MICHAEL KORS HOLDINGS LTD, 10-Q filed on 11/8/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Sep. 30, 2017
Oct. 31, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2018 
 
Document Fiscal Period Focus
Q2 
 
Entity Registrant Name
MICHAEL KORS HOLDINGS LTD 
 
Entity Central Index Key
0001530721 
 
Current Fiscal Year End Date
--03-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
152,078,642 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2017
Apr. 1, 2017
Current assets
 
 
Cash and cash equivalents
$ 178.2 
$ 227.7 
Receivables, net
274.5 
265.8 
Inventories
696.5 
549.3 
Prepaid expenses and other current assets
181.5 
121.9 
Total current assets
1,330.7 
1,164.7 
Property and equipment, net
562.7 
591.5 
Intangible assets, net
405.7 
418.1 
Goodwill
119.7 
119.7 
Deferred tax assets
69.2 
73.3 
Other assets
43.7 
42.3 
Total assets
2,531.7 
2,409.6 
Current liabilities
 
 
Accounts payable
174.0 
176.3 
Accrued payroll and payroll related expenses
51.9 
61.1 
Accrued income taxes
60.1 
60.3 
Short-term debt
133.1 
Accrued expenses and other current liabilities
188.7 
135.0 
Total current liabilities
474.7 
565.8 
Deferred rent
131.7 
137.8 
Deferred tax liabilities
78.7 
80.0 
Other long-term liabilities
41.4 
31.0 
Total liabilities
726.5 
814.6 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Ordinary shares, no par value; 650,000,000 shares authorized; 210,200,479 shares issued and 152,066,668 outstanding at September 30, 2017; 209,332,493 shares issued and 155,833,304 outstanding at April 1, 2017
Treasury shares, at cost (58,133,811 shares at September 30, 2017 and 53,499,189 shares at April 1, 2017)
(2,815.8)
(2,654.9)
Additional paid-in capital
791.9 
767.8 
Accumulated other comprehensive loss
(59.6)
(80.6)
Retained earnings
3,888.5 
3,560.3 
Total shareholders’ equity of MKHL
1,805.0 
1,592.6 
Noncontrolling interest
0.2 
2.4 
Total equity
1,805.2 
1,595.0 
Total liabilities and shareholders’ equity
$ 2,531.7 
$ 2,409.6 
Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2017
Apr. 1, 2017
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)
210,200,479 
209,332,493 
Ordinary shares, shares outstanding (in shares)
152,066,668 
155,833,304 
Treasury shares (in shares)
58,133,811 
53,499,189 
Consolidated Statements of Operations and Comprehensive Income (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Sep. 30, 2017
Oct. 1, 2016
Sep. 30, 2017
Oct. 1, 2016
Income Statement [Abstract]
 
 
 
 
Net sales
$ 1,108.6 
$ 1,049.4 
$ 2,032.1 
$ 2,006.7 
Licensing revenue
38.0 
38.8 
66.9 
69.4 
Total revenue
1,146.6 
1,088.2 
2,099.0 
2,076.1 
Cost of goods sold
455.8 
443.5 
833.5 
840.1 
Gross profit
690.8 
644.7 
1,265.5 
1,236.0 
Selling, general and administrative expenses
421.2 
379.7 
798.9 
733.7 
Depreciation and amortization
48.3 
56.4 
95.9 
106.8 
Impairment of long-lived assets
16.3 
4.9 
16.3 
4.9 
Restructuring and other charges
5.9 
5.9 
Total operating expenses
491.7 
441.0 
917.0 
845.4 
Income from operations
199.1 
203.7 
348.5 
390.6 
Other income, net
(0.3)
(0.3)
(0.9)
(0.6)
Interest expense, net
0.8 
1.4 
1.9 
1.7 
Foreign currency (gain) loss
(40.5)
(41.7)
1.3 
Income before provision for income taxes
239.1 
202.6 
389.2 
388.2 
Provision for income taxes
36.4 
41.9 
61.0 
81.2 
Net income
202.7 
160.7 
328.2 
307.0 
Less: Net loss attributable to noncontrolling interest
(0.2)
(0.2)
(0.2)
(1.0)
Net income attributable to MKHL
202.9 
160.9 
328.4 
308.0 
Weighted average ordinary shares outstanding:
 
 
 
 
Weighted average ordinary shares outstanding, basic (in shares)
151,781,340 
166,695,631 
153,134,119 
170,427,101 
Weighted average ordinary shares outstanding, diluted (in shares)
154,168,094 
168,839,967 
155,519,806 
172,726,859 
Net income per ordinary share attributable to MKHL:
 
 
 
 
Net income per ordinary share, basic (in dollars per share)
$ 1.34 
$ 0.97 
$ 2.14 
$ 1.81 
Net income per ordinary share, diluted (in dollars per share)
$ 1.32 
$ 0.95 
$ 2.11 
$ 1.78 
Statements of Comprehensive Income:
 
 
 
 
Net income
202.7 
160.7 
328.2 
307.0 
Foreign currency translation adjustments
15.0 
(0.3)
37.1 
(0.7)
Net (loss) gain on derivatives
(6.4)
(1.3)
(16.1)
1.8 
Comprehensive income
211.3 
159.1 
349.2 
308.1 
Less: Net loss attributable to noncontrolling interest
(0.2)
(0.2)
(0.2)
(1.0)
Less: Other comprehensive loss attributable to noncontrolling interest
(0.1)
Comprehensive income attributable to MKHL
$ 211.5 
$ 159.4 
$ 349.4 
$ 309.1 
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
 
 
 
 
$ (80.9)
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income
307.0 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
1.1 
 
 
 
Comprehensive income
308.1 
 
 
 
 
 
 
 
Ending balance at Oct. 01, 2016
 
 
 
 
(79.8)
 
 
 
Beginning balance at Apr. 01, 2017
1,595.0 
767.8 
(2,654.9)
(80.6)
3,560.3 
1,592.6 
2.4 
Beginning balance (in shares) at Apr. 01, 2017
209,332,493 
209,332,000 
 
 
 
 
 
 
Beginning balance (in shares) at Apr. 01, 2017
(53,499,189)
 
 
(53,499,000)
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income
328.2 
 
 
 
 
328.4 
328.4 
(0.2)
Other comprehensive income
21.0 
 
 
 
21.0 
 
21.0 
Comprehensive income
349.2 
 
 
 
 
 
349.4 
(0.2)
Partial repurchase of non-controlling interest
(0.5)
 
0.5 
 
 
 
0.5 
(1.0)
Vesting of restricted awards, net of forfeitures (in shares)
 
462,000 
 
 
 
 
 
 
Exercises of employee share options (in shares)
 
406,000 
 
 
 
 
 
 
Exercises of employee share options
3.0 
 
3.0 
 
 
 
3.0 
 
Equity compensation expense
21.1 
 
21.1 
 
 
 
21.1 
 
Purchase of treasury shares (in shares)
 
 
 
(4,635,000)
 
 
 
 
Purchase of treasury shares
(160.9)
 
 
(160.9)
 
 
(160.9)
 
Redemption of capital/dividends
(1.2)
 
 
 
 
(0.2)
(0.2)
(1.0)
Other
(0.5)
 
(0.5)
 
 
 
(0.5)
 
Ending balance at Sep. 30, 2017
$ 1,805.2 
$ 0 
$ 791.9 
$ (2,815.8)
$ (59.6)
$ 3,888.5 
$ 1,805.0 
$ 0.2 
Ending balance (in shares) at Sep. 30, 2017
210,200,479 
210,200,000 
 
 
 
 
 
 
Ending balance (in shares) at Sep. 30, 2017
(58,133,811)
 
 
(58,134,000)
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Sep. 30, 2017
Oct. 1, 2016
Cash flows from operating activities
 
