MICHAEL KORS HOLDINGS LTD, 10-K filed on 6/1/2016
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Apr. 2, 2016
May 25, 2016
Sep. 26, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Apr. 02, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
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
--04-02 
 
 
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
 
176,472,163 
 
Entity Public Float
 
 
$ 7,523,414,533 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Apr. 2, 2016
Mar. 28, 2015
Current assets
 
 
Cash and cash equivalents
$ 702.0 
$ 978.9 
Receivables, net
307.9 
363.4 
Inventories
546.8 
519.9 
Prepaid expenses and other current assets
113.1 
127.5 
Total current assets
1,669.8 
1,989.7 
Property and equipment, net
758.2 
562.9 
Intangible assets, net
67.4 
61.5 
Goodwill
23.2 
14.0 
Deferred tax assets
24.5 
23.0 
Other assets
23.7 
33.5 
Total assets
2,566.8 
2,684.6 
Current liabilities
 
 
Accounts payable
131.4 
114.1 
Accrued payroll and payroll related expenses
59.7 
62.9 
Accrued income taxes
51.6 
25.5 
Accrued expenses and other current liabilities
192.8 
123.8 
Total current liabilities
435.5 
326.3 
Deferred rent
106.4 
88.3 
Deferred tax liabilities
3.5 
7.0 
Long-term debt
2.3 
Other long-term liabilities
19.6 
22.0 
Total liabilities
567.3 
443.6 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Ordinary shares, no par value; 650,000,000 shares authorized; 208,084,175 shares issued and 176,441,891 outstanding at April 2, 2016; 206,486,699 shares issued and 199,656,833 outstanding at March 28, 2015
Treasury shares, at cost (31,642,284 shares at April 2, 2016 and 6,829,866 shares at March 28, 2015)
(1,650.1)
(497.7)
Additional paid-in capital
718.9 
636.7 
Accumulated other comprehensive loss
(80.9)
(66.8)
Retained earnings
3,007.8 
2,168.8 
Total shareholders' equity of MKHL
1,995.7 
2,241.0 
Noncontrolling interest
3.8 
Total equity
1,999.5 
2,241.0 
Total liabilities and shareholders’ equity
$ 2,566.8 
$ 2,684.6 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Apr. 2, 2016
Mar. 28, 2015
Statement of Financial Position [Abstract]
 
 
Ordinary shares, par value (dollars per share)
$ 0 
$ 0 
Ordinary shares, shares authorized (in shares)
650,000,000 
650,000,000 
Ordinary shares, shares issued (in shares)
208,084,175 
206,486,699 
Ordinary shares, shares outstanding (in shares)
176,441,891 
199,656,833 
Treasury shares (in shares)
31,642,284 
6,829,866 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
12 Months Ended
Apr. 2, 2016
Mar. 28, 2015
Mar. 29, 2014
Income Statement [Abstract]
 
 
 
Net sales
$ 4,538,800,000 
$ 4,199,700,000 
$ 3,170,500,000 
Licensing revenue
173,300,000 
171,800,000 
140,300,000 
Total revenue
4,712,100,000 
4,371,500,000 
3,310,800,000 
Cost of goods sold
1,914,900,000 
1,723,800,000 
1,294,700,000 
Gross profit
2,797,200,000 
2,647,700,000 
2,016,100,000 
Selling, general and administrative expenses
1,428,000,000 
1,251,500,000 
926,900,000 
Depreciation and amortization
183,200,000 
138,400,000 
79,700,000 
Impairment of long-lived assets
10,900,000 
800,000 
1,300,000 
Total operating expenses
1,622,100,000 
1,390,700,000 
1,007,900,000 
Income from operations
1,175,100,000 
1,257,000,000 
1,008,200,000 
Other income, net
(3,700,000)
(1,600,000)
Interest expense, net
1,700,000 
200,000 
400,000 
Foreign currency loss
4,800,000 
2,600,000 
100,000 
Income before provision for income taxes
1,172,300,000 
1,255,800,000 
1,007,700,000 
Provision for income taxes
334,600,000 
374,800,000 
346,200,000 
Net income
837,700,000 
881,000,000 
661,500,000 
Less: Net loss attributable to noncontrolling interest
(1,400,000)
Net income attributable to MKHL
839,100,000 
881,000,000 
661,500,000 
Weighted average ordinary shares outstanding:
 
