MICHAEL KORS HOLDINGS LTD, 10-K filed on 5/30/2018
Annual Report
v3.8.0.1
Document and Entity Information - USD ($)
12 Months Ended
Mar. 31, 2018
May 23, 2018
Sep. 30, 2017
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Mar. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol KORS    
Entity Registrant Name MICHAEL KORS HOLDINGS LTD    
Entity Central Index Key 0001530721    
Current Fiscal Year End Date --03-31    
Entity Well-known Seasoned Issuer Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Large Accelerated Filer    
Entity Common Stock, Shares Outstanding   149,891,999  
Entity Public Float     $ 6,957,593,123
v3.8.0.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Mar. 31, 2018
Apr. 01, 2017
Current assets    
Cash and cash equivalents $ 163.1 $ 227.7
Receivables, net 290.5 265.8
Inventories 660.7 549.3
Prepaid expenses and other current assets 147.8 121.9
Total current assets 1,262.1 1,164.7
Property and equipment, net 583.2 591.5
Intangible assets, net 1,235.7 418.1
Goodwill 847.7 119.7
Deferred tax assets 56.2 73.3
Other assets 74.1 42.3
Total assets 4,059.0 2,409.6
Current liabilities    
Accounts payable 294.1 176.3
Accrued payroll and payroll related expenses 93.0 61.1
Accrued income taxes 77.6 60.3
Short-term debt 200.0 133.1
Accrued expenses and other current liabilities 295.6 135.0
Total current liabilities 960.3 565.8
Deferred rent 128.4 137.8
Deferred tax liabilities 186.3 80.0
Long-term debt 674.4 0.0
Other long-term liabilities 88.1 31.0
Total liabilities 2,037.5 814.6
Commitments and contingencies
Shareholders’ equity    
Ordinary shares, no par value; 650,000,000 shares authorized; 210,991,091 shares issued and 149,698,407 outstanding at March 31, 2018; 209,332,493 shares issued and 155,833,304 outstanding at April 1, 2017 0.0 0.0
Treasury shares, at cost (61,292,684 shares at March 31, 2018 and 53,499,189 shares at April 1, 2017) (3,015.9) (2,654.9)
Additional paid-in capital 831.1 767.8
Accumulated other comprehensive income (loss) 50.5 (80.6)
Retained earnings 4,152.0 3,560.3
Total shareholders’ equity of MKHL 2,017.7 1,592.6
Noncontrolling interest 3.8 2.4
Total shareholders’ equity 2,021.5 1,595.0
Total liabilities and shareholders’ equity $ 4,059.0 $ 2,409.6
v3.8.0.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Mar. 31, 2018
Apr. 01, 2017
Statement of Financial Position [Abstract]    
Ordinary shares, par value (in dollars per share) $ 0 $ 0
Ordinary shares, shares authorized 650,000,000 650,000,000
Ordinary shares, shares issued 210,991,091 209,332,493
Ordinary shares, shares outstanding 149,698,407 155,833,304
Treasury shares 61,292,684 53,499,189
v3.8.0.1
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME - USD ($)
$ in Millions
12 Months Ended
Mar. 31, 2018
Apr. 01, 2017
Apr. 02, 2016
Income Statement [Abstract]      
Total revenue $ 4,718.6 $ 4,493.7 $ 4,712.1
Cost of goods sold 1,859.3 1,832.3 1,914.9
Gross profit 2,859.3 2,661.4 2,797.2
Selling, general and administrative expenses 1,766.8 1,541.2 1,428.0
Depreciation and amortization 208.6 219.8 183.2
Impairment of long-lived assets 32.7 199.2 10.9
Restructuring and other charges [1] 102.1 11.3 0.0
Total operating expenses 2,110.2 1,971.5 1,622.1
Income from operations 749.1 689.9 1,175.1
Other income, net (1.7) (5.4) (3.7)
Interest expense, net 22.3 4.1 1.7
Foreign currency (gain) loss (13.3) 2.6 4.8
Income before provision for income taxes 741.8 688.6 1,172.3
Provision for income taxes 149.7 137.1 334.6
Net income 592.1 551.5 837.7
Less: Net income (loss) attributable to noncontrolling interest 0.2 (1.0) (1.4)
Net income attributable to MKHL $ 591.9 $ 552.5 $ 839.1
Weighted average ordinary shares outstanding:      
Basic (in shares) 152,283,586 165,986,733 186,293,295
Diluted (in shares) 155,102,885 168,123,813 189,054,289
Net income per ordinary share attributable to MKHL:      
Basic (in dollars per share) $ 3.89 $ 3.33 $ 4.50
Diluted (in dollars per share) $ 3.82 $ 3.29 $ 4.44
Statements of Comprehensive Income:      
Net income $ 592.1 $ 551.5 $ 837.7
Foreign currency translation adjustments 147.4 (8.8) 18.5
Net (loss) gain on derivatives (16.2) 8.7 (32.5)
Comprehensive income 723.3 551.4 823.7
Less: Net income (loss) attributable to noncontrolling interest 0.2 (1.0) (1.4)
Less: Other comprehensive income (loss) attributable to noncontrolling interest 0.1 (0.4) 0.1
Comprehensive income attributable to MKHL $ 723.0 $ 552.8 $ 825.0
[1] Restructuring and other charges includes store closure costs recorded in connection with the Retail Fleet Optimization Plan, as well as transaction and transition costs recorded in connection with the acquisitions of Jimmy Choo Group Limited (formerly known as Jimmy Choo PLC) and Michael Kors (HK) Limited and Subsidiaries (see Note 3 and Note 9).
v3.8.0.1
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Ordinary Shares
Additional Paid-in Capital
Treasury Shares
Accumulated Other Comprehensive (Loss) Income
Retained Earnings
Total Equity of MKHL
Non-controlling Interests
Beginning balance at Mar. 28, 2015 $ 2,241.0 $ 0.0 $ 636.7 $ (497.7) $ (66.8) $ 2,168.8 $ 2,241.0 $ 0.0
Beginning balance (in shares) at Mar. 28, 2015   206,487,000            
Beginning balance (in shares) at Mar. 28, 2015       (6,830,000)        
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 837.7         839.1 839.1 (1.4)
Other comprehensive income (loss) (14.0)       (14.1)   (14.1) 0.1
Comprehensive income 823.7           825.0 (1.3)
Noncontrolling interest in MK Panama and Jimmy Choo joint ventures 5.1             5.1
Forfeitures of restricted awards, net of vestings (in shares)   (35,000)            
Exercise of employee share options 12.7   12.7       12.7  
Exercise of employee share options (in shares)   1,632,000            
Equity compensation expense 48.4   48.4       48.4  
Tax benefits on exercise of share options 21.1   21.1       21.1  
Purchase of treasury shares (1,152.4)     $ (1,152.4)     (1,152.4)  
Purchase of treasury shares (in shares)       (24,812,000)        
Other (0.1)         (0.1) (0.1)  
Ending balance (in shares) at Apr. 02, 2016       (31,642,000)        
Ending balance (in shares) at Apr. 02, 2016   208,084,000            
Ending balance at Apr. 02, 2016 1,999.5 $ 0.0 718.9 $ (1,650.1) (80.9) 3,007.8 1,995.7 3.8
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 551.5         552.5 552.5 (1.0)
Other comprehensive income (loss) (0.1)       0.3   0.3 (0.4)
Comprehensive income 551.4           552.8 (1.4)
Vesting of restricted awards, net of forfeitures (in shares)   454,000            
Exercise of employee share options 8.4   8.4       8.4  
Exercise of employee share options (in shares)   794,000            
Equity compensation expense 33.9   33.9       33.9  
Tax benefits on exercise of share options 6.6   6.6       6.6  
Purchase of treasury shares $ (1,004.8)     $ (1,004.8)     (1,004.8)  
Purchase of treasury shares (in shares)       (21,857,000)        
Ending balance (in shares) at Apr. 01, 2017 (53,499,189)     (53,499,000)        
Ending balance (in shares) at Apr. 01, 2017 209,332,493 209,332,000            
Ending balance at Apr. 01, 2017 $ 1,595.0 $ 0.0 767.8 $ (2,654.9) (80.6) 3,560.3 1,592.6 2.4
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 592.1         591.9 591.9 0.2
Other comprehensive income (loss) 131.2       131.1   131.1 0.1
Comprehensive income 723.3           723.0 0.3
Noncontrolling interest in MK Panama and Jimmy Choo joint ventures 3.1             3.1
Partial repurchase of non-controlling interest (0.5)   0.5       0.5 (1.0)
Vesting of restricted awards, net of forfeitures (in shares)   542,000            
Exercise of employee share options 13.7   13.7       13.7  
Exercise of employee share options (in shares)   1,117,000            
Equity compensation expense 49.6   49.6       49.6  
Purchase of treasury shares (361.0)     $ (361.0)     (361.0)  
Purchase of treasury shares (in shares)       (7,794,000)        
Redemption of capital/dividends (1.2)         (0.2) (0.2) (1.0)