 
Net income
$ 328.2 
$ 307.0 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
95.9 
106.8 
Equity compensation expense
21.1 
21.4 
Deferred income taxes
5.6 
5.5 
Amortization of deferred rent
0.1 
2.1 
Loss on disposal of fixed assets
2.1 
0.8 
Impairment of long-lived assets
16.3 
4.9 
Amortization of deferred financing costs
0.5 
0.4 
Tax deficit (benefit) on exercise of share options
0.1 
(2.8)
Foreign currency (gains) losses
(5.0)
1.4 
Change in assets and liabilities:
 
 
Receivables, net
(2.4)
45.2 
Inventories
(128.4)
(120.2)
Prepaid expenses and other current assets
(22.7)
(29.4)
Other assets
(0.6)
(4.0)
Accounts payable
(4.6)
38.3 
Accrued expenses and other current liabilities
21.2 
(44.6)
Other long-term liabilities
1.7 
15.0 
Net cash provided by operating activities
329.1 
347.8 
Cash flows from investing activities
 
 
Capital expenditures
(57.9)
(99.2)
Purchase of intangible assets
(5.7)
Unrealized gain on hedge related to acquisition of Jimmy Choo PLC
(36.7)
Cash paid for business acquisition, net of cash acquired
(1.4)
(480.6)
Net cash used in investing activities
(96.0)
(585.5)
Cash flows from financing activities
 
 
Borrowings under revolving credit agreement
632.9 
377.9 
Repayments under revolving credit agreement
(766.0)
(2.2)
Repurchases of treasury shares
(160.9)
(654.7)
Exercises of employee share options
3.0 
6.2 
Other financing activities
(0.1)
Net cash used in financing activities
(291.1)
(272.8)
Effect of exchange rate changes on cash and cash equivalents
6.6 
(5.1)
Net decrease in cash and cash equivalents and restricted cash
(51.4)
(515.6)
Beginning of period (including restricted cash of $1.9 million at April 1, 2017)
229.6 
702.0 
End of period
178.2 
186.4 
Supplemental disclosures of cash flow information
 
 
Cash paid for interest
2.2 
1.7 
Cash paid for income taxes
70.9 
103.0 
Supplemental disclosure of non-cash investing and financing activities
 
 
Accrued capital expenditures
$ 15.9 
$ 31.7 
Consolidated Statements of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
Apr. 1, 2017
Statement of Cash Flows [Abstract]
 
Restricted cash
$ 1.9 
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 and accessories bearing the Michael Kors tradename and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” and various other related trademarks and logos. The Company’s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores and lifestyle stores, including concessions, and outlet stores, located primarily in the Americas (United States, Canada and Latin America, excluding Brazil), Europe and Asia, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas, Europe and Asia, as well as from our geographic licensees. The Company licenses its trademarks on products such as watches, jewelry, eyewear, fragrances, beauty, belts, coats, cold weather accessories, men’s suits, swimwear, socks, furs and ties, as well as through geographic licenses.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of September 30, 2017 and for the three and six months ended September 30, 2017 and October 1, 2016 are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended April 1, 2017, as filed with the Securities and Exchange Commission on May 31, 2017, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
On May 31, 2016, the Company acquired 100% of the stock of its previously licensed business in the Greater China region, Michael Kors (HK) Limited and Subsidiaries ("MKHKL"), which has operations in China, Hong Kong, Macau and Taiwan. As a result, the Company began consolidating MKHKL into its operations beginning on June 1, 2016. See Note 3 for additional information.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three and six months ended September 30, 2017 and October 1, 2016, 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 consolidated financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
Seasonality
The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company’s wholesale segment generally experiences its lowest sales in its first fiscal quarter. The Company’s retail segment generally experiences greater sales during its third fiscal quarter as a result of holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to the other three quarters.

Derivative Financial Instruments
The Company uses forward currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
In connection with the July 25, 2017 recommended cash offer for the entire issued and to be issued share capital of Jimmy Choo PLC, a public company organized under the laws of England and Wales and its subsidiaries (collectively, "Jimmy Choo"), the Company entered into a forward foreign currency exchange contract with a notional amount of £1.115 billion to mitigate its foreign currency exchange risk through the expected closing date of the acquisition. This derivative contract was not designated as an accounting hedge. Therefore, changes in fair value are recorded to foreign currency (gain) loss in the Company's consolidated statement of operations. The Company’s accounting policy is to classify cash flows from derivative instruments that are accounted for as cash flow hedges in the same category as the cash flows from the items being hedged. Accordingly, the Company classified the unrealized gain relating to this derivative instrument within cash flows from investing activities.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, or within operating activities for contracts related to inventory purchases.
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
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to MKHL
$
202.9

 
$
160.9

 
$
328.4

 
$
308.0

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
151,781,340

 
166,695,631

 
153,134,119

 
170,427,101

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options, restricted shares/units, and performance restricted share units
2,386,754

 
2,144,336

 
2,385,687

 
2,299,758

Diluted weighted average shares
154,168,094

 
168,839,967

 
155,519,806

 
172,726,859

 
 
 
 
 
 
 
 
Basic net income per share
$
1.34

 
$
0.97

 
$
2.14

 
$
1.81

Diluted net income per share
$
1.32

 
$
0.95

 
$
2.11

 
$
1.78


During the three and six months ended September 30, 2017, share equivalents of 2,782,083 shares and 2,633,955 shares, respectively, have been excluded from the above calculations due to their anti-dilutive effect. Share equivalents of 2,000,778 shares and 2,049,980 shares, respectively, have been excluded from the above calculations during the three and six months ended October 1, 2016.
Please refer to Note 2 in the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2017 for a complete disclosure of the Company's significant accounting policies.
Recently Adopted Accounting Pronouncements
Share-Based Compensation
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies accounting and presentation of share-based payments, primarily relating to the recognition and classification of excess tax benefits, accounting for forfeitures and tax withholding requirements. The Company adopted ASU 2016-09 during the first quarter of Fiscal 2018, as required. Accordingly, during the three and six months ended September 30, 2017, excess tax benefits of $5.0 million and $0.1 million, respectively, which would have been previously reflected within additional paid-in capital, were recognized within the Company's provision of income taxes. This change is expected to increase volatility in future provisions for income taxes. In addition, the Company eliminated windfall tax benefits from the treasury stock method calculation used to compute its diluted earnings per share. Both of the above changes have been adopted on a prospective basis, whereas cash flows related to excess tax benefits, previously reflected within financing activities, have been presented within operating activities within the Company's consolidated statements of cash flows on a retrospective basis. Cash flows related to excess tax benefits were $2.8 million during the six months ended October 1, 2016. The Company continues to reflect estimated forfeitures in its share-based compensation expense.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
Hedge Accounting
On August 28, 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities." The new standard is intended to improve and simplify rules relating to hedge accounting, including the elimination of periodic hedge ineffectiveness, recognition and presentation of components excluded from hedge effectiveness assessment, the ability to elect to perform subsequent effectiveness assessments qualitatively, and other provisions designed to provide more transparency around the economics of a company's hedging strategy. ASU 2017-12 is effective for the Company in Fiscal 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2017-12 on its consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s Fiscal 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers" issued in December 2016, ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" issued in May 2016, ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" issued in April 2016, and ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" issued in March 2016 . The Company will consider this guidance in evaluating the impact of ASU 2014-09.
Most of our business is comprised of retail and wholesale operations, where revenue is recognized at a point of time. The Company has completed the initial assessment of the new standard and is currently progressing in its implementation. While the evaluation process is not complete, based on our assessment to date, the Company believes that some of the potential impacts of implementing this standard will include the timing of revenue recognition for its licensing royalties, recognition of breakage revenue for unredeemed gift cards, as well as expanded financial statement disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The Company currently anticipates adopting this standard using the modified retrospective method with the cumulative adjustment to retained earnings recorded during the first quarter of Fiscal 2019.
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize a lease liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is effective beginning with the Company's Fiscal 2020, with early adoption permitted, and must be implemented using a modified retrospective approach for all leases existing at, or entered into after the beginning of the earliest comparative period that is presented in the financial statements. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements but expects that the adoption of this standard will result in a significant increase in assets and liabilities on its consolidated balance sheets.
Goodwill
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment by eliminating Step 2 of the goodwill impairment analysis, while retaining the option to perform an initial qualitative assessment for a reporting unit to determine if a quantitative impairment test is required. ASU 2017-04 is effective in the Company’s Fiscal 2021 with early adoption permitted and should be applied on a prospective basis. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements.
Share-Based Compensation
In May 2017, the FASB issued ASU No. 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting", which simplifies modification accounting for entities that change the terms or conditions of share-based awards. ASU 2017-09 is effective for the Company’s Fiscal 2019 with early adoption permitted and is required to be applied on a prospective basis. The Company will evaluate the impact of ASU 2017-09 on any future changes to the terms and conditions of its share-based compensation awards.
Acquisitions
Acquisitions
Acquisitions
Acquisition of Jimmy Choo PLC
On July 25, 2017, the Company announced a recommended cash offer for the entire issued and to be issued share capital of Jimmy Choo, whereby JAG Acquisitions (UK) Limited ("Michael Kors Bidco"), the Company's wholly-owned subsidiary, will acquire all of Jimmy Choo's issued and to be issued shares at a purchase price of 230 pence in cash per share, or approximately£896 million. The total transaction value is estimated to be approximately $1.40 billion, including the refinancing of existing debt obligations. The transaction closed on November 1, 2017.
On July 25, 2017, in connection with the intended acquisition of Jimmy Choo, the Company entered into a forward foreign currency exchange derivative contract with a notional amount of £1.115 billion to mitigate its foreign currency exchange risk through the expected closing date of the acquisition. This derivative contract was not designated as an accounting hedge. Therefore, changes in the fair value are recorded to foreign currency loss in the Company's consolidated statements of operations. As of September 30, 2017, the Company had derivative assets of $36.7 million recorded in its consolidated balance sheet relating to this derivative contract.
Please refer to Note 12 for additional information relating to the derivative contract and Note 9 and Note 19 for information relating to financing arrangements and the acquisition of Jimmy Choo.
Acquisition of Michael Kors (HK) Limited
On May 31, 2016, the Company acquired 100% of the stock of Michael Kors (HK) Limited and its subsidiaries, its licensees in the Greater China region, which includes China, Hong Kong, Macau and Taiwan. The Company believes that having direct control of this business will allow it to better manage opportunities and capitalize on the growth potential in the region. This acquisition was funded by a cash payment of $500.0 million, subject to certain purchase price adjustments. The Company accounted for the acquisition as a business combination. The following table summarized the fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
 