 
 
Basic (in shares)
186,293,295 
202,680,572 
202,582,945 
Diluted (in shares)
189,054,289 
205,865,769 
205,638,107 
Net income per ordinary share attributable to MKHL:
 
 
 
Basic (dollars per share)
$ 4.50 
$ 4.35 
$ 3.27 
Diluted (dollars per share)
$ 4.44 
$ 4.28 
$ 3.22 
Statements of Comprehensive Income:
 
 
 
Net income
837,700,000 
881,000,000 
661,500,000 
Foreign currency translation adjustments
18,500,000 
(91,300,000)
Net (losses) gains on derivatives
(32,500,000)
30,900,000 
(2,900,000)
Comprehensive income
823,700,000 
820,600,000 
658,600,000 
Less: Net loss attributable to noncontrolling interest
(1,400,000)
Less: Other comprehensive income attributable to noncontrolling interest
100,000 
Comprehensive income attributable to MKHL
$ 825,000,000 
$ 820,600,000 
$ 658,600,000 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
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. 30, 2013
$ 1,047,200,000 
$ 0 
$ 424,400,000 
$ 0 
$ (3,500,000)
$ 626,300,000 
$ 1,047,200,000 
$ 0 
Beginning balance (in shares) at Mar. 30, 2013
 
 
 
 
 
 
 
Beginning balance (in shares) at Mar. 30, 2013
 
201,454,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income
661,500,000 
661,500,000 
661,500,000 
 
Other comprehensive loss
(2,900,000)
(2,900,000)
(2,900,000)
 
Total comprehensive income (loss)
658,600,000 
658,600,000 
 
Issuance of restricted shares
 
 
Issuance of restricted shares (in shares)
 
251,000 
 
 
 
 
 
 
Exercise of employee share options
19,000,000 
19,000,000 
19,000,000 
 
Exercise of employee share options (in shares)
 
2,586,000 
 
 
 
 
 
 
Equity compensation expense
29,100,000 
29,100,000 
29,100,000 
 
Tax benefits on exercise of share options
54,700,000 
54,700,000 
54,700,000 
 
Purchase of treasury shares
(2,400,000)
(2,400,000)
(2,400,000)
 
Purchase of treasury shares (in shares)
 
 
 
(30,000)
 
 
 
 
Ending balance at Mar. 29, 2014
1,806,200,000 
527,200,000 
(2,400,000)
(6,400,000)
1,287,800,000 
1,806,200,000 
Ending balance (in shares) at Mar. 29, 2014
 
 
 
(30,000)
 
 
 
 
Ending balance (in shares) at Mar. 29, 2014
 
204,291,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income
881,000,000 
881,000,000 
881,000,000 
 
Other comprehensive loss
(60,400,000)
(60,400,000)
(60,400,000)
 
Total comprehensive income (loss)
820,600,000 
820,600,000 
 
Issuance of restricted shares
 
 
Issuance of restricted shares (in shares)
 
413,000 
 
 
 
 
 
 
Exercise of employee share options
15,300,000 
15,300,000 
15,300,000 
 
Exercise of employee share options (in shares)
 
1,783,000 
 
 
 
 
 
 
Equity compensation expense
48,900,000 
48,900,000 
48,900,000 
 
Tax benefits on exercise of share options
45,300,000 
45,300,000 
45,300,000 
 
Purchase of treasury shares
(495,300,000)
(495,300,000)
(495,300,000)
 
Purchase of treasury shares (in shares)
 
 
 
(6,800,000)
 
 
 
 
Ending balance at Mar. 28, 2015
2,241,000,000 
636,700,000 
(497,700,000)
(66,800,000)
2,168,800,000 
2,241,000,000 
Ending balance (in shares) at Mar. 28, 2015
(6,829,866)
 
 
(6,830,000)
 
 
 
 
Ending balance (in shares) at Mar. 28, 2015
206,486,699 
206,487,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income
837,700,000 
839,100,000 
839,100,000 
(1,400,000)
Other comprehensive loss
(14,000,000)
(14,100,000)
(14,100,000)
100,000 
Total comprehensive income (loss)
823,700,000 
825,000,000 
(1,300,000)
Fair value of noncontrolling interest in MK Panama
5,100,000 
 
