MICHAEL KORS HOLDINGS LTD, 10-K filed on 5/31/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Apr. 1, 2017
May 25, 2017
Oct. 1, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Apr. 01, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
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
--04-01 
 
 
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
 
155,839,126 
 
Entity Public Float
 
 
$ 7,374,518,747 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Apr. 1, 2017
Apr. 2, 2016
Current assets
 
 
Cash and cash equivalents
$ 227.7 
$ 702.0 
Receivables, net
265.8 
307.9 
Inventories
549.3 
546.8 
Prepaid expenses and other current assets
121.9 
113.1 
Total current assets
1,164.7 
1,669.8 
Property and equipment, net
591.5 
758.2 
Intangible assets, net
418.1 
67.4 
Goodwill
119.7 
23.2 
Deferred tax assets
73.3 
24.5 
Other assets
42.3 
23.7 
Total assets
2,409.6 
2,566.8 
Current liabilities
 
 
Accounts payable
176.3 
131.4 
Accrued payroll and payroll related expenses
61.1 
59.7 
Accrued income taxes
60.3 
51.6 
Short-term debt
133.1 
Accrued expenses and other current liabilities
135.0 
192.8 
Total current liabilities
565.8 
435.5 
Deferred rent
137.8 
106.4 
Deferred tax liabilities
80.0 
3.5 
Long-term debt
2.3 
Other long-term liabilities
31.0 
19.6 
Total liabilities
814.6 
567.3 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Ordinary shares, no par value; 650,000,000 shares authorized; 209,332,493 shares issued and 155,833,304 outstanding at April 1, 2017; 208,084,175 shares issued and 176,441,891 outstanding at April 2, 2016
Treasury shares, at cost (53,499,189 shares at April 1, 2017 and 31,642,284 shares at April 2, 2016)
(2,654.9)
(1,650.1)
Additional paid-in capital
767.8 
718.9 
Accumulated other comprehensive loss
(80.6)
(80.9)
Retained earnings
3,560.3 
3,007.8 
Total shareholders' equity of MKHL
1,592.6 
1,995.7 
Noncontrolling interest
2.4 
3.8 
Total equity
1,595.0 
1,999.5 
Total liabilities and shareholders’ equity
$ 2,409.6 
$ 2,566.8 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Apr. 1, 2017
Apr. 2, 2016
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
209,332,493 
208,084,175 
Ordinary shares, shares outstanding
155,833,304 
176,441,891 
Treasury shares
53,499,189 
31,642,284 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Apr. 1, 2017
Apr. 2, 2016
Mar. 28, 2015
Income Statement [Abstract]
 
 
 
Net sales
$ 4,347.9 
$ 4,538.8 
$ 4,199.7 
Licensing revenue
145.8 
173.3 
171.8 
Total revenue
4,493.7 
4,712.1 
4,371.5 
Cost of goods sold
1,832.3 
1,914.9 
1,723.8 
Gross profit
2,661.4 
2,797.2 
2,647.7 
Selling, general and administrative expenses
1,552.5 
1,428.0 
1,251.5 
Depreciation and amortization
219.8 
183.2 
138.4 
Impairment of long-lived assets
199.2 
10.9 
0.8 
Total operating expenses
1,971.5 
1,622.1 
1,390.7 
Income from operations
689.9 
1,175.1 
1,257.0 
Other income, net
(5.4)
(3.7)
(1.6)
Interest expense, net
4.1 
1.7 
0.2 
Foreign currency loss
2.6 
4.8 
2.6 
Income before provision for income taxes
688.6 
1,172.3 
1,255.8 
Provision for income taxes
137.1 
334.6 
374.8 
Net income
551.5 
837.7 
881.0 
Less: Net loss attributable to noncontrolling interest
(1.0)
(1.4)
Net income attributable to MKHL
552.5 
839.1 
881.0 
Weighted average ordinary shares outstanding:
 
 
 
Basic (in shares)
165,986,733 
186,293,295 
202,680,572 
Diluted (in shares)
168,123,813 
189,054,289 
205,865,769 
Net income per ordinary share attributable to MKHL:
 
 
 
Basic (in dollars per share)
$ 3.33 
$ 4.50 
$ 4.35 
Diluted (in dollars per share)
$ 3.29 
$ 4.44 
$ 4.28 
Statements of Comprehensive Income:
 
 
 
Net income
551.5 
837.7 
881.0 
Foreign currency translation adjustments
(8.8)
18.5 
(91.3)
Net gains (losses) on derivatives
8.7 
(32.5)
30.9 
Comprehensive income
551.4 
823.7 
820.6 
Less: Net loss attributable to noncontrolling interest
(1.0)
(1.4)
Less: Other comprehensive income attributable to noncontrolling interest
(0.4)
0.1 
Comprehensive income attributable to MKHL
$ 552.8 
$ 825.0 
$ 820.6 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, except Share data, unless otherwise specified
Total
Ordinary Shares
Additional Paid-in Capital
Treasury Shares
Accumulated Other Comprehensive Loss
Retained Earnings
Total Equity of MKHL
Non-controlling Interest
Beginning balance at Mar. 29, 2014
$ 1,806.2 
$ 0 
$ 527.2 
$ (2.4)
$ (6.4)
$ 1,287.8 
$ 1,806.2 
$ 0 
Beginning balance (in shares) at Mar. 29, 2014
 
 
 
(30,000)
 
 
 
 
Beginning balance (in shares) at Mar. 29, 2014
 
204,291,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income (loss)
881.0 
 
 
 
 
881.0 
881.0 
 
Other comprehensive income (loss)
(60.4)
 
 
 
(60.4)
 
(60.4)
Comprehensive income
820.6 
 
 
 
 
 
820.6 
 
Issuance and vesting of restricted shares (in shares)
 
413,000 
 
 
 
 
 
 
Exercise of employee share options
15.3 
 
15.3 
 
 
 
15.3 
 
Exercise of employee share options (in shares)
 
1,783,000 
 
 
 
 
 
 
Equity compensation expense
48.9 
 
48.9 
 
 
 
48.9 
 
Tax benefits on exercise of share options
45.3 
 
45.3 
 
 
 
45.3 
 
Purchase of treasury shares
(495.3)
 
 
(495.3)
 
 
(495.3)
 
Purchase of treasury shares (in shares)
 
 
 
(6,800,000)
 
 
 
 
Ending balance at Mar. 28, 2015
2,241.0 
636.7 
(497.7)
(66.8)
2,168.8 
2,241.0 
Ending balance (in shares) at Mar. 28, 2015
 
 
 
(6,830,000)
 
 
 
 
Ending balance (in shares) at Mar. 28, 2015
 
206,487,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income (loss)
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)
Fair value of noncontrolling interest in MK Panama
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 at Apr. 02, 2016
1,999.5 
718.9 
(1,650.1)
(80.9)
3,007.8 
1,995.7 
3.8 
Ending balance (in shares) at Apr. 02, 2016
(31,642,284)
 
 
(31,642,000)
 
 
 
 
Ending balance (in shares) at Apr. 02, 2016
208,084,175 
208,084,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income (loss)
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)
Issuance and vesting of restricted shares (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 at Apr. 01, 2017
$ 1,595.0 
$ 0 
$ 767.8 
$ (2,654.9)
$ (80.6)
$ 3,560.3 
$ 1,592.6 
$ 2.4 
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 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Apr. 1, 2017
Apr. 2, 2016
Mar. 28, 2015
Cash flows from operating activities
 