May 31, 2016
Cash and cash equivalents
$
19.4

Accounts receivable
22.3

Inventory
36.1

Other current assets
5.5

Current assets
83.3

Property and equipment
46.6

Goodwill
96.5

Reacquired rights
400.4

Favorable lease assets
1.8

Customer relationships
0.7

Deferred tax assets
7.8

Other assets
6.6

Total assets acquired
$
643.7

 
 
Accounts payable
$
8.9

Short-term debt
5.8

Other current liabilities
27.8

Current liabilities
42.5

Unfavorable lease liabilities
4.8

Deferred tax liabilities
92.3

Other liabilities
4.1

Total liabilities assumed
$
143.7

 
 
Fair value of net assets acquired
$
500.0

Fair value of acquisition consideration
$
500.0


The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, with the $96.5 million difference between the purchase price over the net identifiable tangible and intangible assets acquired allocated to goodwill, which is not deductible for tax purposes. As part of this acquisition, the Company reacquired the rights to use its trademarks and to import, sell, advertise and promote certain of its products in the licensed territories, which were previously granted to its licensees in the Greater China region. As such, the Company recognized reacquired rights as a separate intangible asset from goodwill, which will be amortized through March 31, 2041, the original expiration date of its license agreement in the Greater China region. In addition, the Company recognized customer relationship intangible assets associated with wholesale customers, which will be amortized over ten years. The favorable lease assets and unfavorable lease liabilities have been separately recorded in the Company's financial statements and are recognized as rent expense and a reduction in rent expense, respectively, over the remaining term of the related lease agreements.
MKHKL's results of operations have been included in our consolidated financial statements beginning on June 1, 2016. MKHKL contributed total revenue of $66.9 million and $136.7 million, respectively, for the three and six months ended September 30, 2017, and net income of nil and $2.4 million, respectively, for the three and six months ended September 30, 2017. During the three months ended October 1, 2016, MKHKL contributed total revenue of $51.4 million and net loss of $3.8 million, 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 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
 
October 1, 2016
Pro-forma total revenue
$
1,088.2

 
$
2,102.5

Pro-forma net income
157.8

 
313.0

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

 
$
1.84

Diluted
$
0.93

 
$
1.81


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 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.
Other Acquisitions
During the three months ended July 1, 2017, the Company repurchased a portion of the non-controlling interest in its Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries ("MK Panama") for approximately $0.5 million. As of September 30, 2017, the Company has a 75% ownership interest in MK Panama.
Receivables, net
Receivables, net
Receivables, net
Receivables, net consist of (in millions):
 
September 30,
2017
 
April 1,
2017
Trade receivables:
 
 
 
Credit risk assumed by insured
$
308.2

 
$
294.0

Credit risk retained by Company
47.3

 
63.8

Receivables due from licensees
19.0

 
11.9

 
374.5

 
369.7

Less: allowances
(100.0
)
 
(103.9
)
 
$
274.5

 
$
265.8


Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on wholesale customers' sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in net sales.
The Company's allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for doubtful accounts as of September 30, 2017 was $3.7 million and $0.9 million as of April 1, 2017.
Property and Equipment, net
Property and Equipment, net
Property and Equipment, net
Property and equipment, net consist of (in millions):
 
September 30,
2017
 
April 1,
2017
Leasehold improvements
$
535.3

 
$
507.9

In-store shops
263.7

 
256.0

Furniture and fixtures
250.5

 
244.1

Computer equipment and software
248.5

 
226.2

Equipment
108.4

 
104.4

Building
45.0

 
40.6

Land
15.5

 
14.0

 
1,466.9

 
1,393.2

Less: accumulated depreciation and amortization
(933.9
)
 
(833.9
)
 
533.0

 
559.3

Construction-in-progress
29.7

 
32.2

 
$
562.7

 
$
591.5


Depreciation and amortization of property and equipment for the three months ended September 30, 2017 and October 1, 2016 was $43.3 million and $50.2 million, respectively, and was $85.8 million and $97.1 million, respectively, for the six months ended September 30, 2017 and October 1, 2016. During the three and six months ended September 30, 2017, the Company recorded fixed asset impairment charges of $11.9 million, which were related to underperforming retail store locations, some of which will be closed as part of our previously announced Retail Fleet Optimization Plan, as defined in Note 8. During the three and six months ended October 1, 2016, the Company recorded fixed asset impairment charges of $4.9 million, which were related to underperforming retail store locations.
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):
 
September 30,
2017
 
April 1,
2017
Reacquired Rights
$
400.4

 
$
400.4

Trademarks
23.0

 
23.0

Lease Rights
80.1

 
74.2

Customer Relationships
5.0

 
5.0

 
508.5

 
502.6

Less: accumulated amortization
(102.8
)
 
(84.5
)
 
$
405.7

 
$
418.1


Amortization expense for the Company's finite-lived intangibles assets for the three months ended September 30, 2017 and October 1, 2016 was $5.0 million and $6.2 million, respectively, and was $10.1 million and $9.7 million, respectively, for the six months ended September 30, 2017 and October 1, 2016. During the three and six months ended September 30, 2017, the Company recorded impairment charges of $4.4 million relating to its intangible assets (See Note 11 for further information).
The Company's goodwill balance as of September 30, 2017 and April 1, 2017 was $119.7 million. There were no goodwill impairment charges recorded during the three and six months ended September 30, 2017 and October 1, 2016.
Current Assets and Current Liabilities
Current Assets and Current Liabilities
Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):    
 