 
 
 
 
 
5,100,000 
Forfeitures of restricted awards, net
 
 
Forfeitures of restricted awards, net (in shares)
 
(35,000)
 
 
 
 
 
 
Exercise of employee share options
12,700,000 
12,700,000 
12,700,000 
 
Exercise of employee share options (in shares)
 
1,632,000 
 
 
 
 
 
 
Equity compensation expense
48,400,000 
48,400,000 
48,400,000 
 
Tax benefits on exercise of share options
21,100,000 
21,100,000 
21,100,000 
 
Purchase of treasury shares
(1,152,400,000)
(1,152,400,000)
(1,152,400,000)
 
Purchase of treasury shares (in shares)
 
 
 
(24,812,000)
 
 
 
 
Other
(100,000)
 
 
 
 
(100,000)
(100,000)
 
Ending balance at Apr. 02, 2016
$ 1,999,500,000 
$ 0 
$ 718,900,000 
$ (1,650,100,000)
$ (80,900,000)
$ 3,007,800,000 
$ 1,995,700,000 
$ 3,800,000 
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 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Apr. 2, 2016
Mar. 28, 2015
Mar. 29, 2014
Cash flows from operating activities
 
 
 
Net income
$ 837.7 
$ 881.0 
$ 661.5 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
183.2 
138.4 
79.7 
Equity compensation expense
48.4 
48.9 
29.1 
Deferred income taxes
(1.9)
6.2 
(29.9)
Non-cash litigation related costs
1.9 
5.7 
2.0 
Amortization of deferred rent
2.6 
5.1 
6.3 
Loss on disposal of fixed assets
2.8 
1.9 
3.8 
Impairment and write-off of property and equipment
10.9 
0.8 
1.3 
Amortization of deferred financing costs
0.9 
0.7 
0.7 
Tax benefits on exercise of share options
(21.1)
(45.3)
(54.7)
Foreign currency (gains) losses
4.8 
(1.5)
0.1 
Gain on acquisition of MK Korea
(3.7)
Loss (income) earned on joint venture
1.0 
(0.1)
(0.4)
Change in assets and liabilities:
 
 
 
Receivables, net
52.5 
(83.3)
(104.4)
Inventories
(16.3)
(112.4)
(158.2)
Prepaid expenses and other current assets
(5.3)
(20.1)
(5.2)
Other assets
(0.4)
(6.3)
(4.3)
Accounts payable
14.2 
(8.6)
53.7 
Accrued expenses and other current liabilities
104.5 
36.3 
126.5 
Other long-term liabilities
11.7 
10.5 
25.4 
Net cash provided by operating activities
1,228.4 
857.9 
633.0 
Cash flows from investing activities
 
 
 
Capital expenditures
(369.2)
(356.2)
(184.7)
Purchase of intangible assets
(11.4)
(29.2)
(28.8)
Investment in joint venture
(1.0)
(3.0)
Equity method investments
(2.0)
Cash received, net of cash paid for acquired businesses
0.5 
Net cash used in investing activities
(381.1)
(388.4)
(215.5)
Cash flows from financing activities
 
 
 
Repurchase of treasury shares
(1,152.4)
(495.3)
(2.4)
Tax benefits on exercise of share options
21.1 
45.3 
54.7 
Exercise of employee share options
12.7 
15.3 
19.0 
Repayments of borrowings under revolving credit agreement
(199.8)
(21.1)
Borrowings under revolving credit agreement
192.6 
21.1 
Payment of deferred financing costs
(2.4)
(0.2)
Other financing activities
(0.1)
Net cash (used in) provided by financing activities
(1,128.3)
(434.7)
71.1 
Effect of exchange rate changes on cash and cash equivalents
4.1 
(27.1)
(4.7)
Net (decrease) increase in cash and cash equivalents
(276.9)
7.7 
483.9 
Beginning of period
978.9 
971.2 
487.3 
End of period
702.0 
978.9 
971.2 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
1.5 
0.7 
0.7 
Cash paid for income taxes
273.0 
373.3 
280.7 
Supplemental disclosure of noncash investing and financing activities
 
 
 