 
 
Net income
$ 551.5 
$ 837.7 
$ 881.0 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
219.8 
183.2 
138.4 
Equity compensation expense
33.9 
48.4 
48.9 
Deferred income taxes
(60.3)
(1.9)
6.2 
Non-cash litigation related costs
1.9 
5.7 
Amortization of deferred rent
9.2 
2.6 
5.1 
Loss on disposal of fixed assets
3.4 
2.8 
1.9 
Impairment of long-lived assets
199.2 
10.9 
0.8 
Amortization of deferred financing costs
0.9 
0.9 
0.7 
Tax benefits on exercise of share options
(6.6)
(21.1)
(45.3)
Foreign currency losses (gains)
2.6 
4.8 
(1.5)
Gain on acquisition of MK Korea
(3.7)
Loss (income) earned on joint venture
1.0 
(0.1)
Change in assets and liabilities:
 
 
 
Receivables, net
59.6 
52.5 
(83.3)
Inventories
20.6 
(16.3)
(112.4)
Prepaid expenses and other current assets
(0.9)
(5.3)
(20.1)
Other assets
(7.9)
(0.4)
(6.3)
Accounts payable
37.5 
14.2 
(8.6)
Accrued expenses and other current liabilities
(61.0)
104.5 
36.3 
Other long-term liabilities
26.5 
11.7 
10.5 
Net cash provided by operating activities
1,028.0 
1,228.4 
857.9 
Cash flows from investing activities
 
 
 
Capital expenditures
(164.8)
(369.2)
(356.2)
Purchase of intangible assets
(5.5)
(11.4)
(29.2)
Investment in joint venture
(1.0)
(3.0)
Cash paid for business acquisition, net of cash acquired
(480.6)
0.5 
Net cash used in investing activities
(650.9)
(381.1)
(388.4)
Cash flows from financing activities
 
 
 
Repurchase of treasury shares
(1,004.8)
(1,152.4)
(495.3)
Tax benefits on exercise of share options
6.6 
21.1 
45.3 
Exercise of employee share options
8.4 
12.7 
15.3 
Repayments under revolving credit agreement
(1,093.8)
(199.8)
Borrowings under revolving credit agreement
1,240.0 
192.6 
Payment of deferred financing costs
(2.4)
Other financing activities
(0.1)
Net cash used in financing activities
(843.6)
(1,128.3)
(434.7)
Effect of exchange rate changes on cash and cash equivalents
(5.9)
4.1 
(27.1)
Net (decrease) increase in cash and cash equivalents
(472.4)
(276.9)
7.7 
Beginning of period
702.0 
978.9 
971.2 
End of period (including restricted cash of $1.9 million at April 1, 2017)
229.6 
702.0 
978.9 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
3.5 
1.5 
0.7 
Cash paid for income taxes
171.1 
273.0 
373.3 
Supplemental disclosure of noncash investing and financing activities
 
 
 
Accrued capital expenditures
$ 22.8 
$ 33.6 
$ 32.9 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
In Millions, unless otherwise specified
Apr. 1, 2017
Apr. 2, 2016
Statement of Cash Flows [Abstract]
 
 
Restricted cash
$ 1.9 
$ 0 
Business and Basis of Presentation
Business and Basis of Presentation
Business and Basis of Presentation
Michael Kors Holdings Limited (“MKHL,” and together with its subsidiaries, the “Company”) was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002. The Company is a leading designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel bearing the Michael Kors tradename and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” and various other related trademarks and logos. The Company’s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores and lifestyle stores, including concessions, and outlet stores, located primarily in the Americas (United States, Canada and Latin America, excluding Brazil), Europe and Asia, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas, Europe and Asia, as well as from our geographic licensees. The Company licenses its trademarks on products such as fragrances, beauty, eyewear, belts, cold weather accessories, jewelry, watches, coats, men’s suits, swimwear, socks, furs and ties, as well as through geographic licenses.
The 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.
On May 31, 2016, the Company acquired 100% of the stock of its previously licensed business in the Greater China region, Michael Kors (HK) Limited and Subsidiaries ("MKHKL"), which has operations in China, Hong Kong, Macau and Taiwan. As a result, the Company began consolidating MKHKL into its operations beginning on June 1, 2016. See Note 3 for additional information.
The Company has historically accounted for its investment in its Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries (“MK Panama”), under the equity method of accounting. During the second quarter of Fiscal 2016, the Company made a series of capital contributions to the joint venture, obtaining a controlling interest in MK Panama. As such, the Company has been consolidating MK Panama into its operations beginning with the second quarter of Fiscal 2016. In addition, on January 1, 2016, the Company acquired its previously licensed business in South Korea ("MK Korea") upon expiration of the related license agreement. As a result, the Company began consolidating MK Korea into its operations during the fourth quarter of Fiscal 2016. See Note 3 for additional information.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the fiscal years ending on April 1, 2017 and March 28, 2015 (“Fiscal 2017” and “Fiscal 2015”, respectively) contain 52 weeks, whereas the fiscal year ending on April 2, 2016 (“Fiscal 2016”) contained 53 weeks.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
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 April 1, 2017April 2, 2016, and March 28, 2015 (in millions):
 
Balance
Beginning
of Year
 
Amounts
Charged to
Revenue
 
Write-offs
Against
Reserves
 
Balance
at
Year End
Retail
 
 
 
 
 
 
 
Return Reserves:
 
 
 
 
 
 
 
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

Fiscal year ended March 28, 2015
2.3

 
57.0

 
(56.8
)
 
2.5

 
Balance
Beginning
of Year
 
Amounts
Charged to
Revenue
 
Write-offs
Against
Reserves
 
Balance
at
Year End
Wholesale
 
 
 
 
 
 
 
Total Sales Reserves:
 
 
 
 
 
 
 
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

Fiscal year ended March 28, 2015
65.9

 
281.0

 
(259.4
)
 