September 30,
2017
 
April 1,
2017
Prepaid taxes
$
87.2

 
$
56.6

Unrealized gains on forward foreign exchange contracts
36.8

 
4.7

Prepaid rent
19.9

 
21.7

Leasehold incentive receivable
9.1

 
12.0

Prepaid insurance
4.5

 
3.2

Restricted cash

 
1.9

Other
24.0

 
21.8

 
$
181.5

 
$
121.9


Accrued expenses and other current liabilities consist of the following (in millions):
 
September 30,
2017
 
April 1,
2017
Other taxes payable
$
42.0

 
$
29.2

Accrued rent
25.3

 
21.5

Accrued advertising and marketing
23.5

 
10.7

Accrued capital expenditures
15.6

 
20.5

Professional services
14.0

 
7.1

Gift cards and retail store credits
12.6

 
12.9

Unrealized loss on forward foreign currency exchange contracts
11.3

 
0.4

Advance royalties
7.1

 
5.0

Other
37.3

 
27.7

 
$
188.7

 
$
135.0

Restructuring and Other Charges
Restructuring and Other Charges
Restructuring and Other Charges
On May 31, 2017, the Company announced that it plans to close between 100 and 125 of its full-price retail stores over the next two years, in order to improve the profitability of its retail store fleet ("Retail Fleet Optimization Plan"). Over this time period, the Company expects to incur approximately $100 - $125 million of one-time costs associated with these store closures. Collectively, the Company anticipates ongoing annual savings of approximately $60 million as a result of store closures and lower depreciation and amortization expense as a result of the impairment charges recorded during Fiscal 2017.
During the six months ended September 30, 2017, the Company finalized plans to close 38 of its retail stores under the Retail Fleet Optimization Plan, 10 of which have been closed. There were no material restructuring charges recorded during the first quarter of Fiscal 2018. The below table presents a summary of cash charges recorded in connection with this plan (in millions):
 
Six Months Ended
 
September 30,
2017
Lease termination and store closure costs
$
5.3

Severance and benefits costs
0.6

Total restructuring charges
$
5.9


During the six months ended September 30, 2017, the Company made payments of $5.0 million, primarily relating to lease termination costs. As of September 30, 2017, the Company's remaining restructuring liability was $0.9 million.
Debt Obligations
Debt Obligations
Debt Obligations
Bridge Credit Agreement
On July 25, 2017, the Company and certain of its subsidiaries, as loan parties, entered into a bridge credit agreement providing for a term loan facility in the principal amount of £1.115 billion with the lenders from time to time party thereto and JPMorgan Europe Limited, as administrative agent. In connection with Term Loan Facility provided for under the 2017 Credit Facility, as described and defined below, the commitments under the bridge credit agreement were reduced to approximately £344.2 million as of September 30, 2017 and eliminated in their entirety as a result of the October 20, 2017 issuance of $450.0 million 4.000% senior notes due 2024. Please refer to Note 19 for additional information. As a result, the bridge credit agreement was terminated.
Senior Unsecured Revolving Credit Facility
On August 22, 2017, the Company entered into a second amended and restated senior unsecured credit facility (as amended, the "2017 Credit Facility") with, among others, JPMorgan Chase Bank, N.A., as administrative agent, which replaced its prior 2015 senior unsecured revolving credit facility ("2015 Credit Facility"). The Company and its U.S., Canadian, Dutch and Swiss subsidiaries are the borrowers under the 2017 Credit Facility. The borrowers and certain material subsidiaries of the Company provide unsecured guarantees of the 2017 Credit Facility. The 2017 Credit Facility provides for a $1.0 billion revolving credit facility (the “Revolving Credit Facility”), which may be denominated in U.S. Dollars and other currencies, including Euros, Canadian Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The Revolving Credit Facility also provides sub-facilities for the issuance of letters of credit of up to $75.0 million and swing line loans of up to $50.0 million. The 2017 Credit Facility also provides for a $1.0 billion term loan facility (the “Term Loan Facility”) to finance a portion of the purchase price of the Company's acquisition of Jimmy Choo. The Revolving Credit Facility expires on August 22, 2022. The Term Loan Facility is divided into two tranches, a $600.0 million tranche that matures on the third anniversary of the initial borrowing of the term loans and a $400.0 million tranche that matures on the fifth anniversary of the initial borrowing of the term loans. The Company has the ability to expand its borrowing availability under the 2017 Credit Facility in the form of revolving commitments or term loans by up to an additional $500.0 million, subject to the agreement of the participating lenders and certain other customary conditions.
On November 1, 2017, the Company borrowed $1.0 billion under the Term Loan Facility to pay a portion of the acquisition consideration for Jimmy Choo and other fees and expenses related thereto (please refer to Note 19 for additional information). The loans under the Term Loan Facility are required to be repaid on the last business day of March, June, September and December of each year, commencing after the last business day of the first full fiscal quarter after the initial borrowing, in installments equal to 2.50% of the aggregate original principal amount of the term loans.
Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at the following rates:
for loans denominated in U.S. Dollars, an alternate base rate, which is the greatest of: (a) the prime rate publicly announced from time to time by JPMorgan Chase, (b) the greater of the federal funds effective rate and the Federal Reserve Bank of New York overnight bank funding rate and zero, plus 50 basis points, and (c) the greater of the one-month London Interbank Offered Rate adjusted for statutory reserve requirements for Eurocurrency liabilities (“Adjusted LIBOR”) and zero, plus 100 basis points, in each case, plus an applicable margin based on the Company’s public debt ratings;
for loans denominated other than in Canadian Dollars, the greater of Adjusted LIBOR for the applicable interest period and zero, plus an applicable margin based on the Company’s public debt rating;
for loans denominated in Canadian Dollars, the Canadian prime rate, which is the greater of the PRIMCAN Index rate and 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 public debt ratings; or
for loans denominated in Canadian Dollars, the average CDOR rate for the applicable interest period, plus 0.10% per annum, plus an applicable margin based on the Company’s public debt ratings.
Borrowings under the Term Loan Facility bear interest, at the Company’s option, at (a) the alternate base rate plus an applicable margin based on the Company’s public debt ratings; or (b) the greater of Adjusted LIBOR for the applicable interest period and zero, plus an applicable margin based on the Company’s public debt ratings.
The Revolving Credit Facility also provides for an annual administration fee and a commitment fee equal to 0.10% to 0.25% per annum, based on the Company's public debt ratings, applied to the average daily unused amount of the Revolving Credit Facility. The Term Loan Facility provides for a commitment fee equal to 0.10% to 0.25% per annum, based on the Company's public debt ratings, applied to the undrawn amount of the Term Loan Facility, from September 23, 2017 until the term loans are fully drawn or the commitments under the Term Loan Facility terminate or expire. Loans under the 2017 Credit facility may be repaid and commitments may be terminated or reduced by the borrowers without premium or penalty other than the customary breakage costs with respect to loans bearing interest based on Adjusted LIBOR or the CDOR rate.
The 2017 Credit Facility requires the Company to maintain a leverage ratio as of the end of each fiscal quarter of no greater than 3.5 to 1. Such leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus six times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR (as defined below) for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus income tax expense, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash charges, subject to certain additions and deductions. The 2017 Credit Facility also includes covenants that limit additional indebtedness, guarantees, liens, acquisitions and other investments and cash dividends that are customary for financings of this type. 
The 2017 Credit Facility contains events of default customary for financings of this type, including, but not limited to, payment of defaults, material inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy or insolvency, certain events under ERISA, material judgments, actual or asserted failure of any guaranty supporting the 2017 Credit Facility to be in full force and effect, and changes of control. If such an event of default occurs, the lenders under the 2017 Credit Facility would be entitled to take various actions, including, but not limited to, terminating the commitments and accelerating amounts outstanding under the 2017 Credit Facility, subject to "certain funds" limitations in connection with the transaction governing the Term Loan Facility.
As of September 30, 2017, the Company had no borrowings outstanding under the 2017 Credit Facility. Stand-by letters of credit of $11.3 million were outstanding as of September 30, 2017. There were borrowings of $127.3 million outstanding under the prior 2015 Credit Facility as of April 1, 2017, which were recorded within short-term debt in the Company's balance sheet as of April 1, 2017. At September 30, 2017, the amount available for future borrowings under the Revolving Credit Facility was $988.7 million. In addition, at September 30, 2017, the Company had a $1.0 billion Term Loan Facility, which was fully drawn on November 1, 2017 to pay a portion of the purchase price of the Company's acquisition of Jimmy Choo.
Please refer to Note 19 for additional information regarding debt-related transactions, primarily associated with the acquisition of Jimmy Choo subsequent to the balance sheet date.
Hong Kong Credit Facility
In December 2016, the Company's Hong Kong subsidiary, MKHKL, renewed its uncommitted credit facility ("HK Credit Facility") with HSBC (the "Bank"), which may be used to fund general working capital needs of MKHKL through November 30, 2017, subject to the Bank's discretion. The HK Credit Facility provides MKHKL with a revolving line of credit of up to 100.0 million Hong Kong Dollars (approximately $12.8 million), and may be used to support bank guarantees. In addition, this credit facility provides for a business card facility of up to 0.4 million Hong Kong Dollars (less than $0.1 million). Borrowings under the HK Credit Facility must be made in increments of at least 5.0 million Hong Kong Dollars and bear interest at the Hong Kong Interbank Offered Rate ("HIBOR") plus 150 basis points. As of April 1, 2017, borrowings outstanding under the HK Credit facility were 45.0 million Hong Kong Dollars (approximately $5.8 million), which were recorded within short-term debt in the Company's consolidated balance sheet as of April 1, 2017. As of September 30, 2017, there were no borrowings outstanding under the HK Credit Facility. As of September 30, 2017, bank guarantees supported by this facility were 11.8 million Hong Kong Dollars (approximately $1.5 million). At September 30, 2017, the amount available for future borrowings under the Hong Kong Credit Facility was 88.2 million Hong Kong Dollars (approximately $11.3 million).
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 Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2017 for a detailed disclosure of other commitments and contractual obligations as of April 1, 2017.
Please refer to Note 3 and Note 19 for information regarding the Company's acquisition of Jimmy Choo, which was completed on November 1, 2017.
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-base (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability
to access at the measurement date.
Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the
asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