Accrued capital expenditures
$ 33.6 
$ 32.9 
$ 16.3 
Business and Basis of Presentation
Business and Basis of Presentation
Business and Basis of Presentation
Michael Kors Holdings Limited (“MKHL,” and together with its subsidiaries, the “Company”) was incorporated in the British Virgin Islands (“BVI”) on December 13, 2002. The Company is a leading designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel bearing the Michael Kors tradename and related trademarks “MICHAEL KORS,” “MICHAEL MICHAEL KORS,” and various other related trademarks and logos. The Company’s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores and lifestyle stores, including concessions and outlet stores, located primarily in the Americas (United States, Canada and Latin America), Europe and Asia, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas, Europe and Asia. The Company licenses its trademarks on products such as fragrances, beauty, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties, as well as through geographic licenses.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company 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 year ending on April 2, 2016 contains 53 weeks (“Fiscal 2016”), whereas each of the fiscal years ending on March 28, 2015 and March 29, 2014 (“Fiscal 2015” and “Fiscal 2014”, respectively) consisted of 52 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 site 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 2, 2016March 28, 2015, and March 29, 2014 (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 2, 2016
$
2.5

 
$
71.7

 
$
(69.5
)
 
$
4.7

Fiscal year ended March 28, 2015
2.3

 
57.0

 
(56.8
)
 
2.5

Fiscal year ended March 29, 2014
3.2

 
45.6

 
(46.5
)
 
2.3

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

Fiscal year ended March 29, 2014
43.0

 
203.5

 
(180.6
)
 
65.9


Royalty revenue generated from product licenses, which includes contributions for advertising, is based on reported sales of licensed products bearing the Company’s tradenames at rates specified in the license agreements. These agreements are also subject to contractual minimum levels. Royalty revenue generated by geography-specific 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 $103.9 million, $103.6 million and $65.7 million in Fiscal 2016, Fiscal 2015 and Fiscal 2014, 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 2016, Fiscal 2015 and Fiscal 2014, were $7.4 million, $8.0 million and $7.3 million, respectively.
Shipping and Handling
Shipping and handling costs were $98.6 million, $92.6 million and $78.6 million for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations.
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 2, 2016 and March 28, 2015 are credit card receivables of $14.5 million and $15.8 million, respectively, which generally settle within two to three business days.
Inventories
Inventories consist of finished goods and are stated at the lower of cost or market 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 and in-store shops are amortized over 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’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 or four years.
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 years 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.
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 2016.
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, as such, 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.
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. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash from operating activities.
The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge.
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 2, 2016, deferred financing costs were $3.9 million, net of accumulated amortization of $0.4 million. As of March 28, 2015 deferred financing costs were $2.1 million, net of accumulated amortization of $3.6 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 2,
2016
 
March 28,
2015
 
March 29,
2014
Numerator:
 
 
 
 
 
Net income attributable to MKHL
$
839.1

 
$
881.0

 
$
661.5

Denominator:
 
 
 
 
 
Basic weighted average shares
186,293,295

 
202,680,572

 
202,582,945

Weighted average dilutive share equivalents:
 
 
 
 
 
Share options and restricted shares/units, and performance restricted share units
2,760,994