Other $ (0.5)   (0.5)       (0.5)  
Ending balance (in shares) at Mar. 31, 2018 (61,292,684)     (61,293,000)        
Ending balance (in shares) at Mar. 31, 2018 210,991,091 210,991,000            
Ending balance at Mar. 31, 2018 $ 2,021.5 $ 0.0 $ 831.1 $ (3,015.9) $ 50.5 $ 4,152.0 $ 2,017.7 $ 3.8
v3.8.0.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
12 Months Ended
Mar. 31, 2018
Apr. 01, 2017
Apr. 02, 2016
Cash flows from operating activities      
Net income $ 592.1 $ 551.5 $ 837.7
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 208.6 219.8 183.2
Equity compensation expense 49.6 33.9 48.4
Impairment of long-lived assets 32.7 199.2 10.9
Losses on store lease exits 29.0 0.0 0.0
Deferred income taxes 9.1 (60.3) (1.9)
Loss on disposal of fixed assets 4.5 3.4 2.8
Amortization of deferred financing costs 4.4 0.9 0.9
Tax benefits on exercise of share options (7.3) (6.6) (21.1)
Amortization of deferred rent (4.0) 9.2 2.6
Foreign currency (gains) losses (13.3) 2.6 4.8
Gain on acquisition of MK Korea 0.0 0.0 (3.7)
Other non-cash adjustments 0.0 0.0 2.9
Change in assets and liabilities:      
Receivables, net 19.3 59.6 52.5
Inventories 46.0 20.6 (16.3)
Prepaid expenses and other current assets 49.1 (0.9) (5.3)
Other assets (4.8) (7.9) (0.4)
Accounts payable (20.9) 37.5 14.2
Accrued expenses and other current liabilities 56.3 (54.4) 125.6
Other long-term liabilities 12.1 26.5 11.7
Net cash provided by operating activities 1,062.5 1,034.6 1,249.5
Cash flows from investing activities      
Capital expenditures (120.4) (164.8) (369.2)
Purchase of intangible assets (3.2) (5.5) (11.4)
Investment in joint venture 0.0 0.0 (1.0)
Cash paid for business acquisitions, net of cash acquired (1,414.5) (480.6) 0.5
Realized gain on hedge related to Jimmy Choo acquisition 4.7 0.0 0.0
Net cash used in investing activities (1,533.4) (650.9) (381.1)
Cash flows from financing activities      
Debt borrowings 2,520.3 1,240.0 192.6
Debt repayments (1,783.2) (1,093.8) (199.8)
Repurchase of treasury shares (361.0) (1,004.8) (1,152.4)
Exercise of employee share options 13.7 8.4 12.7
Payment of deferred financing costs 0.0 0.0 (2.4)
Other financing activities (0.2) 0.0 (0.1)
Net cash provided by (used in) financing activities 389.6 (850.2) (1,149.4)
Effect of exchange rate changes on cash and cash equivalents 15.1 (5.9) 4.1
Net decrease in cash and cash equivalents (66.2) (472.4) (276.9)
Beginning of period 229.6 702.0 978.9
End of period (including restricted cash of $0.3 million at March 31, 2018 and $1.9 million at April 1, 2017) 163.4 229.6 702.0
Supplemental disclosures of cash flow information      
Cash paid for interest 11.0 3.5 1.5
Cash paid for income taxes 103.5 171.1 273.0
Supplemental disclosure of noncash investing and financing activities      
Accrued capital expenditures $ 26.3 $ 22.8 $ 33.6
v3.8.0.1
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2018
Apr. 01, 2017
Statement of Cash Flows [Abstract]    
Restricted cash $ 0.3 $ 1.9
v3.8.0.1
Business and Basis of Presentation
12 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Business and Basis of Presentation
Business and Basis of Presentation
Michael Kors Holdings Limited (“MKHL,” and together with its subsidiaries, the “Company”) was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002. The Company is a leading designer, marketer, distributor and retailer of branded women’s and men’s accessories, apparel and footwear bearing the Michael Kors and Jimmy Choo tradenames and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” “JIMMY CHOO,” and various other related trademarks and logos. The Company’s business consists of four reportable segments: Michael Kors (“MK”) Retail, MK Wholesale, MK Licensing and Jimmy Choo. See Note 19 for additional information.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s audited consolidated financial statements include the following operations for the periods from the respective acquisition/consolidation date through March 31, 2018:
Jimmy Choo Group Limited, formerly known as Jimmy Choo PLC (“Jimmy Choo”), acquired on November 1, 2017;
the previously licensed business in the Greater China region, Michael Kors (HK) Limited and Subsidiaries (“MKHKL”) with operations in China, Hong Kong, Macau and Taiwan, which was acquired on May 31, 2016;
the previously licensed business in South Korea (“MK Korea”), which was acquired on January 1, 2016; and
the Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries (“MK Panama”), in which the Company obtained controlling interest on June 28, 2015 upon making a series of capital contributions to MK Panama.
See Note 3 for additional information related to the above acquisitions.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the fiscal years ending on March 31, 2018 and April 1, 2017 (“Fiscal 2018” and “Fiscal 2017”, respectively) contain 52 weeks, whereas the fiscal year ending on April 2, 2016 (“Fiscal 2016”) contained 53 weeks.
v3.8.0.1
Summary of Significant Accounting Policies
12 Months Ended
Mar. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates related to the Company’s new customer loyalty program, 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. The Company reclassified $11.3 million of transaction costs recorded in Fiscal 2017 in connection with the acquisition of MKHKL from selling, general and administrative expenses to restructuring and other charges in the Company’s consolidated statements of operations and comprehensive income to provide a more transparent disclosure of these costs. In addition, the Company reclassified $6.6 million and $21.1 million of excess tax benefits from net cash used in financing activities to net cash provided by operating activities in Fiscal 2017 and Fiscal 2016, respectively, within the Company’s consolidated statements of cash flows, in connection with the adoption of ASU No. 2016-09.
Seasonality
The Company experiences certain effects of seasonality with respect to its business. The Company’s MK Retail segment generally experiences greater sales during its third fiscal quarter as a result of holiday season sales. The MK Wholesale segment generally experiences the lowest sales in its first fiscal quarter. The Jimmy Choo segment generally experiences greater sales during its third fiscal quarter, primarily driven by the product launch calendar and holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to the other three quarters.
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed and determinable and collectability is reasonably assured. The Company recognizes retail store revenues upon sale of its products to retail consumers, net of estimated returns. Revenue from sales through the Company’s e-commerce sites is recognized at the time of delivery to the customer, reduced by an estimate of returns. Wholesale revenue is recognized net of estimates for sales returns, discounts, markdowns and allowances, after merchandise is shipped and the title and risk of loss are transferred to the Company’s wholesale customers. To arrive at net sales for retail, gross sales are reduced by actual customer returns as well as by a provision for estimated future customer returns, which is based on management’s review of historical and current customer returns. Sales taxes collected from retail customers are presented on a net basis and, as such, are excluded from revenue. To arrive at net sales for wholesale, gross sales are reduced by provisions for estimated future returns, based on current expectations, as well as trade discounts, markdowns, allowances, operational chargebacks, and certain cooperative selling expenses. These estimates are based on such factors as historical trends, actual and forecasted performance, and market conditions, which are reviewed by management on a quarterly basis.
The following table details the activity and balances of the Company’s sales reserves for the fiscal years ended March 31, 2018April 1, 2017, and April 2, 2016 (in millions):
 