At September 30, 2017 and April 1, 2017, the fair values of the Company’s foreign currency forward contracts, the Company’s only derivative instruments, were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or liabilities to the Company, as detailed in Note 12.
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in millions):
 
Fair value at September 30, 2017 using:
 
Fair value at April 1, 2017 using:
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Forward foreign currency exchange contracts - assets
$

 
$
36.8

 
$

 
$

 
$
4.7

 
$

Forward foreign currency exchange contracts - liabilities
$

 
$
11.3

 
$

 
$

 
$
0.4

 
$


The Company’s cash and cash equivalents, accounts receivable, accounts payable and restructuring liabilities are recorded at carrying value, which approximates fair value. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which resembles fair value due to the short-term nature of such borrowings.
Non-Financial Assets and Liabilities
The Company's non-financial assets include goodwill, intangible assets and property and equipment. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. The Company's goodwill is assessed for impairment at least annually during the fourth quarter of each fiscal year, while its other long-lived assets, including fixed assets and finite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The fair values of these assets are determined based on Level 3 measurements using the Company's best estimates of the amount and timing of future cash flows, based on historical experience, market conditions, current trends and performance expectations.
The following table details the carrying values and fair values of the Company's long-lived assets that have been impaired during the three months and six months ended September 30, 2017 (in millions):
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
Property and equipment
$
13.4

 
$
1.5

 
$
11.9

Lease Rights
3.6

 
0.2

 
3.4

Customer relationships
1.0

 

 
1.0

Total
$
18.0

 
$
1.7

 
$
16.3


During the three months and six 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.
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 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 September 30, 2017 and April 1, 2017 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
September 30,
2017
 
April 1,
2017
 
September 30,
2017
 
April 1,
2017
 
September 30,
2017
 
April 1,
2017
Designated forward foreign currency exchange contracts
$
176.6

 
$
167.5

 
$
0.1

 
$
4.7

 
$
11.3

 
$
0.4

Undesignated forward foreign currency exchange contracts (3)
1,468.6

 

 
36.7

 

 

 

Total
$
1,645.2

 
$
167.5

 
$
36.8

 
$
4.7

 
$
11.3

 
$
0.4

 
 
(1) 
Recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
(2) 
Recorded within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
(3) 
On July 25, 2017, in connection with the intended acquisition of Jimmy Choo, the Company entered into a forward foreign currency exchange contract with a notional amount of £1.115 billion to mitigate its foreign currency exchange risk through the expected closing date of the acquisition. This derivative contract was not designated as an accounting hedge. Therefore, changes in fair value are recorded to foreign currency (gain) loss in the Company's consolidated statement of operations.
The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheet on a gross basis as shown in the above table. However, as of September 30, 2017 and April 1, 2017, the Company had derivative assets of $0.1 million and $4.7 million, respectively, and derivative liabilities of $11.3 million and $0.3 million, respectively, that were subject to master netting arrangements. If the Company were to offset and record the asset and liability balances for its derivative instruments on a net basis in accordance with the terms of its master netting arrangements, which provide for the right to setoff amounts for similar transactions denominated in the same currencies, its net derivative liabilities as of September 30, 2017 and April 1, 2017 would be $11.2 million and $0.2 million, respectively, and it would have derivative net assets of $4.5 million as of April 1, 2017. The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties.
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income (loss) into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations and comprehensive income (loss). The following table summarizes the impact of the effective portion of gains and losses on the forward contracts designated as hedges (in millions):
 
Three Months Ended
 
September 30, 2017
 
October 1, 2016
 
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
$
(6.0
)
 
$
1.3

 
$
(1.2
)
 
$
0.3

 
Six Months Ended
 
September 30, 2017
 
October 1, 2016
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward foreign currency exchange contracts
$
(15.3
)
 
$
3.2

 
$
2.1

 
$
0.2

Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive loss will be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turnover. These amounts are subject to fluctuations in the applicable currency exchange rates.
During the three and six months ended September 30, 2017, the Company recognized net gains of $36.6 million and $35.2 million, respectively, related to changes in the fair value of undesignated forward currency exchange contracts within foreign currency (gain) loss in the Company’s consolidated statement of operations, $36.7 million of which related to the derivative contract entered into during the three months ended September 30, 2017 to mitigate foreign currency exchange risk through the expected closing date of the Jimmy Choo acquisition. During the three and six months ended October 1, 2016, the Company recognized net gains of $0.1 million and $0.3 million, respectively.
Shareholders' Equity
Shareholders' Equity
Shareholders’ Equity
Share Repurchase Program
On May 25, 2017, the Company's Board of Directors authorized a $1.0 billion share repurchase program. During the six months ended September 30, 2017 and October 1, 2016, the Company repurchased 4,543,500 shares and 13,044,832 shares, respectively, at a cost of $157.8 million and $650.0 million, respectively, under its share-repurchase programs through open market transactions. As of September 30, 2017, the remaining availability under the Company’s share repurchase program was $842.2 million. Share repurchases are subject to market conditions and the Company's business priorities. The Company currently does not plan to repurchase additional shares for the remainder of Fiscal 2018 and has not repurchased shares under its share repurchase program during the three months ended September 30, 2017.
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 September 30, 2017 and October 1, 2016, the Company withheld 91,122 shares and 99,739 shares, respectively, at a cost of $3.1 million and $4.7 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)
The following table details changes in the components of accumulated other comprehensive income (loss) ("AOCI"), net of taxes for the six months ended September 30, 2017 and October 1, 2016, respectively (in millions):
 
Foreign Currency
Translation
(Losses) Gains
 
Net (Losses) Gains on
Derivatives
(1)
 
Other Comprehensive (Loss) Income Attributable to MKHL
 
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
 
Total Accumulated Other Comprehensive (Loss) Income
Balance at April 2, 2016
$
(77.7
)
 
$
(3.2
)
 