87.5


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.
Advertising
Advertising and marketing costs are expensed when incurred and are reflected in general and administrative expenses. Advertising and marketing expense was $118.7 million, $103.9 million and $103.6 million in Fiscal 2017, Fiscal 2016 and Fiscal 2015, 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 2017, Fiscal 2016 and Fiscal 2015, were $5.4 million, $7.4 million and $8.0 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 $102.1 million, $98.6 million and $92.6 million for Fiscal 2017, Fiscal 2016 and Fiscal 2015, 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 April 1, 2017 and April 2, 2016 are credit card receivables of $13.9 million and $14.5 million, respectively, which generally settle within two to three business days.
At April 1, 2017, the Company had restricted cash of $1.9 million, primarily related to European customs obligations, which was recorded within other assets in the Company's consolidated balance sheet.
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, Holland, Canada, 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 loss 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.
Finite-Lived Intangible Assets
The Company’s finite-lived intangible assets consist of trademarks, lease rights and customer relationships and are stated at cost less accumulated amortization. Trademarks are amortized over twenty years, customer relationships are amortized over five to ten 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 finite-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
The Company performs an assessment of goodwill on an annual basis, or whenever impairment indicators exist. In the absence of any impairment indicators, goodwill is assessed 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 for impairment initially using a qualitative approach (“step zero”) to determine whether it is more likely than not that the fair value of goodwill is greater than its carrying value. If the results of the qualitative assessment indicate that it is not more likely than not that the fair value of goodwill exceeds its carrying value, a quantitative goodwill analysis would be performed to determine if impairment is required. The Company may also elect to perform a quantitative analysis of goodwill initially rather than using a qualitative approach. 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 carrying amount of a reporting unit exceeds its fair value, the Company would compare the implied fair value of the reporting unit goodwill to its carrying value. To compute the implied fair value, the Company would assign the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying value of the reporting unit goodwill exceeded the implied fair value of the reporting unit goodwill, the Company would record an impairment loss to write down such goodwill to its implied fair value. 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.
There were no impairment charges related to goodwill in any of the fiscal periods presented. See Note 11 for information relating to the Company's annual impairment analysis performed during the fourth quarter of Fiscal 2017.
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. The closing market price at the grant date 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.
The Company’s expected volatility is based on the average volatility rates of similar actively traded companies over the Company’s estimated expected holding periods. The expected holding period for performance-based options is based on the period to expiration, which is generally 9-10 years, which directly correlates to the Company’s service period requirement for such options. The expected holding period for time-based options is calculated using the simplified method, which uses the vesting term of the options, generally 4 years, and the contractual term of 7 years, resulting in a holding period of 4.5-4.75 years. The simplified method was chosen as a means to determine the Company’s estimated holding period, as prior to December 2011, the Company was privately held and there is insufficient historical option exercise experience. 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.
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 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.
The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company’s consolidated statements of operations and comprehensive income. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash flows from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
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.
Deferred Financing Costs
The Company defers costs directly associated with acquiring third party financing. These deferred costs are amortized on a straight-line basis, which approximates the effective interest method, as interest expense over the term of the related indebtedness. As of April 1, 2017, deferred financing costs were $3.1 million, net of accumulated amortization of $1.3 million. As of April 2, 2016 deferred financing costs were $3.9 million, net of accumulated amortization of $0.4 million. Deferred financing costs are included in other assets on the consolidated balance sheets.
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
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Numerator:
 
 
 
 
 
Net income attributable to MKHL
$
552.5

 
$
839.1

 
$
881.0

Denominator:
 
 
 
 
 
Basic weighted average shares
165,986,733

 
186,293,295

 
202,680,572

Weighted average dilutive share equivalents:
 
 
 
 
 
Share options and restricted shares/units, and performance restricted share units
2,137,080

 
2,760,994

 
3,185,197

Diluted weighted average shares
168,123,813

 
189,054,289

 
205,865,769

Basic net income per share
$
3.33

 
$
4.50

 
$
4.35

Diluted net income per share
$
3.29

 
$
4.44

 
$
4.28


Share equivalents for 2,034,658 shares, 2,255,271 shares and 699,321 shares, for fiscal years ending April 1, 2017April 2, 2016 and March 28, 2015, respectively, have been excluded from the above calculation due to their anti-dilutive effect.
Recently Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides new guidance for restricted cash classification and presentation of the statement of cash flows. ASU 2016-18 requires restricted cash to be included within cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective beginning with the Company's fiscal year 2019, with earlier application permitted, and should be applied prospectively. The Company early adopted ASU 2016-18 during Fiscal 2017, which impacted the classification of its restricted cash in its consolidated statements of cash flows.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." The new guidance requires inventory accounted for using the average cost or first-in first-out method ("FIFO") to be measured at the lower of cost or net realizable value, replacing the current requirement to value inventory at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective beginning with the Company's fiscal year 2018 and should be applied prospectively, with earlier application permitted. The adoption of ASU No. 2015-11 did not have a material impact on the Company's financial statements.
In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," which simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments and requiring such adjustments to be recognized in the reporting period in which they are determined. ASU 2015-16 requires disclosures of any amounts that would have been recorded in previous reporting periods if the adjustment was recognized as of the acquisition date. ASU 2015-16 is effective beginning with the Company's Fiscal 2017, with earlier application permitted, and should be applied prospectively. The adoption of ASU 2015-16 did not have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target under stock-based compensation arrangements that could be achieved after the service period is treated as a performance condition and not reflected in the grant-date fair value of the award. Rather, the related compensation cost should be recognized when it becomes probable that the performance targets will be achieved. ASU 2014-12 is effective beginning with the Company’s fiscal year 2018, with early adoption and retrospective application permitted. The Company adopted ASU 2014-12 during the first quarter of Fiscal 2017, which did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
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.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s Fiscal 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2014-09, including ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers" issued in December 2016, ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" issued in May 2016, ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" issued in April 2016, and ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" issued in March 2016 . The Company will consider this guidance in evaluating the impact of ASU 2014-09.
Most of our business is comprised of retail and wholesale operations, where revenue is recognized at a point of time. The Company has completed the initial assessment of the new standard and is currently progressing in its implementation. While the evaluation process is not complete, based on our assessment to date, the Company believes that some of the potential impacts of implementing this standard will include the timing of revenue recognition for its licensing royalties, recognition of breakage revenue for unredeemed gift cards, as well as expanded financial statement disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The Company currently anticipates adopting this standard using the modified retrospective method with the cumulative adjustment to retained earnings recorded during the first quarter of Fiscal 2019.
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize a lease liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is effective beginning with the Company's Fiscal 2020, with early adoption permitted, and must be implemented using a modified retrospective approach for all leases existing at, or entered into after the beginning of the earliest comparative period that is presented in the financial statements. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements but expects that the adoption of this standard will result in a significant increase in assets and liabilities on its consolidated balance sheets.
Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies accounting and presentation of share-based payments, primarily relating to the recognition and classification of excess tax benefits, accounting for forfeitures and tax withholding requirements. The Company will adopt ASU 2016-09 during the first quarter of Fiscal 2018, as required. Upon adoption, any excess tax benefits or deficiencies from share-based compensation awards, which are currently recorded as additional paid-in capital in the Company's consolidated balance sheets, will be recorded in its consolidated statements of operations and comprehensive income at the time of settlement, which will increase future volatility of tax expense. In addition, the elimination of windfall tax benefits from assumed proceeds in applying the treasury stock method for computing diluted earnings per share will result in the Company's share-based compensation awards having a more dilutive effect on earnings per share. The above changes will be adopted on a prospective basis. In addition, the Company will present excess tax benefits solely within operating activities within its consolidated statements of cash flows on a retrospective basis.
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 is permitted and should be applied on a prospective basis. The Company is currently evaluating the impact of ASU 2017-04 on the consolidated financial statements.
Acquisitions
Acquisitions
Acquisitions
Fiscal 2017 Acquisition
On May 31, 2016, the Company acquired 100% of the stock of Michael Kors (HK) Limited and its subsidiaries, its licensees in the Greater China region, which includes China, Hong Kong, Macau and Taiwan. The Company believes that having direct control of this business will allow it to better manage opportunities and capitalize on the growth potential in the region. This acquisition was funded by a cash payment of $500.0 million, which may be subject to certain purchase price adjustments. The Company accounted for the acquisition as a business combination. The following table summarized the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
 