Balance
Beginning
of Year
 
Amounts
Charged to
Revenue
 
Write-offs
Against
Reserves
 
Balance
at
Year End
Retail
 
 
 
 
 
 
 
Return Reserves:
 
 
 
 
 
 
 
Fiscal year ended March 31, 2018
$
7.3

 
$
160.7

 
$
(155.9
)
 
$
12.1

Fiscal year ended April 1, 2017
4.7

 
102.4

 
(99.8
)
 
7.3

Fiscal year ended April 2, 2016
2.5

 
71.7

 
(69.5
)
 
4.7

 
Balance
Beginning
of Year
 
Amounts
Charged to
Revenue
 
Write-offs
Against
Reserves
 
Balance
at
Year End
Wholesale
 
 
 
 
 
 
 
Total Sales Reserves:
 
 
 
 
 
 
 
Fiscal year ended March 31, 2018
$
96.7

 
$
257.7

 
$
(245.8
)
 
$
108.6

Fiscal year ended April 1, 2017
110.9

 
271.1

 
(285.3
)
 
96.7

Fiscal year ended April 2, 2016
87.5

 
348.4

 
(325.0
)
 
110.9


Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales of licensed products bearing the Company’s tradenames at rates specified in the license agreements. These agreements are also subject to contractual minimum levels. Royalty revenue generated by geographic licensing agreements is recognized as it is earned under the licensing agreements based on reported sales of licensees applicable to specified periods, as outlined in the agreements. These agreements allow for the use of the Company’s tradenames to sell its branded products in specific geographic regions.
Loyalty Program
During Fiscal 2018, the Company launched its Michael Kors customer loyalty program in the U.S., which allows customers to earn points on qualifying purchases toward monetary and non-monetary rewards that may be redeemed for purchases at the Company’s U.S. retail stores and e-commerce site. The Company defers a portion of the initial sales transaction based on the estimated relative fair value of the benefits using statistical formulas based on projected timing of future redemptions and historical activity. These amounts include estimated “breakage” for points that are not expected to be redeemed. The deferred revenue, net of an estimated “breakage,” is recorded as a reduction to revenue in the consolidated statements of income and comprehensive income and within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
Advertising and Marketing Costs
Advertising and marketing costs are expensed over the period of benefit and are recorded in general and administrative expenses. Advertising and marketing expense was $167.1 million, $118.7 million and $103.9 million in Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.
Cooperative advertising expense, which represents the Company’s participation in advertising expenses of its wholesale customers, is reflected as a reduction of net sales. Expenses related to cooperative advertising for Fiscal 2018, Fiscal 2017 and Fiscal 2016, were $6.3 million, $5.4 million and $7.4 million, respectively.
Shipping and Handling
Freight-in expenses are recorded as part of cost of goods sold, along with product costs and other costs to acquire inventory. The costs of preparing products for sale, including warehousing expenses, are included in selling, general and administrative expenses. Selling, general and administrative expenses also include the costs of shipping products to the Company’s e-commerce customers. Shipping and handling costs included within selling, general and administrative expenses in the Company’s consolidated statements of operations and comprehensive income were $107.6 million, $102.1 million and $98.6 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. Shipping and handling costs charged to customers are included in total revenue.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Included in the Company’s cash and cash equivalents as of March 31, 2018 and April 1, 2017 are credit card receivables of $21.2 million and $13.9 million, respectively, which generally settle within two to three business days.
At March 31, 2018 and April 1, 2017, the Company had restricted cash of $0.3 million and $1.9 million, respectively, primarily related to European customs obligations, which was recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
Inventories
Inventories consist of finished goods and are stated at the lower of cost or net realizable value. Cost is determined using the weighted-average cost method. Costs include amounts paid to independent manufacturers, plus duties and freight to bring the goods to the Company’s warehouses, which are located in the United States, Canada, Holland, Switzerland, United Kingdom, United Arab Emirates, China, Japan, Hong Kong and South Korea. The Company continuously evaluates the composition of its inventory and makes adjustments when the cost of inventory is not expected to be fully recoverable. The net realizable value of the Company’s inventory is estimated based on historical experience, current and forecasted demand, and market conditions. In addition, reserves for inventory losses are estimated based on historical experience and physical inventory counts. The Company’s inventory reserves are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from expectations. Our historical estimates of these adjustments have not differed materially from actual results.
Store Pre-opening Costs
Costs associated with the opening of new retail stores and start up activities, are expensed as incurred.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization (carrying value). Depreciation is recorded on a straight-line basis over the expected remaining useful lives of the related assets. Equipment, furniture and fixtures, are depreciated over five to seven years, computer hardware and software are depreciated over three to five years. The Company’s share of the cost of constructing in-store shop displays within its wholesale customers’ floor-space (“shop-in-shops”), which is paid directly to third-party suppliers, is capitalized as property and equipment and is generally amortized over a useful life of three to four years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated remaining useful lives of the related assets or the remaining lease term, including highly probable renewal periods. The Company includes all depreciation and amortization expense as a component of total operating expenses, as the underlying long-lived assets are not directly or indirectly related to bringing the Company’s products to their existing location and condition. Maintenance and repairs are charged to expense in the year incurred.
The Company capitalizes, in property and equipment, direct costs incurred during the application development stage and the implementation stage for developing, purchasing or otherwise acquiring software for its internal use. These costs are amortized over the estimated useful lives of the software, generally five years. All costs incurred during the preliminary project stage, including project scoping and identification and testing of alternatives, are expensed as incurred.
Definite-Lived Intangible Assets
The Company’s definite-lived intangible assets consist of trademarks, lease rights and customer relationships and are stated at cost less accumulated amortization. Michael Kors trademarks are amortized over twenty years, customer relationships are amortized over five to eighteen years, and lease rights are amortized over the terms of the related lease agreements, including highly probable renewal periods, on a straight-line basis. Reacquired rights recorded in connection with the acquisition of MKHKL are amortized through March 31, 2041, the original expiration date of the Company’s license agreement in the Greater China region.
Impairment of Long-lived Assets
The Company evaluates its long-lived assets, including fixed assets and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The Company’s impairment testing is based on its best estimate of its future operating cash flows. If the sum of estimated undiscounted future cash flows associated with the asset is less than the asset’s carrying value, an impairment charge is recognized, which is measured as the amount by which the carrying value exceeds the fair value of the asset. These estimates of cash flow require significant management judgment and certain assumptions about future volume, sales and expense growth rates, devaluation and inflation. As such, these estimates may differ from actual cash flows.
Goodwill and Other Indefinite-lived Intangible Assets
The Company records intangible assets based on their fair value on the date of acquisition. Goodwill is recorded for the difference between the fair value of the purchase consideration over the fair value of the net identifiable tangible and intangible assets acquired. The brand intangible asset recorded in connection with the Jimmy Choo acquisition was determined to be an indefinite-lived intangible asset, which is not subject to amortization. The Company performs an impairment assessment of goodwill and the Jimmy Choo brand intangible asset on an annual basis, or whenever impairment indicators exist. In the absence of any impairment indicators, goodwill and the Jimmy Choo brand are assessed for impairment during the fourth quarter of each fiscal year. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business.
The Company may assess its goodwill and its indefinite-lived intangible asset for impairment initially using a qualitative approach to determine whether it is more likely than not that the fair value of these assets is greater than their carrying value. When performing a qualitative test, the Company assesses various factors including industry and market conditions, macroeconomic conditions and performance of the Company's businesses. If the results of the qualitative assessment indicate that it is more likely than not that the Company’s goodwill and other indefinite-lived intangible assets are impaired, a quantitative impairment analysis would be performed to determine if impairment is required. The Company may also elect to perform a quantitative analysis of goodwill and its indefinite-lived intangible asset initially rather than using a qualitative approach.