 
3,185,197

 
3,055,162

Diluted weighted average shares
189,054,289

 
205,865,769

 
205,638,107

Basic net income per share
$
4.50

 
$
4.35

 
$
3.27

Diluted net income per share
$
4.44

 
$
4.28

 
$
3.22


Share equivalents for 2,255,271 shares, 699,321 shares and 44,256 shares, for fiscal years ending April 2, 2016March 28, 2015 and March 29, 2014, respectively, have been excluded from the above calculation due to their anti-dilutive effect.
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which eliminated the prior requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. ASU 2015-17 will require all deferred tax assets and liabilities to be classified as noncurrent. ASU 2015-17 is effective beginning with the Company's Fiscal 2018, with earlier application permitted. The Company elected to early adopt ASU 2015-17 during the third quarter of Fiscal 2016 on a retrospective basis. As of March 28, 2015, previously recorded current deferred tax assets and liabilities of $27.7 million and $3.7 million, respectively, were subject to reclassification to noncurrent. The Company's balance sheet as of March 28, 2015 also reflects a $7.3 million reclassification between total deferred tax assets and deferred tax liabilities due to the fact that jurisdictional netting is not impacted by ASU 2015-17.
Recently Issued Accounting Pronouncements
The Company has considered all new accounting pronouncements and has concluded that, with the exception of the below, there are no new pronouncements that are currently expected to have a material impact on results of operations, financial condition, or cash flows.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU No. 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU No. 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s fiscal year 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is currently evaluating the adoption method and the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
The FASB has issued several additional ASUs to provide implementation guidance on ASU No. 2015-14, including ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" issued in March 2016 and ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" issued in April 2016. The Company will consider this guidance in evaluating the impact of ASU 2014-09.
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize a lease liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is effective beginning with the Company's fiscal year 2020, with early adoption permitted, and must be implemented using a modified restrospective 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 2016-09 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 the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies accounting and presentation of share-based payments, primarily relating to the recognition and classification of excess tax benefits, accounting for forfeitures and tax withholding requirements. ASU 2016-09 is effective beginning with the Company's fiscal year 2018, with early adoption permitted and different permitted adoption methods for each provision of the standard. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.
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 2017, with early adoption and retrospective application permitted. The Company does not expect that ASU 2014-12 will have a material impact on its consolidated financial statements.
Business Combinations
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 year 2017, with earlier application permitted, and should be applied prospectively. The Company is currently evaluating the impact of ASU 2015-15 on its consolidated financial statements.
Inventory Valuation
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." The new guidance requires inventory accounted for using the average cost or first-in first-out method ("FIFO") to be measured at the lower of cost or net realizable value, replacing the current requirement to value inventory at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective beginning with the Company's fiscal year 2018 and should be applied prospectively, with earlier application permitted. The Company does not expect that ASU No. 2015-11 will have a material impact on its financial statements.
Acquisitions
Acquisitions
Acquisitions
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.
The Company is in the process of finalizing the purchase accounting adjustments related to the MK Korea acquisition, which could result in measurement period adjustments.
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 in connection with the revaluation of its prior interest in MK Panama was not material.
Receivables
Receivables
Receivables
Receivables consist of (in millions):
 
April 2,
2016
 
March 28,
2015
Trade receivables:
 
 
 
Credit risk assumed by insured/factors
$
353.7

 
$
374.1

Credit risk retained by Company
61.8

 
67.5

Receivables due from licensees
9.5

 
11.8

 
425.0

 
453.4

Less allowances:
(117.1
)
 
(90.0
)
 
$
307.9

 
$
363.4


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 during the periods presented. However, the majority of its trade receivables as of April 2, 2016 and March 28, 2015 are insured. The allowance for doubtful accounts is determined through analysis of periodic aging of receivables for which credit risk is not assumed by the factors, or which 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 $0.7 million as of April 2, 2016 and March 28, 2015.
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 2, 2016March 28, 2015 and March 29, 2014, net sales related to our largest wholesale customer, Macy's, accounted for approximately 12.7%, 13.7% and 14.4%, respectively, of total revenue. The accounts receivable related to this customer were either factored or substantially insured for all three fiscal years. No other customer accounted for 10% or more of the Company’s total revenues during Fiscal 2016, Fiscal 2015, or Fiscal 2014.
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 2, 2016March 28, 2015 and March 29, 2014, one agent sourced approximately 14.9%, 11.7% and 12.6%, respectively, and one contractor accounted for approximately 26.7%, 29.1% and 30.4%, 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 2,
2016
 
March 28,
2015
Leasehold improvements
$
414.6

 
$
294.2

In-store shops
242.9

 
189.3

Furniture and fixtures
212.7

 
160.2

Computer equipment and software
167.9

 
104.4

Equipment
79.1

 
73.6

Land
15.1

 

 
1,132.3

 
821.7

Less: accumulated depreciation and amortization
(490.9
)
 
(337.8
)
 