$
(80.9
)
 
$
0.1

 
$
(80.8
)
Other comprehensive (loss) income before reclassifications (2)
(0.7
)
 
1.9

 
1.2

 

 
1.2

Less: amounts reclassified from AOCI to earnings (3)

 
0.1

 
0.1

 

 
0.1

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

 
1.1

 

 
1.1

Balance at October 1, 2016
$
(78.4
)
 
$
(1.4
)
 
$
(79.8
)
 
$
0.1

 
$
(79.7
)
 
 
 
 
 
 
 
 
 
 
Balance at April 1, 2017
$
(86.1
)
 
$
5.5

 
$
(80.6
)
 
$
(0.3
)
 
$
(80.9
)
Other comprehensive income (loss) before reclassifications (2)
37.1

 
(13.2
)
 
23.9

 

 
23.9

Less: amounts reclassified from AOCI to earnings (3)

 
2.9

 
2.9

 

 
2.9

Other comprehensive income (loss) net of tax
37.1

 
(16.1
)
 
21.0

 

 
21.0

Balance at September 30, 2017
$
(49.0
)
 
$
(10.6
)
 
$
(59.6
)
 
$
(0.3
)
 
$
(59.9
)
_________________________
(1) 
Accumulated other comprehensive income balance related to net gains on derivative financial instruments as of September 30, 2017 and April 1, 2017 is net of a tax benefit of $1.6 million and a tax provision $0.8 million, respectively. Other comprehensive income (loss) before reclassifications related to derivative financial instruments for the six months ended September 30, 2017 is net of a tax provision of $2.1 million. All other tax effects were not material for the periods presented.
(2) 
Foreign currency translation losses for the six months ended September 30, 2017 include net losses of $2.8 million on intra-entity transactions that are of a long-term investment nature.
(3) 
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within cost of goods sold in the Company’s consolidated statements of operations.
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 September 30, 2017, there were no shares available to grant equity awards under the 2008 Plan. The Incentive Plan allows for grants of share options, restricted shares and restricted share units, and other equity awards, and authorizes a total issuance of up to 15,246,000 ordinary shares. At September 30, 2017, there were 7,447,720 ordinary shares available for future grants of equity awards under the Incentive Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the Incentive Plan generally expire seven years from the date of the grant.
The following table summarizes the Company's share-based compensation activity during the six months ended September 30, 2017:
 
Options
 
Restricted Shares
 
Service-Based RSUs
 
Performance-Based RSUs
Outstanding/Unvested at April 1, 2017
4,791,045

 
185,425

 
1,470,767

 
401,777

Granted
208,264

 

 
1,086,859

 
139,562

Exercised/Vested
(405,951
)
 
(102,908
)
 
(385,286
)
 
(81,212
)
Decrease due to performance condition

 

 

 
(12,891
)
Canceled/forfeited
(58,309
)
 
(4,076
)
 
(36,688
)
 

Outstanding/Unvested at September 30, 2017
4,535,049

 
78,441

 
2,135,652

 
447,236


The weighted average grant date fair value for options granted during the six months ended September 30, 2017 and October 1, 2016 was $11.59 and $13.79, respectively. The weighted average grant date fair value of service-based and performance-based RSUs granted during the six months ended September 30, 2017 was $34.94 and $34.68, respectively and $50.24 and $49.88, respectively, during the six months ended October 1, 2016.
The Company uses the Black-Scholes valuation model to estimate the grant date fair value of its share option awards. Beginning in Fiscal 2018, the Company started using its own historical experience in determining the expected holding period and volatility of its time-based share option awards. In prior periods, the Company used the simplified method for determining the expected life of its options and average volatility rates of similar actively traded companies over the estimated holding period, due to insufficient historical option exercise experience as a public company. The following table presents assumptions used to estimate the fair value of options granted during the six months ended September 30, 2017 and October 1, 2016:
 
Six Months Ended
 
September 30
2017
 
October 1
2016
Expected dividend yield
0.0
%
 
0.0
%
Volatility factor
36.3
%
 
30.1
%
Weighted average risk-free interest rate
1.8
%
 
1.1
%
Expected life of option
4.69 years

 
4.75 years


Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for the three and six months ended September 30, 2017 and October 1, 2016 (in millions):
 
Three Months Ended
 
Six Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Share-based compensation expense
$
10.3

 
$
11.6

 
$
21.1

 
$
21.4

Tax benefits related to share-based compensation expense
$
3.2

 
$
3.8

 
$
6.8

 
$
7.5


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 September 30, 2017 is approximately $8.7 million.
Please refer to Note 15 in the Company's Fiscal 2017 Annual Report on Form 10-K for additional information relating to the Company's share-based compensation awards.
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, excluding Brazil), Europe, and Asia, as well as the Company’s e-commerce sales. Products sold through the Retail segment include women’s apparel, accessories (which include handbags and small leather goods such as wallets), men's apparel, footwear and licensed products, such as watches, jewelry, fragrances and beauty, and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout the Americas, Europe and Asia. Products sold through the Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. We also have wholesale arrangements pursuant to which we sell products to our geographic licensees. The Licensing segment includes royalties earned on licensed products and use of the Company’s trademarks, and rights granted to third parties for the right to operate retail stores and/or sell the Company’s products in certain geographic regions such as Brazil, the Middle East, Eastern Europe, certain parts of Asia and Australia. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Corporate overhead expenses are allocated to the segments based upon specific usage or other allocation methods.
As of September 30, 2017 and April 1, 2017, the Company's goodwill balance of $119.7 million was allocated $91.9 million, $25.9 million and $1.9 million to the Company's Retail, Wholesale and Licensing segments, respectively. The Company does not have identifiable assets separated by segment.
The following table presents the key performance information of the Company’s reportable segments (in millions):
 
Three Months Ended
 
Six Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Revenue:
 
 
 
 
 
 
 
Net sales: Retail
$
645.0

 
$
597.2

 
$
1,264.9

 
$
1,160.1

Wholesale
463.6

 
452.2

 
767.2

 
846.6

Licensing
38.0

 
38.8

 
66.9

 
69.4

Total revenue
$
1,146.6

 
$
1,088.2

 
$
2,099.0

 
$
2,076.1

 
 
 
 
 
 
 
 
Income from operations:
 
 
 
 
 
 
 
Retail
$
69.0

 
$
69.6

 
$
161.2

 
$
136.2

Wholesale
119.6

 
122.0

 
163.1

 
227.0

Licensing
10.5

 
12.1

 
24.2

 
27.4

Income from operations
$
199.1

 
$
203.7

 
$
348.5

 
$
390.6


Depreciation and amortization expense for each segment are as follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Depreciation and amortization:
 
 
 
 
 
 
 
Retail
$
33.1

 
$
40.5

 
$
65.1

 
$
74.5

Wholesale
14.6

 
15.3

 
29.6

 
31.2

Licensing
0.6

 
0.6

 
1.2

 
1.1

Total depreciation and amortization
$
48.3

 
$
56.4

 
$
95.9

 
$
106.8


During the three and six months ended September 30, 2017, the Company recorded impairment charges of $16.3 million and restructuring and other charges of $5.9 million relating to its retail operations. Please refer to Notes 5, 6 and 11 for additional information. During the three and six months ended October 1, 2016, the Company recorded impairment charges of $4.9 million relating to its retail operations.
Total revenue (as recognized based on country of origin), and long-lived assets by geographic location are as follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Revenue:
 
 
 
 
 
 
 
       The Americas (U.S., Canada and Latin America)(1)
$
751.9

 
$
745.1

 
$
1,386.0

 
$
1,435.9

Europe
270.7

 
248.0

 
471.9

 
472.0

Asia
124.0

 
95.1

 
241.1

 
168.2

Total revenue
$
1,146.6

 
$
1,088.2

 
$
2,099.0

 
$
2,076.1


 
As of
 
September 30,
2017
 
April 1,
2017
Long-lived assets:
 
 
 