The impairment testing for goodwill is performed at the reporting unit level. The valuation methods used in the quantitative fair value assessment, discounted cash flow and market multiples method, require the Company’s management to make certain assumptions and estimates regarding certain industry trends and future profitability of the Company’s reporting units. If the fair value of a reporting unit exceeds the related carrying value, the reporting unit's goodwill is considered not to be impaired and no further testing is performed. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference. The valuation of goodwill is affected by, among other things, the Company’s business plan for the future and estimated results of future operations. Future events could cause the Company to conclude that impairment indicators exist, and, therefore, that goodwill may be impaired.
If the Company elects to perform a quantitative impairment assessment of the Company's indefinite-lived intangible asset, the fair value of the Jimmy Choo brand is estimated using a discounted cash flow analysis based on the "relief from royalty" method, assuming that a third party would be willing to pay a royalty in lieu of ownership for this intangible asset. This approach is dependent on many factors, including estimates of future growth, royalty rates, and discount rates. Actual future results may differ from these estimates. Impairment loss is recognized when the estimated fair value of the Jimmy Choo brand intangible assets is less than its carrying amount.
There were no impairment charges related to goodwill and other indefinite-lived intangible assets in any of the fiscal periods presented. See Note 12 for information relating to the Company’s annual impairment analysis performed during the fourth quarter of Fiscal 2018.
Insurance
The Company uses a combination of insurance and self-insurance for losses related to a number of risks, including workers’ compensation and employee-related health care benefits. The Company also maintains stop-loss coverage with third-party insurers to limit its exposure arising from claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the discounted cost for self-insured claims incurred using actuarial assumptions, historical loss experience, actual payroll and other data. Although the Company believes that it can reasonably estimate losses related to these claims, actual results could differ from these estimates.
The Company also maintains other types of customary business insurance policies, including business interruption insurance. Insurance recoveries represent gain contingencies and are recorded upon actual settlement with the insurance carrier. During Fiscal 2017, the Company received an insurance settlement of $3.8 million related to the prior-year disruption to our former third party operated e-commerce fulfillment center. This amount was recorded within other income in the Company’s consolidated statement of operations and comprehensive income for Fiscal 2017.
Share-based Compensation
The Company grants share-based awards to certain employees and directors of the Company. The grant date fair value of share options is calculated using the Black-Scholes option pricing model. Beginning in Fiscal 2018, the Company began using its own historical experience in determining the expected holding period and volatility of its time-based share option awards. In prior periods, the Company used the simplified method for determining the expected life of its options and average volatility rates of similar actively traded companies over the estimated holding period, due to insufficient historical option exercise experience as a public company. The risk-free interest rate is derived from the zero-coupon U.S. Treasury Strips yield curve based on the grant’s estimated holding period. Determining the grant date fair value of share-based awards requires considerable judgment, including estimating expected volatility, expected term and risk-free rate. If factors change and the Company employs different assumptions, the fair value of future awards and the resulting share-based compensation expense may differ significantly from what the Company has estimated in the past.
The closing market price of the Company’s shares on the date of grant is used to determine the grant date fair value of restricted shares, restricted shares units (RSUs) and performance RSUs. These fair values are recognized as expense over the requisite service period, net of estimated forfeitures, based on expected attainment of pre-established performance goals for performance grants, or the passage of time for those grants which have only time-based vesting requirements.
Foreign Currency Translation and Transactions
The financial statements of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. The Company’s functional currency is the United States Dollar (“USD”) for MKHL and its United States based subsidiaries. Assets and liabilities are translated using period-end exchange rates, while revenues and expenses are translated using average exchange rates over the reporting period. The resulting translation adjustments are recorded separately in shareholders’ equity as a component of accumulated other comprehensive income (loss). Foreign currency income and losses resulting from the re-measuring of transactions denominated in a currency other than the functional currency of a particular entity are included in foreign currency (gain) loss on the Company’s consolidated statements of operations and comprehensive income.
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, 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 related to the acquisition. This derivative contract was not designated as an accounting hedge. Therefore, changes in fair value were 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 in the same category as the cash flows from the items being hedged. Accordingly, the Company classified the $4.7 million realized gain relating to this derivative instrument within cash flows from investing activities for Fiscal 2018.
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 affects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash flows from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
Income Taxes
Deferred income tax assets and liabilities have been provided for temporary differences between the tax bases and financial reporting bases of the Company’s assets and liabilities using the tax rates and laws in effect for the periods in which the differences are expected to reverse. The Company periodically assesses the realizability of deferred tax assets and the adequacy of deferred tax liabilities, based on the results of local, state, federal or foreign statutory tax audits or estimates and judgments used.
Realization of deferred tax assets associated with net operating loss and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration in the applicable tax jurisdiction. The Company periodically reviews the recoverability of its deferred tax assets and provides valuation allowances, as deemed necessary, to reduce deferred tax assets to amounts that more-likely-than-not will be realized. The Company’s management considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within various taxing jurisdictions, expectations of future taxable income, the carryforward periods remaining and other factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Deferred tax assets could be reduced in the future if the Company’s estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable.
The Company recognizes the impact of an uncertain income tax position taken on its income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will be recognized if it has less than a 50% likelihood of being sustained. The tax positions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. The Company records interest expense and penalties payable to relevant tax authorities as income tax expense.
Rent Expense, Deferred Rent and Landlord Construction Allowances
The Company leases office space, retail stores and distribution facilities under agreements that are classified as operating leases. Many of these operating leases include contingent rent provisions (percentage rent), and/or provide for certain landlord allowances related to tenant improvements and other relevant items. The recognition of rent expense for an operating lease commences on the earlier of the related lease commencement date or the date of possession of the property. Rent expense is calculated by recognizing total minimum rental payments (net of any rental abatements, construction allowances and other rental concessions) on a straight-line basis over the lease term. The difference between straight-line rent expense and rent paid is recorded as deferred rent, which is classified within short-term and long-term liabilities in the Company’s consolidated balance sheets. The Company accounts for landlord allowances and incentives as a component of deferred rent, which is amortized over the lease term as a reduction of rent expense. The Company records rent expense as a component of selling, general and administrative expenses.
Debt Issuance Costs and Unamortized Discounts
The Company defers debt issuance costs directly associated with acquiring third party financing. These debt issuance costs and any discounts on issued debt are amortized on a straight-line basis, which approximates the effective interest method, as interest expense over the term of the related indebtedness. Deferred financing fees associated with the Company’s revolving credit facilities are recorded within prepaid expenses and other current assets. Deferred financing fees and unamortized discounts associated with the Company’s other borrowings are recorded as an offset to long-term debt in the Company’s consolidated balance sheets. See Note 10 for additional information.
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):
 