641.4

 
483.9

Construction-in-progress
116.8

 
79.0

 
$
758.2

 
$
562.9


Depreciation and amortization of property and equipment for the fiscal years ended April 2, 2016March 28, 2015, and March 29, 2014, was $172.2 million, $131.4 million, and $76.6 million, respectively. During the fiscal years ended April 2, 2016March 28, 2015, and March 29, 2014, the Company recorded fixed asset impairment charges of $10.9 million, $0.8 million and $1.3 million, respectively. Approximately $8.6 million of the Company's Fiscal 2016 impairment charges primarily related to seven retail locations still in operation, $0.4 million related to its wholesale operations and $1.9 million related to a corporate fixed asset that is no longer in service. Fiscal 2015 impairment charges related to two retail locations and Fiscal 2014 impairment charges related to three retail locations, all of which were still in operation.
Intangible Assets and Goodwill
Intangible Assets and Goodwill
Intangible Assets and Goodwill
The following table details the carrying values of the Company's intangible assets that are subject to amortization (in millions):
 
April 2, 2016
 
March 28, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trademarks
$
23.0

 
$
15.1

 
$
7.9

 
$
23.0

 
$
14.0

 
$
9.0

Lease Rights
73.3

 
17.8

 
55.5

 
61.1

 
8.6

 
52.5

Customer Relationships
4.2

 
0.2

 
4.0

 

 

 

 
$
100.5

 
$
33.1

 
$
67.4

 
$
84.1

 
$
22.6

 
$
61.5


The trademarks relate to the Company’s brand name and are amortized over twenty years. Customer lists 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 $11.0 million, $7.0 million and $3.1 million, respectively, for each of the fiscal years ended April 2, 2016March 28, 2015 and March 29, 2014.
Estimated amortization expense for each of the next five years is as follows (in millions):
Fiscal 2017
$
8.7

Fiscal 2018
8.7

Fiscal 2019
8.6

Fiscal 2020
8.6

Fiscal 2021
8.4

Thereafter
24.4

 
$
67.4


The future amortization expense above reflects weighted-average estimated remaining useful lives of 8.6 years for lease rights, 6.8 years for trademarks and 6.9 years for customer lists. There were no impairment charges related to the Company’s lease rights, trademarks or customer lists during any of the periods presented.
The following table details the changes in goodwill for each of the Company's reportable segments (in millions):
 
Retail
 
Wholesale
 
Licensing
 
Total
Balance at March 28, 2015
$

 
$
12.1

 
$
1.9

 
$
14.0

Acquisition of controlling interest in MK Panama (Note 3)
8.0

 
1.2

 

 
9.2

Balance at April 2, 2016
$
8.0

 
$
13.3

 
$
1.9

 
$
23.2


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 2016, and determined that there was no impairment (See Note 11 for additional information). As of April 2, 2016, 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 2,
2016
 
March 28,
2015
Prepaid taxes
$
57.8

 
$
60.8

Prepaid rent
27.3

 
16.8

Leasehold incentive receivable
8.9

 
12.3

Unrealized gains on forward foreign exchange contracts
0.1

 
25.0

Other
19.0

 
12.6

 
$
113.1

 
$
127.5


Accrued expenses and other current liabilities consist of the following (in millions):
 