       The Americas (U.S., Canada and Latin America)(1)
$
321.4

 
$
356.1

Europe
201.1

 
197.7

Asia
445.9

 
455.8

Total Long-lived assets
$
968.4

 
$
1,009.6

 
 
(1) 
Total revenues earned in the U.S. were $694.0 million and $1.281 billion, respectively, for the three and six months ended September 30, 2017 and $693.7 million and $1.335 billion for the three and six months ended October 1, 2016. Long-lived assets located in the U.S. as of September 30, 2017 and April 1, 2017 were $295.3 million and $328.8 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 minimum sales benchmarks were not met. Royalties earned under these agreements were approximately $1.2 million during the two months ended May 31, 2016 preceding the acquisition. These royalties were driven by Licensee sales (of the Company’s goods) to their customers of approximately $28.9 million during the two months ended May 31, 2016 preceding the acquisition. In addition, the Company sold certain inventory items to the Licensees through its wholesale segment at terms consistent with those of similar licensees in the region. During the two-month period ended May 31, 2016 preceding the acquisition, amounts recognized as net sales in the Company’s consolidated statements of operations and comprehensive income related to these sales were approximately $7.9 million. Please refer to Note 3 for information relating to the Company's acquisition of MKHKL on May 31, 2016.
A former executive officer of the Company (who is no longer a related party as of October 31, 2016) is married to a former employee of one of the Company's suppliers of fixtures for its shop-in-shops, retail stores and showrooms. During the six months ended October 1, 2016, purchases from this supplier reflected in the Company's consolidated financial statements were $0.6 million. Accounts payable to this supplier were $0.3 million as of October 1, 2016.
Non-cash Investing Activities
Non-cash Investing Activities
Non-cash Investing Activities
Significant non-cash investing activities during the six months ended September 30, 2017 included a $36.7 million unrealized gain related to a forward foreign currency exchange derivative contract to hedge the transaction price for the Jimmy Choo acquisition (see Note 3 and Note 12 for additional information).
Significant non-cash investing activities during the six months ended October 1, 2016 included the non-cash allocations of the fair values of the net assets acquired in connection with the Company's acquisition of the Greater China business on May 31, 2016. See Note 3 for additional information.
There were no other significant non-cash investing or financing activities during the fiscal periods presented.
Subsequent Events
Subsequent Events
Subsequent Events
Senior Notes
On October 20, 2017, Michael Kors (USA), Inc. (the “Issuer”), the Company's wholly owned subsidiary, completed its offering of $450 million aggregate principal amount of 4.000% senior notes due 2024 (the “Senior Notes”) at an issue price of 99.508% of aggregate principal amount, pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Senior Notes have been issued under an indenture dated October 20, 2017, among the Issuer, the Company, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (the "Indenture"). The Senior Notes have been issued to finance a portion of the Company’s acquisition of Jimmy Choo and certain related refinancing transactions.
The Senior Notes bear interest at a rate of 4.000% per year, subject to adjustments from time to time if either Moody’s or S&P (or a substitute rating agency therefore) downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Senior Notes. Interest on the Senior Notes is payable semi-annually on May 1 and November 1 of each year, beginning on May 1, 2018.

The Senior Notes are unsecured and are guaranteed by the Company and its existing and future subsidiaries that guarantee or are borrowers under the 2017 Credit Facility (subject to certain exceptions, including subsidiaries organized in China), including, following the closing of the acquisition, Jimmy Choo and all of its existing and future subsidiaries who are guarantors or borrowers under the 2017 Credit Facility (subject to certain exceptions, including subsidiaries organized in China).
The Senior Notes rank equally in right of payment with all of the Issuer’s and guarantors’ existing and future senior unsecured indebtedness, senior in right of payment to any future subordinated indebtedness, effectively subordinated in right of payment to any of the Company’s subsidiaries’ obligations (including secured and unsecured obligations) and any of the Company’s secured obligations, to the extent of the assets securing such obligations.
The Indenture contains covenants, including those that limit the Company’s ability to create certain liens and enter into certain sale and leaseback transactions. In the event of a “Change of Control Triggering Event,” as defined in the Indenture, the Issuer will be required to make an offer to repurchase the Senior Notes at a repurchase price in cash equal to 101% of the aggregate principal amount of the Senior Notes being repurchased plus any unpaid interest. These covenants are subject to important limitations and exceptions, as per the Indenture.
Acquisition of Jimmy Choo
On November 1, 2017, the Company completed the acquisition of Jimmy Choo for 230 pence per share in cash for a total transaction value of approximately $1.40 billion, including the refinancing of existing debt obligations, which was funded through a combination of borrowings under the Company’s new Term Loan Facility, the issuance of the Senior Notes and cash on hand. The Company believes that this combination will further strengthen its future growth opportunities while also increasing both product and geographic diversification and will allow it to grow its international presence through the formation of a global fashion luxury group, bringing together industry-leading fashion luxury brands. The Company will account for this acquisition as a business combination and is in the process of aggregating information required to support purchase accounting, as well as to prepare business combination disclosures. The Company will include all of the required business combination disclosures in its Form 10-Q for the three-month period ended December 30, 2017.
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 intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements as of September 30, 2017 and for the three and six months ended September 30, 2017 and October 1, 2016 are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended April 1, 2017, as filed with the Securities and Exchange Commission on May 31, 2017, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
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 September 30, 2017 and October 1, 2016, 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 consolidated financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
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 lowest sales in its first fiscal quarter. The Company’s retail segment generally experiences greater sales during its 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 currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these forward currency contracts to hedge the Company’s cash flows, as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company’s derivative instruments are recorded in the Company’s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation.
In connection with the July 25, 2017 recommended cash offer for the entire issued and to be issued share capital of Jimmy Choo PLC, a public company organized under the laws of England and Wales and its subsidiaries (collectively, "Jimmy Choo"), the Company entered into a forward foreign currency exchange contract with a notional amount of £1.115 billion to mitigate its foreign currency exchange risk through the expected closing date of the acquisition. This derivative contract was not designated as an accounting hedge. Therefore, changes in fair value are recorded to foreign currency (gain) loss in the Company's consolidated statement of operations. The Company’s accounting policy is to classify cash flows from derivative instruments that are accounted for as cash flow hedges in the same category as the cash flows from the items being hedged. Accordingly, the Company classified the unrealized gain relating to this derivative instrument within cash flows from investing activities.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, or within operating activities for contracts related to inventory purchases.
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
Share-Based Compensation
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies accounting and presentation of share-based payments, primarily relating to the recognition and classification of excess tax benefits, accounting for forfeitures and tax withholding requirements. The Company adopted ASU 2016-09 during the first quarter of Fiscal 2018, as required. Accordingly, during the three and six months ended September 30, 2017, excess tax benefits of $5.0 million and $0.1 million, respectively, which would have been previously reflected within additional paid-in capital, were recognized within the Company's provision of income taxes. This change is expected to increase volatility in future provisions for income taxes. In addition, the Company eliminated windfall tax benefits from the treasury stock method calculation used to compute its diluted earnings per share. Both of the above changes have been adopted on a prospective basis, whereas cash flows related to excess tax benefits, previously reflected within financing activities, have been presented within operating activities within the Company's consolidated statements of cash flows on a retrospective basis. Cash flows related to excess tax benefits were $2.8 million during the six months ended October 1, 2016. The Company continues to reflect estimated forfeitures in its share-based compensation expense.
Recently Issued Accounting Pronouncements
We have considered all new accounting pronouncements and, other than the recent pronouncements discussed below, have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
Hedge Accounting
On August 28, 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities." The new standard is intended to improve and simplify rules relating to hedge accounting, including the elimination of periodic hedge ineffectiveness, recognition and presentation of components excluded from hedge effectiveness assessment, the ability to elect to perform subsequent effectiveness assessments qualitatively, and other provisions designed to provide more transparency around the economics of a company's hedging strategy. ASU 2017-12 is effective for the Company in Fiscal 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2017-12 on its consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s Fiscal 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers" issued in December 2016, ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" issued in May 2016, ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" issued in April 2016, and ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" issued in March 2016 . The Company will consider this guidance in evaluating the impact of ASU 2014-09.
Most of our business is comprised of retail and wholesale operations, where revenue is recognized at a point of time. The Company has completed the initial assessment of the new standard and is currently progressing in its implementation. While the evaluation process is not complete, based on our assessment to date, the Company believes that some of the potential impacts of implementing this standard will include the timing of revenue recognition for its licensing royalties, recognition of breakage revenue for unredeemed gift cards, as well as expanded financial statement disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The Company currently anticipates adopting this standard using the modified retrospective method with the cumulative adjustment to retained earnings recorded during the first quarter of Fiscal 2019.
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize a lease liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is effective beginning with the Company's Fiscal 2020, with early adoption permitted, and must be implemented using a modified retrospective approach for all leases existing at, or entered into after the beginning of the earliest comparative period that is presented in the financial statements. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements but expects that the adoption of this standard will result in a significant increase in assets and liabilities on its consolidated balance sheets.
Goodwill
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment by eliminating Step 2 of the goodwill impairment analysis, while retaining the option to perform an initial qualitative assessment for a reporting unit to determine if a quantitative impairment test is required. ASU 2017-04 is effective in the Company’s Fiscal 2021 with early adoption permitted and should be applied on a prospective basis. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements.
Share-Based Compensation
In May 2017, the FASB issued ASU No. 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting", which simplifies modification accounting for entities that change the terms or conditions of share-based awards. ASU 2017-09 is effective for the Company’s Fiscal 2019 with early adoption permitted and is required to be applied on a prospective basis. The Company will evaluate the impact of ASU 2017-09 on any future changes to the terms and conditions of its share-based compensation awards.
Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on wholesale customers' sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in net sales.
The Company's allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered.
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
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to MKHL
$
202.9