Fiscal Years Ended
 
March 31,
2018
 
April 1,
2017
 
April 2,
2016
Numerator:
 
 
 
 
 
Net income attributable to MKHL
$
591.9

 
$
552.5

 
$
839.1

Denominator:
 
 
 
 
 
Basic weighted average shares
152,283,586

 
165,986,733

 
186,293,295

Weighted average dilutive share equivalents:
 
 
 
 
 
Share options and restricted shares/units, and performance restricted share units
2,819,299

 
2,137,080

 
2,760,994

Diluted weighted average shares
155,102,885

 
168,123,813

 
189,054,289

Basic net income per share
$
3.89

 
$
3.33

 
$
4.50

Diluted net income per share
$
3.82

 
$
3.29

 
$
4.44


Share equivalents for 1,662,889 shares, 2,034,658 shares and 2,255,271 shares, for Fiscal 2018Fiscal 2017 and Fiscal 2016, respectively, have been excluded from the above calculation due to their anti-dilutive effect.
Recently Adopted Accounting Pronouncements
Business Combinations
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business,” to clarify the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted. The Company adopted ASU 2017-01 during the three months ended December 30, 2017, which did not have a material impact on its consolidated financial statements.
Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): 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 Fiscal 2018 excess tax benefits of $7.3 million 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 $6.6 million during Fiscal 2017. The Company continues to reflect estimated forfeitures in its share-based compensation expense.
Goodwill
In January 2017, the FASB issued ASU 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 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 early adopted the goodwill impairment testing provisions of ASU 2017-04 during the fourth quarter of Fiscal 2018, with no impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
The Company has 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, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The new standard is intended to improve and simplify rules relating to hedge accounting, including the elimination of periodic hedge ineffectiveness, recognition and presentation of components excluded from hedge effectiveness assessment, the ability to elect to perform subsequent effectiveness assessments qualitatively, and other provisions designed to provide more transparency around the economics of a company’s hedging strategy. ASU 2017-12 is effective for the Company in Fiscal 2020, with early adoption permitted. The Company plans to early adopt ASU 2017-12 in the first quarter of Fiscal 2019. The adoption of ASU 2017-12 is not expected to have a material impact on the Company’s consolidated financial statements with respect to its existing forward foreign currency exchange contracts. However upon adoption, the Company will apply the spot method of designating these contracts under ASU 2017-12 to the net investment hedges that were executed during the first quarter of Fiscal 2019. See Note 22 for additional information.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” 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 (collectively, “ASC 606”).
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 will adopt the standard beginning with the first quarter of Fiscal 2019, as required, using the modified retrospective method. The Company has completed its evaluation of the cumulative adjustment and has concluded that it will have an immaterial impact on its retained earnings. This adjustment will be primarily associated with unrecognized gift card breakage revenue and product licensing revenue previously recorded on a one-month lag.
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.
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.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, which requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective and the Company will adopt the standard beginning with the first quarter of Fiscal 2019, as required, using the modified retrospective method. The Company has completed its evaluation of the cumulative adjustment and has concluded that it will have an immaterial impact on its retained earnings.
v3.8.0.1
Acquisitions
12 Months Ended
Mar. 31, 2018
Business Combinations [Abstract]  
Acquisitions
Acquisitions
Fiscal 2018 Acquisition
Acquisition of Jimmy Choo Group Limited
On November 1, 2017, the Company completed the acquisition of Jimmy Choo, whereby the Company's wholly-owned subsidiary acquired all of Jimmy Choo’s issued and to be issued shares at a purchase price of 230 pence per share in cash, for a total transaction value of $1.447 billion, including the repayment of existing debt obligations, which was funded through a combination of borrowings under the Company’s new $1.0 billion term loan facility, the issuance of the Senior Notes and cash on hand (please refer to Note 10 for additional information).
The following table summarizes the aggregate purchase price consideration paid to acquire Jimmy Choo in cash (in millions):
 
November 1, 2017
Consideration paid to Jimmy Choo shareholders
$
1,181.2

Repayment of debt and related obligations
266.2

Total purchase price
$
1,447.4


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 luxury fashion brands. The Company accounted for this acquisition as a business combination under the acquisition method of accounting. The following table summarizes the preliminary purchase price allocation of fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
 
November 1, 2017
Cash and cash equivalents
$
34.3

Accounts receivable
30.7

Inventory (1)
126.2

Other current assets
63.9

Current assets
255.1

Property and equipment (2)
51.0

Goodwill (3)
684.9

Brand (4)
577.8

Customer relationships (5)
212.8

Lease rights
5.9

Deferred tax assets
22.5

Other assets
28.1

Total assets acquired
$
1,838.1

 
 
Accounts payable
$
129.3

Other current liabilities
96.5

Current liabilities
225.8

Deferred tax liabilities
134.9

Other liabilities
26.9

Total liabilities assumed
$
387.6

 
 
Less: Noncontrolling interest in joint ventures
$
3.1

 
 
Fair value of net assets acquired
$
1,447.4

 
 
Fair value of acquisition consideration
$
1,447.4


 
 
(1) 
Includes an inventory step-up adjustment of $9.5 million, which will be recognized as an adjustment to the Company’s cost of goods sold in its statement of operations over twelve months.
(2) 
Includes a $7.0 million adjustment to reduce the fair value of Jimmy Choo’s leasehold improvements, which will be recognized over the remaining lease term.
(3) 
Represents the difference between the purchase price over the net identifiable tangible and intangible assets acquired allocated to goodwill, which is not deductible for tax purposes.
(4) 
Represents the fair value of Jimmy Choo’s brand, which is an indefinite-lived intangible asset due to being essential to the Company’s ability to operate the Jimmy Choo business for the foreseeable future. The Jimmy Choo brand was valued using the relief-from-royalty method of the income valuation approach.
(5) 
Represents customer relationships associated with Jimmy Choo wholesale customers and geographic licensees, which are being amortized over 15 years and customer relationships with product licensees, which are being amortized over 18 years. These useful lives were estimated based on the time to recover the related future discounted cash flows. These intangible assets were valued using multi-period excess-earnings valuation method.
Jimmy Choo’s results of operations have been included in our consolidated financial statements beginning on November 1, 2017. Jimmy Choo contributed revenue of $222.6 million and net loss of $14.5 million (after amortization of non-cash purchase accounting adjustments and transition and transaction costs) for the period from the date of acquisition through March 31, 2018.
The following table summarizes the unaudited pro-forma consolidated results of operations for the fiscal years ended March 31, 2018 and April 1, 2017 as if the acquisition had occurred on April 3, 2016, the beginning of Fiscal 2017 (in millions):
 
Fiscal Years Ended
 
March 31, 2018
 
April 1, 2017
Pro-forma total revenue
$
5,012.0

 
$
4,984.6

Pro-forma net income
623.2

 
553.9

Pro-forma net income per ordinary share attributable to MKHL:
 
 
 
Basic
$
4.09

 
$
3.34

Diluted
$
4.02

 
$
3.29


The unaudited pro-forma consolidated results above are based on the historical financial statements of the Company and Jimmy Choo 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 2017 and are not indicative of the future operating results of the combined company. The financial information for Jimmy Choo prior to the acquisition has been included in the pro-forma results of operations on a calendar-year basis and includes certain adjustments to Jimmy Choo’s historical consolidated financial statements to align with U.S. GAAP and the Company’s accounting policies. The pro-forma consolidated results of operations also include the effects of purchase accounting adjustments, including amortization charges related to the definite-lived intangible assets acquired, fair value adjustments relating to leases and fixed assets, and the related tax effects assuming that the business combination occurred on April 3, 2016. Purchase accounting amortization of the inventory step-up adjustment has been excluded from the above pro-forma amounts due to the short-term nature of this adjustment. The pro-forma consolidated financial statement also reflect the impact of debt repayment and borrowings made to finance the acquisition (see Note 10) and exclude historical interest expense for Jimmy Choo. Transaction costs of $40.6 million for Fiscal 2018, which have been recorded within restructuring and other charges in the Company’s consolidated statements of operations and comprehensive income, have been excluded from the above pro-forma consolidated results of operations due to their non-recurring nature.
Other Acquisitions
During the first quarter of Fiscal 2018, the Company repurchased a portion of the non-controlling interest in its Latin American joint venture, MK Panama for approximately $0.5 million. As of March 31, 2018, the Company has a 75% ownership interest in MK Panama.
Fiscal 2017 Acquisition
Acquisition of Michael Kors (HK) Limited
On May 31, 2016, the Company acquired 100% of the stock of MKHKL, its licensees in the Greater China region, which includes China, Hong Kong, Macau and Taiwan. The Company believes that having direct control of this business will allow it to better manage opportunities and capitalize on the growth potential in the region. This acquisition was funded by a cash payment of $500.0 million, which may be subject to certain purchase price adjustments. The Company accounted for the acquisition as a business combination.
MKHKL’s results of operations have been included in our consolidated financial statements beginning on June 1, 2016. MKHKL contributed total revenue of $306.2 million and net income of $13.5 million for Fiscal 2018 (after amortization of non-cash valuation adjustments). MKHKL contributed total revenue of $212.4 million and net loss of $10.6 million for the period from the date of acquisition through April 1, 2017 (after amortization of non-cash valuation adjustments and integration costs).
The following table summarizes the unaudited pro-forma consolidated results of operations for the fiscal year ended April 1, 2017 as if the acquisition had occurred on March 29, 2015, the beginning of Fiscal 2016 (in millions):
 
Fiscal Years Ended
 
April 1, 2017
 
April 2, 2016
Pro-forma total revenue
$
4,520.1

 
$
4,839.1

Pro-forma net income
548.7

 
832.2

Pro-forma net income per ordinary share attributable to MKHL:
 
 
 
