively.
Related Party Transactions
Related Party Transactions
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 certain 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, and $1.6 million and $3.3 million, respectively, during the three months and six months ended September 26, 2015. 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, and approximately $36.6 million and $74.9 million, respectively, during the three months and six months ended September 26, 2015. 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. During the three months and six months ended September 26, 2015, amounts recognized as net sales were approximately $14.0 million and $30.0 million, respectively. As of April 2, 2016, the Company’s total accounts receivable from this related party were $16.1 million. Please refer to Note 3 for information relating to the Company's acquisition of MKHKL on May 31, 2016.
The Company’s balance sheet as of April 2, 2016 reflects a $1.0 million long-term loan between EBISA, the Company’s partner in the MK Panama joint venture, and Rosales Development Corp. There is a family relationship between EBISA and Rosales Development Corp. The loan was initiated on November 25, 2014 with an annual rate of interest of 5.0% and was fully repaid during the three months ended July 2, 2016.
A former executive officer of our Company shares a household with an employee of one of our suppliers of fixtures for our shop-in-shops, retail stores and showrooms, and therefore, such employee may be deemed to be an immediate family member of the former executive officer for purposes of federal securities laws. During the six months ended October 1, 2016 and September 26, 2015, purchases from this supplier reflected in the Company's consolidated financial statements were $0.6 million and $1.8 million, respectively. Accounts payable to this supplier were $0.3 million as of October 1, 2016 and immaterial as of April 2, 2016.
Non-cash Investing Activities
Non-cash Investing Activities
Non-cash Investing Activities
Significant non-cash investing activities during the six months ended September 26, 2015 included $15.5 million of non-cash consideration comprised of liabilities owed to the Company, which were converted into additional equity interest in MK Panama. Significant non-cash investing activities also included the non-cash allocations of the fair values of the net assets acquired in connection with the Company obtaining controlling interest in MK Panama during the second quarter of Fiscal 2016 and in connection with its acquisition of the Greater China business during the first quarter of Fiscal 2017. See Note 3 for additional information.
There were no other significant non-cash investing or financing activities during the fiscal periods presented.
Summary of Significant Accounting Policies (Policies)
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 consolidated financial statements as of October 1, 2016 and for the three and six months ended October 1, 2016 and September 26, 2015 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 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 financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended April 2, 2016, as filed with the Securities and Exchange Commission on June 1, 2016, 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 and six months ended October 1, 2016 and September 26, 2015, are based on 13-week and 26-week periods, respectively.
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 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.
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
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.
The Company uses forward foreign 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 foreign currency exchange 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. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash 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.
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.
Recently Adopted Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," which simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments and requiring such adjustments to be recognized in the reporting period in which they are determined. ASU 2015-16 requires disclosures of any amounts that would have been recorded in previous reporting periods if the adjustment was recognized as of the acquisition date. ASU 2015-16 is effective beginning with the Company's fiscal year 2017, with earlier application permitted, and should be applied prospectively. The adoption of ASU 2015-16 did not have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target under stock-based compensation arrangements that could be achieved after the service period is treated as a performance condition and not reflected in the grant-date fair value of the award. Rather, the related compensation cost should be recognized when it becomes probable that the performance targets will be achieved. ASU 2014-12 is effective beginning with the Company’s fiscal year 2018, with early adoption and retrospective application permitted. The Company adopted ASU 2014-12 during the first quarter of Fiscal 2017, which did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, and have concluded that there are no new pronouncements that 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 No. 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 No. 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 year 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 Company is currently evaluating the adoption method and the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" issued in March 2016 and ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" issued in April 2016 and ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" issued in May 2016. The Company will consider this guidance in evaluating the impact of ASU 2014-09.
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 year 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.
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. ASU 2016-09 is effective beginning with the Company's fiscal year 2018, with early adoption permitted and different permitted adoption methods for each provision of the standard. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.
Inventory Valuation
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." The new guidance requires inventory accounted for using the average cost or first-in first-out method ("FIFO") to be measured at the lower of cost or net realizable value, replacing the current requirement to value inventory at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective beginning with the Company's fiscal year 2018 and should be applied prospectively, with earlier application permitted. The Company does not expect that ASU No. 2015-11 will have a material impact on its financial statements.
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 has assumed responsibility for most of the previously factored accounts receivable balances, but a large percentage of its trade receivables as of October 1, 2016 and April 2, 2016 are insured. 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.
Summary of Significant Accounting Policies (Tables)
Components of Calculation of Basic Net Income Per Ordinary Share and Diluted Net Income Per Ordinary Share
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
 
Six Months Ended
 
October 1,
2016
 
September 26,
2015
 
October 1,
2016
 
September 26,
2015
Numerator:
 
 
 
 
 
 
 
Net income attributable to MKHL
$
160.9

 
$
193.1

 
$
308.0

 
$
367.5

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
166,695,631

 
188,857,398

 
170,427,101

 
192,917,209

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options, restricted shares/units, and performance restricted share units
2,144,336

 
2,666,758

 
2,299,758

 
2,872,116

Diluted weighted average shares
168,839,967

 
191,524,156

 
172,726,859

 
195,789,325

 
 