May 31, 2016
Cash and cash equivalents
$
19.4

Accounts receivable
22.3

Inventory
36.1

Other current assets
5.5

Current assets
83.3

Property and equipment
46.6

Goodwill
96.5

Reacquired rights
400.4

Favorable lease assets
1.8

Customer relationships
0.7

Deferred tax assets
7.8

Other assets
6.6

Total assets acquired
$
643.7

 
 
Accounts payable
$
8.9

Short-term debt
5.8

Other current liabilities
27.8

Current liabilities
42.5

Unfavorable lease liabilities
4.8

Deferred tax liabilities
92.3

Other liabilities
4.1

Total liabilities assumed
$
143.7

 
 
Fair value of net assets acquired
$
500.0

 
 
Fair value of acquisition consideration
$
500.0


The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, with the $96.5 million difference between the purchase price over the net identifiable tangible and intangible assets acquired allocated to goodwill, which is not deductible for tax purposes. As part of this acquisition, the Company reacquired the rights to use its trademarks and to import, sell, advertise and promote certain of its products in the licensed territories, which were previously granted to its licensees in the Greater China region. As such, the Company recognized reacquired rights as a separate intangible asset from goodwill, which will be amortized through March 31, 2041, the original expiration date of its license agreement in the Greater China region. In addition, the Company recognized customer relationship intangible assets associated with wholesale customers, which will be amortized over ten years. The favorable lease assets and unfavorable lease liabilities have been separately recorded in the Company's financial statements and are recognized as rent expense and a reduction in rent expense, respectively, over the remaining term of the related lease agreements.
MKHKL's results of operations have been included in our consolidated financial statements beginning on June 1, 2016. MKHKL contributed total revenue of $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 years ended April 1, 2017 and April 2, 2016 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 finite-lived intangible assets acquired (reacquired rights and customer relationships), fair value adjustments relating to leases, fixed assets and inventory, and the related tax effects assuming that the business combination occurred on March 29, 2015. The pro-forma consolidated results of operations for the fiscal year ended April 1, 2017 also reflect the elimination of transaction costs of approximately $11.3 million, which have been recorded within selling, general and administrative expenses in the Company's consolidated statements of operations and comprehensive income for the fiscal year ended April 1, 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. The following table summarizes the fair values of the assets acquired and liabilities assumed (in millions):
 
January 1, 2016
Inventory
$
3.0

Fixed assets
2.1

Customer relationship intangible assets
2.2

Fair value of assets acquired
7.3

Less: consideration paid
3.6

Gain on acquisition of MK Korea
$
3.7


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.
The customer relationship intangible assets associated with the retail concession arrangements and wholesale relationships are being amortized over 5 years.
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.
The Company accounted for its acquisition of controlling interest in MK Panama as a business combination during the second quarter of Fiscal 2016. The following table summarizes the fair values of the assets acquired and liabilities and non-controlling interest assumed as of the date the Company obtained control of MK Panama, inclusive of certain post-closing working capital adjustments (in millions):
 
June 28, 2015
Current assets
$
25.9

Fixed assets
6.4

Customer relationship intangible assets
2.0

Goodwill
9.2

Debt obligations
(9.5
)
Other liabilities
(2.3
)
Total fair value of net assets of MK Panama
31.7

Fair value of preexisting interest in MK Panama
8.1

Non-controlling interest
5.1

Fair value of consideration provided
$
18.5


In connection with this acquisition, the Company recorded non-deductible goodwill of $9.2 million, of which $8.0 million and $1.2 million was assigned to the Company's retail and wholesale segments, respectively. The customer relationship intangible assets are being amortized over 10 years. The amount recorded in the Company's consolidated statement of operations and comprehensive income in connection with the revaluation of its prior interest in MK Panama was not material.
Receivables
Receivables
Receivables
Receivables consist of (in millions):
 
April 1,
2017
 
April 2,
2016
Trade receivables:
 
 
 
Credit risk assumed by insured/factors
$
294.0

 
$
353.7

Credit risk retained by Company
63.8

 
61.8

Receivables due from licensees
11.9

 
9.5

 
369.7

 
425.0

Less allowances:
(103.9
)
 
(117.1
)
 
$
265.8

 
$
307.9


Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on wholesale customers' sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in net sales.
The Company has assumed responsibility for most of the previously factored accounts receivable balances, but a large percentage of its trade receivables as of April 1, 2017 and April 2, 2016 are insured. The Company's allowance for doubtful accounts is determined through analysis of periodic aging of receivables that are not covered by insurance and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions of the Company’s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowance for doubtful accounts was $0.9 million and $0.7 million as of April 1, 2017 and April 2, 2016.
Concentration of Credit Risk, Major Customers and Suppliers
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/factors”). For the fiscal years ended April 1, 2017April 2, 2016 and March 28, 2015, net sales related to our largest wholesale customer, Macy's, accounted for approximately 8.9%, 12.7% and 13.7%, 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 2017, Fiscal 2016 or Fiscal 2015.
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 has relationships with various agents who source the Company’s finished goods with numerous contractors on the Company’s behalf. For the fiscal years ended April 1, 2017April 2, 2016 and March 28, 2015, one agent sourced approximately 13.9%, 14.9% and 11.7%, respectively, and one contractor accounted for approximately 29.6%, 26.7% and 29.1%, respectively, of the Company’s finished goods purchases.
Property and Equipment, Net
Property and Equipment, Net
Property and Equipment, Net
Property and equipment, net, consists of (in millions):
 
April 1,
2017
 
April 2,
2016
Leasehold improvements
$
507.9

 
$
414.6

In-store shops
256.0

 
242.9

Furniture and fixtures
244.1

 
212.7

Computer equipment and software
226.2

 
167.9

Equipment
104.4

 
79.1

Building
40.6

 

Land
14.0

 
15.1

 
1,393.2

 
1,132.3

Less: accumulated depreciation and amortization
(833.9
)
 
(490.9
)
 
559.3

 
641.4

Construction-in-progress
32.2

 
116.8

 
$
591.5

 
$
758.2


Depreciation and amortization of property and equipment for the fiscal years ended April 1, 2017April 2, 2016, and March 28, 2015, was $197.7 million, $172.2 million and $131.4 million, respectively. During Fiscal 2017, Fiscal 2016 and Fiscal 2015, the Company recorded fixed asset impairment charges of $169.0 million, $10.9 million and $0.8 million, respectively, primarily related to underperforming retail locations still in operation. Please refer to Note 18 for detailed disclosures of impairment charges by segment.
Intangible Assets and Goodwill
Intangible Assets and Goodwill
Intangible Assets and Goodwill
The following table details the carrying values of the Company's intangible assets that are subject to amortization (in millions):
 
April 1, 2017
 
April 2, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Reacquired Rights
$
400.4