Basic
$
3.31

 
$
4.47

Diluted
$
3.26

 
$
4.40


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 definite-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 Fiscal 2017 also reflect the elimination of transaction costs of approximately $11.3 million, which have been recorded within restructuring and other charges in the Company’s consolidated statements of operations and comprehensive income for Fiscal 2017.
Fiscal 2016 Acquisitions
Acquisition of the Previously Licensed Business in South Korea
On January 1, 2016, the Company acquired direct control of its previously licensed business in South Korea upon the related license expiration. In connection with the acquisition, the Company acquired certain net assets (including inventory and fixed assets) from the Company’s former licensee in exchange for cash consideration of approximately $3.6 million. The Company accounted for this acquisition as a business combination and began consolidating the South Korean business into its operations beginning with the fourth quarter of Fiscal 2016.
This acquisition resulted in a gain of $3.7 million, representing the excess of the fair value of the assets acquired over the consideration paid, which was recorded in other income in the Company’s consolidated statement of operations and comprehensive income for Fiscal 2016. The purchase price was negotiated upon the natural expiration of the licensing agreement, which allowed the Company to negotiate favorable terms for the assets that could no longer be used by the licensee. Prior to recognizing a bargain purchase gain, the Company reassessed whether all assets acquired and liabilities assumed have been correctly identified, as well as the key valuation assumptions and business combination accounting procedures for this acquisition. After careful consideration and review, it was concluded that the recognition of a bargain purchase gain is appropriate for this acquisition.
Acquisition of Controlling Interest in a Joint Venture
During the second quarter of Fiscal 2016, the Company made contributions to MK Panama totaling $18.5 million, consisting of cash consideration of $3.0 million and the elimination of liabilities owed to the Company of $15.5 million, which increased the Company’s ownership interest to 75%. As a result of obtaining controlling interest in MK Panama, which was previously accounted for under the equity method of accounting, the Company began consolidating MK Panama into its operations during the second quarter of Fiscal 2016. The additional ownership interest provides the Company with more direct control over its operations in Latin America and will allow it to better manage its opportunities in the region.
v3.8.0.1
Receivables, net
12 Months Ended
Mar. 31, 2018
Receivables [Abstract]  
Receivables, net
Receivables, net
Receivables, net consist of (in millions):
 
March 31,
2018
 
April 1,
2017
Trade receivables:
 
 
 
Credit risk assumed by insured
$
296.2

 
$
294.0

Credit risk retained by Company
87.1

 
63.8

Receivables due from licensees
15.8

 
11.9

 
399.1

 
369.7

Less: allowances
(108.6
)
 
(103.9
)
 
$
290.5

 
$
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. Allowances are based on wholesale customers’ sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in revenues.
The Company’s allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial condition of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for doubtful accounts was $5.1 million and $0.9 million as of March 31, 2018 and April 1, 2017, respectively. The March 31, 2018 amount included an allowance due to a bankruptcy of one of our wholesale customers.
v3.8.0.1
Concentration of Credit Risk, Major Customers and Suppliers
12 Months Ended
Mar. 31, 2018
Risks and Uncertainties [Abstract]  
Concentration of Credit Risk, Major Customers and Suppliers
Concentration of Credit Risk, Major Customers and Suppliers
Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and receivables. As part of its ongoing procedures, the Company monitors its concentration of deposits with various financial institutions in order to avoid any undue exposure. The Company mitigates its risk by depositing cash and cash equivalents in major financial institutions. The Company also mitigates its credit risk by obtaining insurance coverage for a substantial portion of its receivables (as demonstrated in the above table in “Credit risk assumed by insured”). For Fiscal 2018Fiscal 2017 and Fiscal 2016, revenue related to our largest Michael Kors wholesale customer, Macy’s, accounted for approximately 7.8%, 8.9% and 12.7%, respectively, of total revenue. The accounts receivable related to this customer were substantially insured for all three fiscal years. No other customer accounted for 10% or more of the Company’s total revenues during Fiscal 2018, Fiscal 2017 or Fiscal 2016.
The Company contracts for the purchase of finished goods principally with independent third-party contractors, whereby the contractor is generally responsible for all manufacturing processes, including the purchase of piece goods and trim. Although the Company does not have any long-term agreements with any of its manufacturing contractors, the Company believes it has mutually satisfactory relationships with them. The Company allocates product manufacturing among agents and contractors based on their capabilities, the availability of production capacity, quality, pricing and delivery. The inability of certain contractors to provide needed services on a timely basis could adversely affect the Company’s operations and financial condition. The Company also has relationships with various agents who source Michael Kors finished goods with numerous contractors on its behalf. For Fiscal 2018Fiscal 2017 and Fiscal 2016, one agent sourced approximately 23.9%, 21.8% and 23.2%, respectively, and one contractor accounted for approximately 19.9%, 23.2% and 21.2%, respectively, of Michael Kors finished goods purchases, based on unit volume. For the period covering November 1, 2017 through March 31, 2018 one contractor accounted for approximately 16.0% of Jimmy Choo’s finished goods purchases, based on unit volume.
v3.8.0.1
Property and Equipment, Net
12 Months Ended
Mar. 31, 2018
Property, Plant and Equipment [Abstract]  
Property and Equipment, Net
Property and Equipment, Net
Property and equipment, net, consists of (in millions):
 
March 31,
2018
 
April 1,
2017
Leasehold improvements
$
551.0

 
$
507.9

In-store shops
273.9

 
256.0

Furniture and fixtures
270.9

 
244.1

Computer equipment and software
266.3

 
226.2

Equipment
116.7

 
104.4

Building
51.6

 
40.6

Land
16.2

 
14.0

 
1,546.6

 
1,393.2

Less: accumulated depreciation and amortization
(1,001.6
)
 
(833.9
)
 
545.0

 
559.3

Construction-in-progress
38.2

 
32.2

 
$
583.2

 
$
591.5


Depreciation and amortization of property and equipment for the fiscal years ended March 31, 2018April 1, 2017, and April 2, 2016, was $182.3 million, $197.7 million and $172.2 million, respectively. During Fiscal 2018, the Company recorded fixed asset impairment charges of $27.5 million, $26.1 million of which related to underperforming Michael Kors full-price retail store locations, some of which will be closed as part of the Company’s previously announced Retail Fleet Optimization Plan (as defined in Note 9) and $1.4 million related to wholesale locations expected to be closed. During Fiscal 2017 and Fiscal 2016, the Company recorded fixed asset impairment charges of $169.0 million and $10.9 million, respectively, primarily related to underperforming retail locations.
v3.8.0.1
Intangible Assets and Goodwill
12 Months Ended
Mar. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets and Goodwill
Intangible Assets and Goodwill
The following table details the carrying values of the Company’s intangible assets other than goodwill (in millions):
 
March 31, 2018
 
April 1, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization (1)
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization (1)
 
Net
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Reacquired rights
$
400.4

 
$
29.4

 
$
371.0

 
$
400.4

 
$
13.4

 
$
387.0

Trademarks
23.0

 
17.4

 
5.6

 
23.0

 
16.3

 
6.7

Lease rights
80.1

 
58.3

 
21.8

 
74.2

 
53.8

 
20.4

Customer relationships
231.3

 
8.1

 
223.2

 
5.0

 
1.0

 
4.0

 
734.8

 
113.2

 
621.6

 
502.6

 
84.5

 
418.1

 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Jimmy Choo brand
614.1

 

 
614.1

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets, excluding goodwill
$
1,348.9

 
$
113.2

 
$
1,235.7

 
$
502.6

 
$
84.5

 
$
418.1


________________________________
(1) 
Includes $5.2 million and $30.2 million, respectively, of impairment charges recorded during Fiscal 2018 and Fiscal 2017 in connection with underperforming full-price retail stores. There were no impairment charges related to the Company’s amortized intangibles assets during Fiscal 2016. See Note 12 for additional information.
Reacquired rights relate to the Company’s reacquisition of the rights to use its trademarks and to import, sell, advertise and promote certain of its products in the previously licensed territories in the Greater China region and are being amortized through March 31, 2041, the expiration date of the related license agreement. The trademarks relate to the Michael Kors brand name and are amortized over twenty years. Customer relationships are amortized over five to eighteen years. Lease rights are amortized over the respective terms of the underlying lease, including highly probable renewal periods. Amortization expense for the Company’s definite-lived intangibles was $26.3 million, $22.1 million and $11.0 million, respectively, for each of the fiscal years ended March 31, 2018April 1, 2017 and April 2, 2016.
Indefinite-lived intangible assets other than goodwill included the Jimmy Choo brand , which was was recorded in connection with the acquisition of Jimmy Choo and has an indefinite life due to being essential to the Company’s ability to operate the Jimmy Choo business for the foreseeable future.
Estimated amortization expense for each of the next five years is as follows (in millions):
Fiscal 2019
$
34.4