 
 
 
 
 
 
Basic net income per share
$
0.97

 
$
1.02

 
$
1.81

 
$
1.90

Diluted net income per share
$
0.95

 
$
1.01

 
$
1.78

 
$
1.88

Acquisitions (Tables) (Michael Kors (HK) Limited)
The following table summarized the preliminary estimated 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 following table summarizes the unaudited pro-forma consolidated results of operations for the three and six months ended October 1, 2016 and September 26, 2015 as if the acquisition had occurred on March 29, 2015, the beginning of Fiscal 2016 (in millions):
 
Three Months Ended
Six Months Ended
 
October 1,
2016
 
September 26,
2015
October 1,
2016
 
September 26,
2015
Pro-forma total revenue
$
1,088.2

 
$
1,155.9

$
2,102.5

 
$
2,171.3

Pro-forma net income
157.8

 
189.4

313.0

 
363.0

Pro-forma net income per ordinary share attributable to MKHL:
 
 
 
 
 
 
Basic
$
0.95

 
$
1.00

1.84

 
1.88

Diluted
$
0.93

 
$
0.99

1.81

 
1.85

Receivables, net (Tables)
Receivables, net
Receivables, net consist of (in millions):
 
October 1,
2016
 
April 2,
2016
Trade receivables:
 
 
 
Credit risk insured/factored
$
316.2

 
$
353.7

Credit risk retained by Company
63.5

 
61.8

Receivables due from licensees
20.8

 
9.5

 
400.5

 
425.0

Less: allowances
(112.5
)
 
(117.1
)
 
$
288.0

 
$
307.9

Property and Equipment, net (Tables)
Schedule of Property and Equipment, Net
Property and equipment, net consist of (in millions):
 
October 1,
2016
 
April 2,
2016
Leasehold improvements
$
479.3

 
$
414.6

In-store shops
250.7

 
242.9

Furniture and fixtures
231.9

 
212.7

Computer equipment and software
211.1

 
167.9

Equipment
100.5

 
79.1

Building
42.2

 

Land
14.8

 
15.1

 
1,330.5

 
1,132.3

Less: accumulated depreciation and amortization
(585.1
)
 
(490.9
)
 
745.4

 
641.4

Construction-in-progress
55.6

 
116.8

 
$
801.0

 
$
758.2

Intangible Assets and Goodwill (Tables)
The following table details the carrying values of the Company's intangible assets that are subject to amortization (in millions):
 
October 1, 2016
 
April 2, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Reacquired rights
$
400.3

 
$
5.4

 
$
394.9

 
$

 
$

 
$

Lease rights
77.7

 
21.0

 
56.7

 
73.3

 
17.8

 
55.5

Trademarks
23.0

 
15.7

 
7.3

 
23.0

 
15.1

 
7.9

Customer relationships
5.1

 
0.6

 
4.5

 
4.2

 
0.2

 
4.0

 
$
506.1

 
$
42.7

 
$
463.4

 
$
100.5

 
$
33.1

 
$
67.4

Estimated amortization expense for each of the next five years is as follows (in millions):
Remainder of Fiscal 2017
$
12.5

Fiscal 2018
25.0

Fiscal 2019
25.0

Fiscal 2020
25.0

Fiscal 2021
24.7

Thereafter
351.2

 
$
463.4

The following table details the changes in goodwill for each of the Company's reportable segments (in millions):
 
Retail
 
Wholesale
 
Licensing
 
Total
Balance at April 2, 2016
$
8.0

 
$
13.3

 
$
1.9

 
$
23.2

Acquisition of MKHKL
83.9

 
12.6

 

 
96.5

Balance at October 1, 2016
$
91.9

 
$
25.9

 
$
1.9

 
$
119.7

Other Current Liabilities (Tables)
Schedule of Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in millions):
 
October 1,
2016
 
April 2,
2016
Accrued capital expenditures
$
31.1

 
$
33.6

Other taxes payable
36.5

 
38.2

Accrued rent
29.6

 
30.5

Gift cards and retail store credits
12.6

 
13.1

Accrued advertising
12.3

 
5.2

Professional services
7.7

 
7.0

Advance royalties
5.6

 
30.2

Unrealized loss on forward foreign currency exchange contracts
2.4

 
5.5

Other
39.1

 
29.5

 
$
176.9

 
$
192.8

Fair Value of Financial Instruments (Tables)
Schedule of Contracts Measured and Recorded at Fair Value on Recurring and Categorized in Level 2 of Fair Value Hierarchy
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 October 1, 2016 using:
 
Fair value at April 2, 2016 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
$

 
$
0.5

 
$

 
$

 
$
0.1

 
$

Forward foreign currency exchange contracts - liabilities
$

 
$
2.4

 
$

 
$

 
$
5.5

 
$

Derivative Financial Instruments (Tables)
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 October 1, 2016 and April 2, 2016 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
October 1,
2016
 
April 2,
2016
 
October 1,
2016
 
April 2,
2016
 
October 1,
2016
 
April 2,
2016
Designated forward foreign currency exchange contracts
$
173.5

 
$
174.1

 
$
0.5

 
$
0.1

 
$
2.4