 
$
13.4

 
$
387.0

 
$

 
$

 
$

Trademarks
23.0

 
16.3

 
6.7

 
23.0

 
15.1

 
7.9

Lease Rights
74.2

 
53.8

(1) 
20.4

 
73.3

 
17.8

 
55.5

Customer Relationships
5.0

 
1.0

 
4.0

 
4.2

 
0.2

 
4.0

 
$
502.6

 
$
84.5

 
$
418.1

 
$
100.5

 
$
33.1

 
$
67.4


________________________________
(1) Includes $30.2 million of impairment charges recorded during 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 and Fiscal 2015.
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 Company’s brand name and are amortized over twenty years. Customer relationships are amortized over five to ten years. Lease rights are amortized over the respective terms of the underlying lease, including highly probable renewal periods. Amortization expense was $22.1 million, $11.0 million and $7.0 million, respectively, for each of the fiscal years ended April 1, 2017April 2, 2016 and March 28, 2015.
Estimated amortization expense for each of the next five years is as follows (in millions):
Fiscal 2018
$
20.4

Fiscal 2019
20.4

Fiscal 2020
20.4

Fiscal 2021
20.2

Fiscal 2022
19.8

Thereafter
316.9

 
$
418.1


The future amortization expense above reflects weighted-average estimated remaining useful lives of 24.2 years for reacquired rights, 5.8 years for trademarks, 6.5 years for customer relationships and 8.3 years for lease rights.
The following table details the changes in goodwill for each of the Company's reportable segments (in millions):
 
Retail
 
Wholesale
 
Licensing
 
Total
Balance at April 2, 2016
$
8.0

 
$
13.3

 
$
1.9

 
$
23.2

Acquisition of MKHKL
83.9

 
12.6

 

 
96.5

Balance at April 1, 2017
$
91.9

 
$
25.9

 
$
1.9

 
$
119.7


The Company's goodwill is not subject to amortization but is evaluated for impairment annually in the last quarter of each fiscal year, or whenever impairment indicators exist. The Company evaluated goodwill during the fourth fiscal quarter of Fiscal 2017, and determined that there was no impairment (See Note 11 for additional information). As of April 1, 2017, cumulative impairment related to goodwill totaled $5.4 million. There were no charges related to the impairment of goodwill in any of the periods presented.
Current Assets and Current Liabilities
Current Assets and Current Liabilities
Current Assets and Current Liabilities
Prepaid expenses and other current assets consist of the following (in millions):
 
April 1,
2017
 
April 2,
2016
Prepaid taxes
$
56.6

 
$
57.8

Prepaid rent
21.7

 
27.3

Leasehold incentive receivable
12.0

 
8.9

Unrealized gains on forward foreign exchange contracts
4.7

 
0.1

Restricted cash
1.9

 

Other
25.0

 
19.0

 
$
121.9

 
$
113.1


Accrued expenses and other current liabilities consist of the following (in millions):
 
April 1,
2017
 
April 2,
2016
Accrued capital expenditures
$
20.5

 
$
33.6

Advance royalties
5.0

 
30.2

Other taxes payable
29.2

 
38.2

Accrued rent
21.5

 
30.5

Gift cards and retail store credits
12.9

 
13.1

Professional services
7.1

 
7.0

Unrealized loss on forward foreign exchange contracts
0.4

 
5.5

Accrued advertising and marketing
10.7

 
8.8

Other
27.7

 
25.9

 
$
135.0

 
$
192.8

Debt Obligations
Debt Obligations
Debt Obligations
Senior Unsecured Revolving Credit Facility
On October 29, 2015, the Company entered into an amended and restated senior unsecured revolving credit facility ("2015 Credit Facility") with, among others, JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), as administrative agent, which replaced its prior 2013 senior unsecured revolving credit facility ("2013 Credit Facility"). The Company and its U.S., Canadian, Dutch and Swiss subsidiaries are the borrowers under the 2015 Credit Facility. The borrowers and certain material subsidiaries of the Company provide unsecured guarantees of the 2015 Credit Facility. The 2015 Credit Facility provides for up to $1.0 billion in borrowings, which may be denominated in U.S. Dollars and other currencies, including Euros, Canadian Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The 2015 Credit Facility also provides for the issuance of letters of credit of up to $75.0 million and swing line loans of up to $50.0 million. The Company has the ability to expand its borrowing availability under the 2015 Credit Facility by up to an additional $500.0 million, subject to the agreement of the participating lenders and certain other customary conditions. The 2015 Credit Facility expires on October 29, 2020.
Borrowings under the 2015 Credit Facility bear interest, at the Company's option, at (i) for loans denominated in U.S. Dollars, an alternative base rate, which is the greater of the prime rate publicly announced from time to time by JPMorgan Chase, the greater of the federal funds effective rate or Federal Reserve Bank of New York overnight bank funding rate plus 50 basis points or the one-month London Interbank Offered Rate adjusted for statutory reserve requirements for Eurocurrency liabilities ("Adjusted LIBOR") plus 100 basis points, in each case, plus an applicable margin based on the Company's leverage ratio; (ii) Adjusted LIBOR for the applicable interest period, plus an applicable margin based on the Company's leverage ratio; (iii) for Canadian borrowings, the Canadian prime rate, which is the greater of the PRIMCAN Index rate or the rate applicable to one-month Canadian Dollar banker's acceptances quoted on Reuters ("CDOR") plus 100 basis points, plus an applicable margin based on the Company's leverage ratio; or (iv) for Canadian borrowings, the average CDOR rate for the applicable interest period, plus an applicable margin based on the Company's leverage ratio.
The 2015 Credit Facility also provides for an annual administration fee and a commitment fee equal to 0.10% to 0.175% per annum, based on the Company's leverage ratio, applied to the average daily unused amount of the facility. Loans under the 2015 Credit Facility may be prepaid and commitments may be terminated or reduced by the borrowers without premium or penalty other than customary breakage costs with respect to loans bearing interest based upon Adjusted LIBOR or the CDOR rate.
The 2015 Credit Facility requires the Company to maintain a leverage ratio at the end of each fiscal quarter of no greater than 3.5 to 1. Such leverage ratio is calculated as the ratio of the sum of total indebtedness as of the date of the measurement plus 6.0 times the consolidated rent expense for the last four consecutive fiscal quarters, to Consolidated EBITDAR for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined as consolidated net income plus income tax expense, net interest expense, depreciation and amortization expense, consolidated rent expense and other non-cash charges, subject to certain deductions. The 2015 Credit Facility also includes covenants that limit additional indebtedness, guarantees, liens, acquisitions and other investments and cash dividends that are customary for financings of this type. As of April 1, 2017, the Company was in compliance with all covenants related to this agreement.
The 2015 Credit Facility contains events of default customary for financings of this type, including but not limited to, payment defaults, material inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy or insolvency, certain events under ERISA, material judgments, actual or asserted failure of any guaranty supporting the 2015 Credit Facility to be in full force and effect, and change of control. If such an event of default occurs, the lenders under the 2015 Credit Facility would be entitled to take various actions, including terminating the commitments and accelerating amounts outstanding under the 2015 Credit Facility.
As of April 1, 2017, the Company had $127.3 million of borrowings outstanding under the 2015 Credit Facility, which were recorded within short-term debt in its consolidated balance sheet as of April 1, 2017. In addition, stand-by letters of credit of $10.6 million were outstanding as of April 1, 2017. There were no borrowings outstanding under the 2015 Credit Facility as of April 2, 2016. At April 1, 2017, the amount available for future borrowings was $862.1 million.