Fiscal 2020
34.1

Fiscal 2021
34.0

Fiscal 2022
33.4

Fiscal 2023
32.5

Thereafter
453.2

 
$
621.6


The future amortization expense above reflects weighted-average estimated remaining useful lives of 23.0 years for reacquired rights, 4.8 years for trademarks, 16.9 years for customer relationships and 7.0 years for lease rights.
The following table details the changes in goodwill for each of the Company’s reportable segments (in millions):
 
MK Retail
 
MK Wholesale
 
MK Licensing
 
Jimmy Choo
 
Total
Balance at April 1, 2017
$
91.9

 
$
25.9

 
$
1.9

 
$

 
$
119.7

Acquisition of Jimmy Choo

 

 

 
684.9

 
684.9

Foreign currency translation

 

 

 
43.1

 
43.1

Balance at March 31, 2018
$
91.9

 
$
25.9

 
$
1.9

 
$
728.0

 
$
847.7


The Company’s goodwill and the Jimmy Choo brand is not subject to amortization but is evaluated for impairment annually in the last quarter of each fiscal year, or whenever impairment indicators exist.
During the fourth quarter of Fiscal 2018, the Company elected to perform its annual goodwill impairment analysis for its Michael Kors brand using a quantitative approach, using the discounted cash flow method to estimate fair value. Based on the results of these assessments, the Company concluded that the fair values of the Michael Kors reporting units significantly exceeded the related carrying amounts and there were no reporting units at risk of impairment. The goodwill impairment analysis relating to the Jimmy Choo brand was performed using a qualitative assessment, due to the proximity to the acquisition date, to determine whether it is more likely than not that the fair value of its reporting units was less than their carrying amounts. As part of the its assessment, the Company considered qualitative factors, including the projected financial performance of Jimmy Choo, as well as various industry, market and macroeconomic factors. Based on this assessment, the Company qualitatively concluded that it is more likely than not that the fair value of the Jimmy Choo reporting units exceeded its carrying value and, therefore, did not result in an impairment. There were no impairment charges related to goodwill in any of the fiscal periods presented.
The Company also performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of its Jimmy Choo brand indefinite-lived intangible asset was less than the carrying amount. As part of this assessment, the Company considered qualitative factors, including the projected financial performance of Jimmy Choo, as well as various industry, market and macroeconomic factors. Based on this assessment, the Company qualitatively concluded that it was more likely than not that the fair value of the Jimmy Choo brand exceeded its carrying value and, therefore, did not result in an impairment.
v3.8.0.1
Current Assets and Current Liabilities
12 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Current Assets and Current Liabilities
Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):
 
March 31,
2018
 
April 1,
2017
Prepaid taxes
$
78.5

 
$
56.6

Prepaid rent
22.7

 
21.7

Leasehold incentive receivable
9.4

 
12.0

Other
37.2

 
31.6

 
$
147.8

 
$
121.9


Accrued expenses and other current liabilities consist of the following (in millions):
 
March 31,
2018
 
April 1,
2017
Other taxes payable
$
54.3

 
$
29.2

Restructuring liability
44.8

 

Accrued rent
34.5

 
21.5

Accrued capital expenditures
26.4

 
20.5

Accrued advertising and marketing
22.6

 
10.7

Gift cards and retail store credits
16.0

 
12.9

Professional services
14.1

 
7.1

Accrued interest
8.7

 
0.3

Unrealized loss on forward foreign exchange contracts
7.7

 
0.4

Deferred income
4.3

 
0.1

Advance royalties
4.1

 
5.0

Other
58.1

 
27.3

 
$
295.6

 
$
135.0

v3.8.0.1
Restructuring and Other Charges
12 Months Ended
Mar. 31, 2018
Restructuring and Related Activities [Abstract]  
Restructuring and Other Charges
Restructuring and Other Charges
On May 31, 2017, the Company announced that it plans to close between 100 and 125 of its Michael Kors full-price retail stores over the next two years, in order to improve the profitability of its retail store fleet (“Retail Fleet Optimization Plan”). Over this time period, the Company expects to incur approximately $100 - $125 million of one-time costs associated with these store closures. Collectively, the Company anticipates ongoing annual savings of approximately $60 million as a result of store closures and lower depreciation and amortization expense as a result of the impairment charges recorded during Fiscal 2017 and Fiscal 2018.
During Fiscal 2018, the Company closed 47 of its Michael Kors full-price retail stores under the Retail Fleet Optimization Plan and recorded restructuring costs of $52.6 million. The Company anticipates finalizing the remainder of the planned store closures under the Retail Fleet Optimization Plan over the next two fiscal years. The below table presents a summary of cash charges recorded in connection with this plan for the MK Retail segment and the Company’s remaining restructuring liability (in millions):
 
Severance and benefit costs
 
Lease-related costs
 
Total
Balance as of April 1, 2017
$

 
$

 
$

Additions charged to expense
0.7

 
51.9

(1) 
52.6

Balance sheet reclassifications (2)

 
12.2

 
12.2

Payments
(0.5
)
 
(19.5
)
 
(20.0
)
Balance as of March 31, 2018
$
0.2

 
$
44.6

 
$
44.8

 
 
 
 
 
(1) 
Includes losses on store lease exits of $29.0 million.
(2) 
Primarily consists of reclassification of deferred rent balances for locations subject to closure to a restructuring liability.
Other Charges
During Fiscal 2018, the Company recorded transaction costs of $40.6 million in connection with the Jimmy Choo acquisition within restructuring and other charges in its consolidated statements of operations. In addition, restructuring and other charges included transition costs of $8.9 million for Fiscal 2018, which were incurred in connection with the Jimmy Choo acquisition. During Fiscal 2017, the Company recorded transaction costs of $11.3 million related to the acquisition of the Greater China business. See Note 3 for additional information relating to these acquisitions.
v3.8.0.1
Debt Obligations
12 Months Ended
Mar. 31, 2018
Debt Disclosure [Abstract]  
Debt Obligations
Debt Obligations
The following table presents the Company’s debt obligations (in millions):
 
March 31,
2018
 
April 1,
2017
Term Loan
$
229.8

 
$

4.000% Senior Notes due 2024
450.0

 

Revolving Credit Facilities
200.0

 
133.1

Other
0.9

 

Total debt
880.7

 
133.1

Less: Unamortized debt issuance costs
4.2

 

Less: Unamortized discount on long-term debt
2.1

 