 
$
160.9

 
$
328.4

 
$
308.0

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
151,781,340

 
166,695,631

 
153,134,119

 
170,427,101

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options, restricted shares/units, and performance restricted share units
2,386,754

 
2,144,336

 
2,385,687

 
2,299,758

Diluted weighted average shares
154,168,094

 
168,839,967

 
155,519,806

 
172,726,859

 
 
 
 
 
 
 
 
Basic net income per share
$
1.34

 
$
0.97

 
$
2.14

 
$
1.81

Diluted net income per share
$
1.32

 
$
0.95

 
$
2.11

 
$
1.78

Acquisitions (Tables) (Michael Kors (HK) Limited)
The following table summarized the fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
 
May 31, 2016
Cash and cash equivalents
$
19.4

Accounts receivable
22.3

Inventory
36.1

Other current assets
5.5

Current assets
83.3

Property and equipment
46.6

Goodwill
96.5

Reacquired rights
400.4

Favorable lease assets
1.8

Customer relationships
0.7

Deferred tax assets
7.8

Other assets
6.6

Total assets acquired
$
643.7

 
 
Accounts payable
$
8.9

Short-term debt
5.8

Other current liabilities
27.8

Current liabilities
42.5

Unfavorable lease liabilities
4.8

Deferred tax liabilities
92.3

Other liabilities
4.1

Total liabilities assumed
$
143.7

 
 
Fair value of net assets acquired
$
500.0

Fair value of acquisition consideration
$
500.0

The following table summarizes the unaudited pro-forma consolidated results of operations for the three and six months ended October 1, 2016 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
 
October 1, 2016
Pro-forma total revenue
$
1,088.2

 
$
2,102.5

Pro-forma net income
157.8

 
313.0

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

 
$
1.84

Diluted
$
0.93

 
$
1.81

Receivables, net (Tables)
Receivables, net
Receivables, net consist of (in millions):
 
September 30,
2017
 
April 1,
2017
Trade receivables:
 
 
 
Credit risk assumed by insured
$
308.2

 
$
294.0

Credit risk retained by Company
47.3

 
63.8

Receivables due from licensees
19.0

 
11.9

 
374.5

 
369.7

Less: allowances
(100.0
)
 
(103.9
)
 
$
274.5

 
$
265.8

Property and Equipment, net (Tables)
Schedule of Property and Equipment, Net
Property and equipment, net consist of (in millions):
 
September 30,
2017
 
April 1,
2017
Leasehold improvements
$
535.3

 
$
507.9

In-store shops
263.7

 
256.0

Furniture and fixtures
250.5

 
244.1

Computer equipment and software
248.5

 
226.2

Equipment
108.4

 
104.4

Building
45.0

 
40.6

Land
15.5

 
14.0

 
1,466.9

 
1,393.2

Less: accumulated depreciation and amortization
(933.9
)
 
(833.9
)
 
533.0

 
559.3

Construction-in-progress
29.7

 
32.2

 
$
562.7

 
$
591.5

Intangible Assets and Goodwill (Tables)
Carrying Values of Intangible Assets
The following table details the carrying values of the Company's intangible assets that are subject to amortization (in millions):
 
September 30,
2017
 
April 1,
2017
Reacquired Rights
$
400.4

 
$
400.4

Trademarks
23.0

 
23.0

Lease Rights
80.1

 
74.2

Customer Relationships
5.0

 
5.0

 
508.5

 
502.6

Less: accumulated amortization
(102.8
)
 
(84.5
)
 
$
405.7

 
$
418.1

Current Assets and Current Liabilities (Tables)
Prepaid expenses and other current assets consist of the following (in millions):    
 
September 30,
2017
 
April 1,
2017
Prepaid taxes
$
87.2

 
$
56.6

Unrealized gains on forward foreign exchange contracts
36.8

 
4.7

Prepaid rent
19.9

 
21.7

Leasehold incentive receivable
9.1

 
12.0

Prepaid insurance
4.5

 
3.2

Restricted cash

 
1.9

Other
24.0

 
21.8

 
$
181.5

 
$
121.9

Accrued expenses and other current liabilities consist of the following (in millions):
 
September 30,
2017
 
April 1,
2017
Other taxes payable
$
42.0

 
$
29.2

Accrued rent
25.3

 
21.5

Accrued advertising and marketing
23.5

 
10.7

Accrued capital expenditures
15.6

 
20.5

Professional services
14.0

 
7.1

Gift cards and retail store credits
12.6

 
12.9

Unrealized loss on forward foreign currency exchange contracts
11.3

 
0.4

Advance royalties
7.1

 
5.0

Other
37.3

 
27.7

 
$
188.7

 
$
135.0

Restructuring and Other Charges (Tables)
Schedule of Restructuring and Related Costs
The below table presents a summary of cash charges recorded in connection with this plan (in millions):
 
Six Months Ended
 
September 30,
2017
Lease termination and store closure costs
$
5.3

Severance and benefits costs
0.6

Total restructuring charges
$
5.9

Fair Value Measurements (Tables)
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 September 30, 2017 using:
 
Fair value at April 1, 2017 using:
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Forward foreign currency exchange contracts - assets
$

 
$
36.8

 
$

 
$

 
$
4.7

 
$

Forward foreign currency exchange contracts - liabilities
$

 
$
11.3

 
$

 
$

 
$
0.4

 
$

The following table details the carrying values and fair values of the Company's long-lived assets that have been impaired during the three months and six months ended September 30, 2017 (in millions):
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
Property and equipment
$
13.4

 
$
1.5

 
$
11.9

Lease Rights
3.6

 
0.2

 
3.4

Customer relationships
1.0

 

 
1.0

Total
$
18.0

 
$
1.7

 
$
16.3

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 September 30, 2017 and April 1, 2017 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
September 30,
2017
 
April 1,
2017
 
September 30,
2017
 
April 1,
2017
 
September 30,
2017
 
April 1,
2017
Designated forward foreign currency exchange contracts
$
176.6

 
$
167.5

 
$
0.1

 
$
4.7

 
$
11.3

 
$
0.4

Undesignated forward foreign currency exchange contracts (3)
1,468.6

 

 
36.7

 

 

 

Total
$
1,645.2

 
$
167.5

 
$
36.8

 
$
4.7