Hong Kong Credit Facility
In December 2016, the Company's Hong Kong subsidiary, MKHKL, renewed its uncommitted credit facility ("HK Credit Facility") with HSBC (the "Bank"), which may be used to fund general working capital needs of MKHKL through November 30, 2017 subject to the Bank's discretion. The HK Credit Facility provides MKHKL with a revolving line of credit of up to 100.0 million Hong Kong Dollars (approximately $12.9 million), and may be used to support bank guarantees. In addition, this credit facility provides for a business card facility of up to 0.4 million Hong Kong Dollars (less than $0.1 million). Borrowings under the HK Credit Facility must be made in increments of at least 5.0 million Hong Kong Dollars and bear interest at the Hong Kong Interbank Offered Rate ("HIBOR") plus 150 basis points. As of 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. In addition, as of April 1, 2017, bank guarantees supported by this facility were 11.8 million Hong Kong Dollars (approximately $1.5 million). At April 1, 2017, the amount available for future borrowings under the HK Credit Facility was 43.2 million Hong Kong Dollars (approximately $5.6 million).
Debt Obligations of MK Panama
The Company's consolidated balance sheet as of April 2, 2016 included $2.3 million in debt related to MK Panama, which was no longer outstanding as of April 1, 2017.
Commitments and Contingencies
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 June 2035. 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
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Minimum rentals
$
257.0

 
$
193.5

 
$
151.0

Contingent rent
75.5

 
64.4

 
65.8

Total rent expense
$
332.5

 
$
257.9

 
$
216.8


Future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in millions):
Fiscal years ending:
 
2018
$
250.1

2019
238.2

2020
226.4

2021
214.6

2022
163.5

Thereafter
549.3

 
$
1,642.1


The Company has issued stand-by letters of credit to guarantee certain of its retail and corporate operating lease commitments, aggregating $11.1 million at April 1, 2017, including $10.6 million in letters of credit issued under the 2015 Credit Facility.
Other Commitments
As of April 1, 2017, the Company also has other contractual commitments aggregating $772.3 million, which consist of inventory purchase commitments of $599.4 million, debt obligations of $133.1 million and other contractual obligations of $39.8 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 $1.0 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.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
Fair Value of Financial Instruments
Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
At April 1, 2017 and April 2, 2016, the fair values of the Company’s foreign currency forward contracts, the Company’s only derivative instruments, were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or (liabilities) to the Company, as detailed in Note 12.
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in millions):
 
Fair value at April 1, 2017, using:
 
Fair value at April 2, 2016, using:
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Forward foreign currency exchange contracts - assets
$

 
$
4.7

 
$

 
$

 
$
0.1

 
$

Forward foreign currency exchange contracts - liabilities
$

 
$
0.4

 
$

 
$

 
$
5.5

 
$


The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value. Borrowings under revolving credit agreements, if outstanding, are recorded at carrying value, which resembles fair value due to the short-term nature of such borrowings.
Non-financial Assets and Liabilities

The Company's non-financial assets include goodwill, intangible assets and property and equipment. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. The Company's goodwill is assessed for impairment at least annually, while its other long-lived assets, including fixed assets and finite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The fair values of these assets 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 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

 
 
 
 
 
 
Fiscal 2015:
 
 
 
 
 
Fixed Assets
$
0.8

 
$

 
$
0.8


Please refer to Notes 6, 7 and 18 for additional information.
During the fourth quarter of Fiscal 2017, the Company elected to perform its annual goodwill impairment analysis using a quantitative approach, using the discounted cash flow method to estimate fair value. Based on the results of this assessment, the Company concluded that the fair values of all reporting units significantly exceeded the related carrying amounts and there were no reporting units at risk of impairment. There were no impairment charges related to goodwill in any of the fiscal periods presented.
Derivative Financial Instruments
Derivative Financial Instruments
Derivative Financial Instruments
The Company uses forward foreign currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company in its normal course of business enters into transactions with foreign suppliers and seeks to minimize risks related to certain forecasted inventory purchases by using forward foreign currency exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company does not enter into derivative contracts for trading or speculative purposes.
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of April 1, 2017 and April 2, 2016 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Designated forward foreign currency exchange contracts
$
167.5

 
$
174.1

 
$
4.7

 
$
0.1

 
$
0.4

 
$
5.1

Undesignated forward foreign currency exchange contracts

 
30.0

 

 

 

 
0.4

Total
$
167.5

 
$
204.1

 
$
4.7

 
$
0.1

 
$
0.4

 
$
5.5

 
 
(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 assets and liabilities of $4.7 million and $0.3 million, respectively, 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, 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 April 1, 2017
 
Fiscal Year Ended April 2, 2016
 
Fiscal Year Ended March 28, 2015
 
Pre-Tax
Gain
Recognized
in OCI
 
Pre-tax Gain
Reclassified from
Accumulated OCI
into Earnings
 
Pre-Tax
Loss
Recognized
in OCI
 
Pre-tax Gain
Reclassified from
Accumulated OCI
into Earnings
 
Pre-Tax
Gain
Recognized in OCI
 
Pre-tax Gain
Reclassified from
Accumulated OCI into Earnings
Designated hedges
$
10.2

 
$
0.4

 
$
(25.2
)
 
$
10.9

 
$
36.6

 
$
2.1


Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive loss will be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turnover. These amounts are subject to fluctuations in the applicable currency exchange rates.
During Fiscal 2017, Fiscal 2016 and Fiscal 2015, the Company recognized net gains of $2.6 million, losses of $2.1 million and gains of $1.5 million respectively, related to the change in the fair value of undesignated forward currency exchange contracts within foreign currency loss in the Company’s consolidated statements of operations and comprehensive income.
Shareholders' Equity
Shareholders' Equity
Shareholders’ Equity
Share Repurchase Program
On May 25, 2016, the Company's Board of Directors authorized a new $1.0 billion share repurchase program, which replaced the remaining balance of the previous share repurchase program authorized on October 30, 2014. During Fiscal 2017 and Fiscal 2016, the Company repurchased 21,756,353 shares and 24,757,543 shares, respectively, at a cost of $1.000 billion and $1.150 billion, respectively, under its current share-repurchase program through open market transactions. As of April 1, 2017, the Company has fully utilized the previously authorized amount under the share repurchase program. On May 25, 2017, the Company's Board of Directors authorized a new $1.000 billion share repurchase program.
The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary shares from certain executive officers to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards. During Fiscal 2017 and Fiscal 2016, the Company withheld 100,552 shares and 54,875 shares, respectively, at a cost of $4.8 million and $2.4 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
The following table details changes in the components of accumulated other comprehensive loss, net of taxes for Fiscal 2017, Fiscal 2016 and Fiscal 2015 (in millions):
 
Foreign  Currency
Translation
Losses
 
Net Gains
(Losses) on
Derivatives
 
Other comprehensive loss attributable to MKHL
 
Other comprehensive income attributable to noncontrolling interest
 
Total other comprehensive loss
Balance at March 29, 2014
$
(4.8
)
 
$
(1.6
)
 
$
(6.4
)
 
$

 
$
(6.4
)
Other comprehensive (loss) income before reclassifications
(91.3
)
 
32.8

(1) 
(58.5
)
 

 
(58.5
)
Less: amounts reclassified from AOCI to earnings

 
1.9

(2) 
1.9

 

 
1.9

Other comprehensive (loss) income, net of tax
(91.3
)
 