April 2,
2016
 
March 28,
2015
Accrued capital expenditures
$
33.6

 
$
32.9

Advance royalties
30.2

 
5.1

Other taxes payable
38.2

 
20.2

Accrued rent
30.5

 
27.1

Gift cards and retail store credits
13.1

 
8.2

Professional services
7.0

 
7.3

Unrealized loss on forward foreign exchange contracts
5.5

 
0.6

Accrued advertising
5.2

 
5.7

Accrued litigation
1.8

 
6.2

Other
27.7

 
10.5

 
$
192.8

 
$
123.8

Debt Obligations
Debt Obligations
Debt Obligations
Senior Unsecured Revolving Credit Facility
On October 29, 2015, the Company entered into an amended and restated senior unsecured revolving credit facility ("2015 Credit Facility") with, among others, JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), as administrative agent, which replaced its prior 2013 senior unsecured revolving credit facility ("2013 Credit Facility"). The Company and a U.S., Canadian, Dutch and Swiss subsidiary are the borrowers under the 2015 Credit Facility. The borrowers and certain material subsidiaries of the Company provide unsecured guarantees of the 2015 Credit Facility. The 2015 Credit Facility provides for up to $1.0 billion in borrowings, which may be denominated in U.S. Dollars and other currencies, including Euros, Canadian Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The 2015 Credit Facility also provides for the issuance of letters of credit of up to $75.0 million and swing line loans of up to $50.0 million. The Company has the ability to expand its borrowing availability under the 2015 Credit Facility by up to an additional $500.0 million, subject to the agreement of the participating lenders and certain other customary conditions. The 2015 Credit Facility expires on October 29, 2020.
Borrowings under the 2015 Credit Facility bear interest, at the Company's option, at (i) for loans denominated in U.S. Dollars, an alternative base rate, which is the greater of the prime rate publicly announced from time to time by JPMorgan Chase, the greater of the federal funds effective rate or Federal Reserve Bank of New York overnight bank funding rate plus 50 basis points or the one-month London Interbank Offered Rate adjusted for statutory reserve requirements for Eurocurrency liabilities ("Adjusted LIBOR") plus 100 basis points, in each case, plus an applicable margin based on the Company's leverage ratio; (ii) Adjusted LIBOR for the applicable interest period, plus an applicable margin based on the Company's leverage ratio; (iii) for Canadian borrowings, the Canadian prime rate, which is the greater of the PRIMCAN Index rate or the rate applicable to one-month Canadian Dollar banker's acceptances quoted on Reuters ("CDOR") plus 100 basis points, plus an applicable margin based on the Company's leverage ratio; or (iv) for Canadian borrowings, the average CDOR rate for the applicable interest period, plus an applicable margin based on the Company's leverage ratio.
The 2015 Credit Facility 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 2, 2016, 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 2, 2016 and March 28, 2015, there were no borrowings outstanding under the 2015 Credit Facility or the prior 2013 Credit Facility. At April 2, 2016, stand-by letters of credit of $10.0 million were outstanding under the 2015 Credit Facility. At April 2, 2016, the amount available for future borrowings was $990.0 million.
Debt Obligations of MK Panama
During the second quarter of Fiscal 2016, the Company obtained controlling interest in MK Panama and began consolidating its financial results into its operations (see Note 3 for additional information). MK Panama's debt obligations included on the Company's consolidated balance sheet as of April 2, 2016 are as follows (in millions):
 
April 2,
2016
4.75% loan, due April 6, 2020 from Banco General de Panama
$
1.2

5.0% loan (see Note 19)
1.0

Other
0.1

Total long-term debt
$
2.3

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 August 2033. 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 2,
2016
 
March 28,
2015
 
March 29,
2014
Minimum rentals
$
193.5

 
$
151.0

 
$
107.1

Contingent rent
64.4

 
65.8

 
56.3

Total rent expense
$
257.9

 
$
216.8

 
$
163.4


Future minimum lease payments under the terms of these noncancelable operating lease agreements are as follows (in millions):
Fiscal years ending:
 
2017
$
220.7

2018
223.4

2019
215.1

2020
213.1

2021
206.9

Thereafter
746.7

 
$
1,825.9


The Company has issued stand-by letters of credit to guarantee certain of its retail and corporate operating lease commitments, aggregating $10.6 million at April 2, 2016, including $10.0 million in letters of credit issued under the 2015 Credit Facility.
Other Commitments
As of April 2, 2016, the Company also has other contractual commitments aggregating $600.5 million, which consist of inventory purchase commitments of $549.0 million, debt obligations of $2.3 million and other contractual obligations of $49.2 million, which primarily relate to obligations related to the Company's new European distribution center, marketing and advertising agreements, information technology agreements and supply agreements.
Long-term Employment Contract
As of April 2, 2016, the Company had 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 2, 2016 and March 28, 2015, 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 2, 2016, using:
 
Fair value at March 28, 2015, 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)
Foreign currency forward contracts:
 
 
 
 
 
 
 
 
 
 
 
Euro
$

 
$
(5.5
)
 
$

 
$

 
$
23.6

 
$

Canadian Dollar

 

 

 

 
1.4

 

U.S. Dollar

 
0.1

 

 

 
(0.6
)
 

Total
$

 
$
(5.4
)
 