Total carrying value of debt
874.4

 
133.1

Less: Short-term debt
200.0

 
133.1

Total long-term debt
$
674.4

 
$


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. 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 right to prepay its borrowings under the Term Loan Facility at any time in whole or in part. 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’s $1.0 billion Term Loan Facility was fully drawn to pay a portion of the acquisition consideration for Jimmy Choo and other related fees and expenses. 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. During Fiscal 2018, the Company made accelerated payments on the Term Loans on a pro-rata basis. As of March 31, 2018, the carrying value of borrowings outstanding under the Term Loan Facility was $229.0 million, net of debt issuance costs.
During the first quarter of Fiscal 2019, the Company repaid an additional $90.0 million principal amount of borrowings outstanding under the Term Loan Facility on a pro-rata basis.
Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at the following rates:
for any loans (except loans denominated 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 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 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 10 basis points 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 2017 Credit Facility requires the Company to maintain a leverage ratio as of the end of each fiscal quarter of no greater than 3.5 to 1. Such leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus six times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR (as defined below) for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus income tax expense, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash charges, subject to certain additions and deductions. The 2017 Credit Facility also includes covenants that limit additional indebtedness, guarantees, liens, acquisitions and other investments and cash dividends that are customary for financings of this type.  As of March 31, 2018, the Company was in compliance with all covenants related to this agreement.
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 The Employee Retirement Income Security Act, 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 March 31, 2018, the Company had borrowings of $200.0 million outstanding under the 2017 Revolving Credit Facility. Stand-by letters of credit of $15.9 million were outstanding as of March 31, 2018. There were borrowings of $127.3 million outstanding under the prior 2015 Revolving 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 March 31, 2018, the amount available for future borrowings under the 2017 Revolving Credit Facility was $784.1 million.
Senior Notes
On October 20, 2017, Michael Kors (USA), Inc. (the “Issuer”), the Company’s wholly owned subsidiary, completed its offering of $450.0 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 were 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 were 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 may be redeemed at the Company’s option at any time in whole or in part at a price equal to 100% of the principal amount, plus accrued and unpaid interest, plus a “make-whole” amount calculated at the applicable Treasury Rate plus 30 basis points.
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.
As of March 31, 2018, the carrying value of the Senior Notes was $444.5 million, net of issuance costs and unamortized discount. See Note 22 for cross-currency swaps executed during the first quarter of Fiscal 2019.
Japan Credit Facility
In November 2017, the Company’s subsidiary in Japan entered into a short term credit facility (“Japan Credit Facility”) with Mitsubishi UFJ Financial Group (“MUFJ”) (the “Bank”) which may be used to fund general working capitals needs of Michael Kors Japan K.K. through November 29, 2018, subject to the Bank’s discretion. The Japan Credit Facility provides Michael Kors Japan K.K. with a revolving credit line of up to ¥1.0 billion (approximately $9.4 million). The Japan Credit Facility bears interest at a rate posted by the Bank plus 0.300% two business days prior to the date of borrowing or the date of interest renewal. As of March 31, 2018, the Company had no borrowings outstanding under the Japan Credit Facility.

Hong Kong Credit Facility
In November 2017, 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, 2018 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 $12.7 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 March 31, 2018, there were no borrowings outstanding under the HK Credit Facility. As of March 31, 2018, bank guarantees supported by this facility were 11.8 million Hong Kong Dollars (approximately $1.5 million). At March 31, 2018, the amount available for future borrowings under the HK Credit Facility was 88.2 million Hong Kong Dollars (approximately $11.2 million).
Other
In addition to the above, the Company had letters of credit outstanding of $4.4 million as of March 31, 2018, which have been issued outside of its credit facilities, and were primarily related to lease guarantees for Jimmy Choo.
v3.8.0.1
Commitments and Contingencies
12 Months Ended
Mar. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Leases
The Company leases office space, retail stores and warehouse space under operating lease agreements that expire at various dates through September 2043. In addition to minimum rental payments, the leases require payment of increases in real estate taxes and other expenses incidental to the use of the property.
Rent expense for the Company’s operating leases consists of the following (in millions):
 
Fiscal Years Ended
 
March 31,
2018
 
April 1,
2017
 
April 2,
2016
Minimum rentals
$
271.8

 
$
257.0

 
$
193.5

Contingent rent
80.4

 
75.5

 
64.4

Total rent expense
$
352.2

 
$
332.5

 
$
257.9


Future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in millions):
Fiscal years ending:
 
2019
$
323.9

2020
299.3

2021
279.5

2022
251.2

2023
221.3

Thereafter
531.4

 
$
1,906.6


As of March 31, 2018, the future minimum lease payments in the table above were reduced by total noncancelable future sublease rental income of $11.8 million.
The Company has issued stand-by letters of credit to guarantee certain of its retail and corporate operating lease commitments, aggregating $20.3 million at March 31, 2018, including $15.9 million in letters of credit issued under the 2017 Credit Facility.
Other Commitments
As of March 31, 2018, the Company also has other contractual commitments aggregating $1.731 billion, which consist of inventory purchase commitments of $750.6 million, debt obligations of $874.4 million and other contractual obligations of $106.4 million, which primarily relate to obligations related to the Company’s marketing and advertising agreements, information technology agreements and supply agreements.
Long-term Employment Contract
The Company has an employment agreement with one of its officers that provided for continuous employment through the date of the officer’s death or permanent disability at a salary of $1.35 million. In addition to salary, the agreement provided for an annual bonus and other employee related benefits.
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.
v3.8.0.1
Fair Value Measurements
12 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
At March 31, 2018 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 13.
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in millions):
 
Fair value at March 31, 2018, 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
$

 
$

 
$

 
$

 
$
4.7

 
$

Forward foreign currency exchange contracts - liabilities
$

 
$
7.7

 
$

 
$

 
$
0.4

 
$


The Company’s long-term debt obligations are recorded in its consolidated balance sheets at carrying values, which may differ from the related fair values. The fair value of the Company’s long-term debt is estimated using external pricing data, including any available quoted market prices and based on other debt instruments with similar characteristics. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which approximates fair value due to the short-term nature of such borrowings. Please refer to Note 10 for detailed information relating to carrying values of the Company’s outstanding debt. The following table summarizes the carrying values and estimated fair values of the Company’s short- and long-term debt, based on Level 2 measurements (in millions):
 
 
March 31, 2018
 
April 1, 2017
 
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
4.000% Senior Notes
 
$
444.5

 
$
448.1

 
$

 
$

Term Loan
 
$
229.0

 
$
231.2

 
$

 
$

Revolving Credit Facilities
 
$
200.0

 
$
200.0

 
$
133.1

 
$
133.1


The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value.
Non-Financial Assets and Liabilities

The Company’s non-financial assets include goodwill, intangible assets and property and equipment. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. The Company’s goodwill is assessed for impairment at least annually, while its other long-lived assets, including fixed assets and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The fair values of these assets were determined based on Level 3 measurements using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations.
The following table details the carrying values and fair values of the Company’s long-lived assets that have been impaired (in millions):
 
Carrying Value Prior to Impairment
 
Fair Value
 
Impairment Charge
Fiscal 2018:
 
 
 
 
 
Lease Rights
$
4.7

 
$
0.5

 
$
4.2

Fixed Assets
30.5

 
3.0

 
27.5

Customer relationships
1.0

 

 
1.0

Total
$
36.2

 
$
3.5

 
$
32.7

 
 
 
 
 
 
Fiscal 2017:
 
 
 
 
 
Lease Rights
$
33.5

 
$
3.3

 
$
30.2

Fixed Assets
186.9

 
17.9

 
169.0

Total
$
220.4

 
$
21.2

 
$
199.2

 
 
 
 
 
 
Fiscal 2016:
 
 
 
 
 
Fixed Assets
$
10.9

 
$

 
$
10.9


Please refer to Notes 6, 7 and 19 for additional information.
v3.8.0.1
Derivative Financial Instruments
12 Months Ended
Mar. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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 March 31, 2018 and April 1, 2017 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Designated forward foreign currency exchange contracts
$
161.7

 
$
167.5

 
$

 
$
4.7

 
$
7.7

 
$
0.4

Total
$
161.7

 
$
167.5

 
$

 
$
4.7

 
$
7.7

 
$
0.4

 
 
(1) 
Recorded within prepaid expenses and other current assets in the Company’s audited consolidated balance sheets.
(2) 
Recorded within accrued expenses and other current liabilities in the Company’s audited consolidated balance sheets.
The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheet on a gross basis as shown in the above table. However, the Company has derivative liabilities of $7.7 million as of March 31, 2018 and derivative assets and liabilities of $4.7 million and $0.3 million, respectively, as of April 1, 2017, which are 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, the March 31, 2018 liability would remain unchanged and derivative net assets and net liabilities as of April 1, 2017 would be $4.5 million and $0.2 million, respectively. The Company’s master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. The Company’s derivative financial instruments were not subject to master netting arrangements in prior fiscal years.
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations and comprehensive income. The following table summarizes the impact of the effective portion of gains and losses on the forward contracts designated as hedges (in millions):
 
 
Fiscal Year Ended March 31, 2018
 
Fiscal Year Ended April 1, 2017
 
Fiscal Year Ended April 2, 2016
 
Pre-Tax
Loss
Recognized
in OCI
 
Pre-tax Loss
Reclassified from
Accumulated OCI
into Earnings
 
Pre-Tax
Gain