30.9

(1) 
(60.4
)
 

 
(60.4
)
Balance at March 28, 2015
(96.1
)
 
29.3

 
(66.8
)
 

 
(66.8
)
Other comprehensive income (loss) before reclassifications
18.4

 
(22.6
)
(1) 
(4.2
)
 
0.1

 
(4.1
)
Less: amounts reclassified from AOCI to earnings

 
9.9

(2) 
9.9

 

 
9.9

Other comprehensive income (loss), net of tax
18.4

 
(32.5
)
 
(14.1
)
 
0.1

 
(14.0
)
Balance at April 2, 2016
(77.7
)
 
(3.2
)
(1) 
(80.9
)
 
0.1

 
(80.8
)
Other comprehensive (loss) income before reclassifications
(8.4
)
(3) 
9.0

(1) 
0.6

 
(0.4
)
 
0.2

Less: amounts reclassified from AOCI to earnings

 
0.3

(2) 
0.3

 

 
0.3

Other comprehensive (loss) income, net of tax
(8.4
)
 
8.7

 
0.3

 
(0.4
)
 
(0.1
)
Balance at April 1, 2017
$
(86.1
)
 
$
5.5

(1) 
$
(80.6
)
 
$
(0.3
)
 
$
(80.9
)
 
 
(1) 
Accumulated other comprehensive income related to net gains (losses) on derivative financial instruments is net of a tax provision (benefit) of $0.8 million, $(0.3) million and $3.3 million, respectively, as of April 1, 2017, April 2, 2016 and March 28, 2015. Other comprehensive income (loss) before reclassifications related to derivative instruments for Fiscal 2017, Fiscal 2016, and Fiscal 2015 is net of a tax provision (benefit) of $1.2 million, $(2.6) million and $3.7 million, respectively.
(2) 
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within cost of goods sold in the Company’s consolidated statements of operations and comprehensive income. The amount reclassified from other comprehensive income for Fiscal 2016 is net of a tax provision of $1.0 million. The tax effects related to other fiscal years were not material.
(3) 
Foreign currency translation losses for Fiscal 2017 include net losses of $2.4 million on intra-entity transactions that are of a long-term investment nature.
Share-Based Compensation
Share-Based Compensation
Share-Based Compensation
The Company issues equity grants to certain employees and directors of the Company at the discretion of the Company’s Compensation and Talent Committee. The Company has two equity plans, one adopted in Fiscal 2008, the Michael Kors (USA), Inc. Stock Option Plan (as amended and restated, the “2008 Plan”), and the other adopted in the third fiscal quarter of Fiscal 2012 and amended and restated with shareholder approval in May 2015, the Michael Kors Holdings Limited Amended and Restated Omnibus Incentive Plan (the “Incentive Plan”). The 2008 Plan only provided for grants of share options and was authorized to issue up to 23,980,823 ordinary shares. As of April 1, 2017, there were no shares available to grant equity awards under the 2008 Plan. The Incentive Plan allows for grants of share options, restricted shares and restricted share units, and other equity awards, and authorizes a total issuance of up to 15,246,000 ordinary shares. At April 1, 2017, there were 8,770,441 ordinary shares available for future grants of equity awards under the Incentive Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the Incentive Plan generally expire seven years from the date of the grant.
Share Options
Share options are generally exercisable at no less than the fair market value on the date of grant. The Company has issued two types of option grants, those that vest based on the attainment of a performance target and those that vest based on the passage of time. Under the 2008 Plan, performance-based share options may vest based upon the attainment of one of two performance measures. One performance measure is a divisional performance target and the other measure is a company-wide performance target, which is based on a cumulative minimum growth requirement in consolidated net equity. The individual performance target vests 20% of the total option grant each year the target is satisfied. The individual has ten years in which to achieve five individual performance vesting tranches. The company-wide performance target must be achieved over the ten-year term. Performance is measured at the end of the term, and any unvested options vest if the target is achieved. The Company-wide performance target is established at the time of the grant. The target metrics underlying individual performance vesting requirements are established for each recipient each year up until such time as the grant is fully vested. Under the Incentive Plan, options subject to time-based vesting requirements become vested in four equal increments on each of the four anniversaries of the date on of grant.
The following table summarizes the share options activity during Fiscal 2017, and information about options outstanding at April 1, 2017:
 
Number of
Options
 
Weighted
Average
Exercise price
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at April 2, 2016
5,820,413

 
$
28.41

 
 
 
 
Granted
177,666

 
$
49.88

 
 
 
 
Exercised
(794,482
)
 
$
10.49

 
 
 
 
Canceled/forfeited
(412,552
)
 
$
70.62

 
 
 
 
Outstanding at April 1, 2017
4,791,045

 
$
28.55

 
3.29
 
$
88.6

Vested or expected to vest at April 1, 2017
4,774,511

 
$
28.55

 
3.29
 
 
Vested and exercisable at April 1, 2017
3,909,592

 
$
21.60

 
2.95
 
$
86.8


There were 881,453 unvested options and 3,909,592 vested options outstanding at April 1, 2017. The total intrinsic value of options exercised during Fiscal 2017 and Fiscal 2016 was $30.5 million and $70.3 million, respectively. The cash received from options exercised during Fiscal 2017 and Fiscal 2016 was $8.3 million and $12.7 million, respectively. As of April 1, 2017, the remaining unrecognized share-based compensation expense for nonvested share options was $9.2 million, which is expected to be recognized over the related weighted-average period of approximately 1.71 years.
The weighted average grant date fair value for options granted during Fiscal 2017, Fiscal 2016 and Fiscal 2015, was $13.79, $14.35 and $27.96, respectively. The following table represents assumptions used to estimate the fair value of options:
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Expected dividend yield
0.0
%
 
0.0
%
 
0.0
%
Volatility factor
30.1
%
 
31.1
%
 
33.2
%
Weighted average risk-free interest rate
1.1
%
 
1.6
%
 
1.5
%
Expected life of option
4.75 years

 
4.75 years

 
4.75 years


Restricted Shares and Restricted Share Units
The Company grants restricted shares and restricted share units at the fair market value on the date of the grant. Expense for restricted share awards is based on the closing market price of the Company’s shares on the date of grant and is recognized ratably over the vesting period net of expected forfeitures.
Restricted share grants generally vest in equal increments on each of the four anniversaries of the date of grant. In addition, the Company grants two types of restricted share unit (“RSU”) awards: time-based RSUs and performance-based RSUs. Time-based RSUs generally vest in full either on the first anniversary of the date of grant for our independent directors, or in equal increments on each of the four anniversaries of the date of grant. Performance-based RSUs vest in full on the three-year anniversary of the date of grant, subject to the employee’s continued employment during the vesting period and only if certain pre-established cumulative performance targets are met at the end of the three-year performance period. Expense related to performance-based RSUs is recognized ratably over the three-year performance period, net of forfeitures, based on the probability of attainment of the related performance targets. The potential number of shares that may be earned ranges from 0%, if the minimum level of performance is not attained, to 150%, if the level of performance is at or above the predetermined maximum achievement level.
The following table summarizes restricted share activity during Fiscal 2017:
 
Restricted Shares
 
Number of Unvested
Restricted Shares
 
Weighted
Average Grant
Date Fair Value
Unvested at April 2, 2016
390,229

 
$
82.38

Granted

 
$

Vested
(139,759
)
 
$
79.46

Canceled/forfeited
(65,045
)
 
$
83.71

Unvested at April 1, 2017
185,425

 
$
84.12


The total fair value of restricted shares vested was $6.7 million, $14.4 million and $22.8 million during Fiscal 2017, Fiscal 2016 and Fiscal 2015, respectively. As of April 1, 2017, the remaining unrecognized share-based compensation expense for non-vested restricted share grants was $8.5 million, which is expected to be recognized over the related weighted-average period of approximately 1.16 years.
The following table summarizes the RSU activity during Fiscal 2017:
 
Service-based
 
Performance-based
 
Number of
Restricted
Share Units
 
Weighted
Average Grant
Date Fair Value
 
Number of
Restricted
Share Units
 
Weighted
Average Grant
Date Fair Value
Unvested at April 2, 2016
1,071,058

 
$
47.13

 
579,774

 
$
61.84

Granted
907,149

 
$
49.27

 
98,237

 
$
49.88

Increase due to performance condition

 
$

 
80,093

 
$
62.24

Vested
(278,643
)
 
$
47.62

 
(240,278
)
 
$
62.24

Canceled/forfeited
(228,797
)
 
$
46.92

 
(116,049
)
 
$
62.73

Unvested at April 1, 2017
1,470,767

 
$
48.39

 
401,777

 
$
58.50


The total fair value of service-based RSUs vested during Fiscal 2017, Fiscal 2016 and Fiscal 2015 was $13.7 million, $1.1 million and $0.4 million, respectively. As of April 1, 2017, the remaining unrecognized share-based compensation expense for non-vested service-based and performance-based RSU grants was $54.0 million and $0.5 million, respectively, which is expected to be recognized over the related weighted-average periods of approximately 2.70 years and 0.22 years, respectively.
Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for Fiscal 2017, Fiscal 2016 and Fiscal 2015 (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Share-based compensation expense
$
33.9

 
$
48.4

 
$
48.9

Tax benefits related to share-based compensation expense
$
11.2

 
$
15.7

 
$
17.5


Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rate to date. The estimated value of future forfeitures for equity grants as of April 1, 2017 is approximately $1.8 million.
Taxes
Taxes
Taxes
On October 29, 2014, the Company's Board of Directors approved a proposal to move the Company’s principal executive office from Hong Kong to the United Kingdom ("U.K.") and to become a U.K. tax resident. The Company will remain incorporated in the British Virgin Islands. The Company has achieved tremendous international growth over the past several years and believes that moving its principal executive office to the U.K. will better position it for further expansion in Europe and internationally, and allow it to compete more effectively with other international luxury brands.
MKHL’s subsidiaries are subject to taxation in the U.S. and various other foreign jurisdictions, which are aggregated in the “Non-U.S.” information captioned below.
Income before provision for income taxes consisted of the following (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
U.S.
$
228.4

 
$
737.5

 
$
814.3

Non-U.S.
460.2

 
434.8

 
441.5

Total income before provision for income taxes
$
688.6

 
$
1,172.3

 
$
1,255.8


The provision for income taxes was as follows (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Current
 
 
 
 
 
U.S. Federal
$
131.2

 
$
268.0

 
$
277.0

U.S. State
20.4

 
14.3

 
49.7

Non-U.S.
45.8

 
54.2

 
41.9

Total current
197.4

 
336.5

 
368.6

Deferred
 
 
 
 
 
U.S. Federal
(34.1
)
 
0.3

 
5.0

U.S. State
(5.0
)
 
1.0

 
0.3

Non-U.S.
(21.2
)
 
(3.2
)
 
0.9

Total deferred
(60.3
)
 
(1.9
)
 
6.2

Total provision for income taxes
$
137.1

 
$
334.6

 
$
374.8


The Company's provision for income taxes for the years ended April 1, 2017, April 2, 2016 and March 28, 2015 was different from the amount computed by applying statutory U.K. or U.S. federal income tax rates to the underlying income from continuing operations before income taxes and equity in net income of affiliates as a result of the following:
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Provision for income taxes at the U.K. (2017), U.S. (2015-2016) statutory tax rate
20.0
 %
 
35.0
 %
 
35.0
 %
State and local income taxes, net of federal benefit
1.3
 %
 
1.2
 %
 
2.4
 %
Effects of global financing arrangements
(13.7
)%
 
(2.8
)%
 
(2.8
)%
Differences in tax effects on foreign income
11.1
 %
 
(5.1
)%
 
(5.4
)%
Foreign tax credit
0.3
 %
 
(0.2
)%
 
(0.4
)%
Liability for uncertain tax positions
 %
 
 %
 
0.2
 %
Effect of changes in valuation allowances on deferred tax assets
0.5
 %
 
(0.2
)%
 
(0.1
)%
Other
0.4
 %
 
0.6
 %
 
0.9
 %
Effective tax rate
19.9
 %
 
28.5
 %
 
29.8
 %

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
Deferred tax assets
 
 
 
Inventories
$
9.0

 
$
10.5

Payroll related accruals
2.2

 
2.2

Deferred rent
39.5

 
37.1

Net operating loss carryforwards
17.7

 
3.4

Stock compensation
26.2

 
30.0

Sales allowances
10.0

 
13.4

Other
14.7

 
12.1

 
119.3

 
108.7

Valuation allowance
(7.2
)
 
(3.4
)
Total deferred tax assets
112.1

 
105.3

 
 
 
 
Deferred tax liabilities
 
 
 
Goodwill and intangibles
(112.3
)
 
(32.9
)
Depreciation
(2.7
)
 
(48.0
)
Other
(3.8
)
 
(3.4
)
Total deferred tax liabilities
(118.8
)
 
(84.3
)
Net deferred tax assets (liabilities)
$
(6.7
)
 
$
21.0


The Company maintains valuation allowances on deferred tax assets applicable to subsidiaries in jurisdictions for which separate income tax returns are filed and where realization of the related deferred tax assets from future profitable operations is not reasonably assured. Deferred tax valuation allowances increased approximately $4.4 million, $3.3 million and $0.2 million in Fiscal 2017, Fiscal 2016 and Fiscal 2015, respectively. As a result of the attainment and expectation of achieving profitable operations in certain countries comprising the Company’s European operations, for which deferred tax valuation allowances had been previously established, the Company released valuation allowances amounting to approximately $0.6 million, $5.6 million and $2.6 million in Fiscal 2017, Fiscal 2016 and Fiscal 2015, respectively.
At April 1, 2017, the Company had non-U.S. net operating loss carryforwards of approximately $85.8 million that will begin to expire in 2018.
As of April 1, 2017 and April 2, 2016, the Company has liabilities related to its uncertain tax positions, including accrued interest, of approximately $29.1 million and $18.5 million, respectively, which are included in other long-term liabilities in the Company’s audited consolidated balance sheets.
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately$26.5 million, $16.8 million and $19.9 million as of April 1, 2017, April 2, 2016 and March 28, 2015, respectively. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2017, Fiscal 2016 and Fiscal 2015, are presented below (in millions):
 
Fiscal Years Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Unrecognized tax benefits beginning balance
$
16.8

 
$
19.9