$

 
$

 
$
24.4

 
$


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. During Fiscal 2016, Fiscal 2015 and Fiscal 2014, the Company recorded impairment charges of $10.9 million, $0.8 million, and $1.3 million, to fully impair certain fixed assets (see Note 6 for additional information). The fair values of these assets were determined based on Level 3 measurements, based on the Company's best estimates of the amount and timing of the related stores' future discounted cash flows, based on historical experience and current market conditions.
During the fourth quarter of Fiscal 2016, the Company elected to perform its annual 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’s derivative financial instruments are not currently subject to master netting arrangements. The Company does not enter into derivative contracts for trading or speculative purposes.
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of April 2, 2016 and March 28, 2015 (in millions):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
April 2,
2016
 
March 28,
2015
 
April 2,
2016
 
March 28,
2015
 
April 2,
2016
 
March 28,
2015
Designated forward currency exchange contracts
$
174.1

 
$
226.1

 
$
0.1

 
$
23.6

 
$
5.1

 
$
0.5

Undesignated forward currency exchange contracts
30.0

 
25.8

 

 
1.4

 
0.4

 
0.1

Total
$
204.1

 
$
251.9

 
$
0.1

 
$
25.0

 
$
5.5

 
$
0.6

 
 
(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.
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations. The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the fiscal years ended April 2, 2016 and March 28, 2015 (in millions):
 
 
Fiscal Year Ended April 2, 2016
 
Fiscal Year Ended March 28, 2015
 
Fiscal Year Ended March 29, 2014
 
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
 
Pre-Tax
Loss
Recognized
in OCI
 
Pre-tax Loss
Reclassified from
Accumulated OCI
into Earnings
Designated hedges
$
(25.2
)
 
$
10.9

 
$
36.6

 
$
2.1

 
$
(3.8
)
 
$
(0.5
)

Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive loss will be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turns. These amounts are subject to fluctuations in the applicable currency exchange rates.
During Fiscal 2016 and Fiscal 2015, the Company recognized 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 gains (losses) in the Company’s consolidated statement of operations. During Fiscal 2014, realized gains and losses related to undesignated forward currency exchange contracts were not material.
Shareholders' Equity
Shareholders' Equity
Shareholders’ Equity
Share Repurchase Program
On October 30, 2014, the Company’s Board of Directors authorized a $1.0 billion share repurchase program, which authorized the repurchase of the Company’s shares for a period of two years. On May 20, 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $500.0 million under the Company’s existing share repurchase program and extended the program through May 2017. On November 3, 2015, the Company's Board of Directors authorized a further increase in the share repurchase program of up to an additional $500.0 million of the Company's ordinary shares and extended the program through March 2018. During Fiscal 2016 and Fiscal 2015, the Company repurchased 24,757,543 shares and 2,040,979 shares, respectively, at a cost of $1.150 billion and $136.9 million, respectively, under its current share-repurchase program through open market transactions. As of April 2, 2016, the remaining availability under the Company’s share repurchase program was $358.1 million.
On November 14, 2014, the Company entered into a $355.0 million accelerated share repurchase program (the “ASR program”) with a major financial institution (the “ASR Counterparty”) to repurchase the Company’s ordinary shares. Under the ASR program, the Company paid $355.0 million to the ASR Counterparty and received 4,437,516 of its ordinary shares from the ASR Counterparty, which represents 100% of the shares expected to be purchased pursuant to the ASR program, based on an initial share price determination. The ASR program also contained a forward contract indexed to the Company’s ordinary shares whereby additional shares would be delivered to the Company by January 29, 2015 (the settlement date) if the share price declined from the initial share price, limited to a stated share price “floor.” The total number of shares repurchased/acquired was determined on final settlement, with the additional shares reacquired based on the volume-weighted average price of the Company’s ordinary shares, less a discount, during the repurchase period, subject to aforementioned price floor. In January 2015, 280,819 additional shares were delivered to the Company pursuant to these provisions, which did not require any additional cash outlay by the Company. The ASR program was accounted for as a treasury stock repurchase, reducing the number of ordinary shares outstanding by 4,718,335 shares. The forward contract was accounted for as an equity instrument.
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 2016 and Fiscal 2015, the Company withheld 54,875 shares and 40,787 shares, respectively, at a cost of $2.4 million and $3.4 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
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.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
The following table details changes in the components of accumulated other comprehensive income, net of taxes for Fiscal 2016, Fiscal 2015 and Fiscal 2014 (in millions):
 
Foreign Currency
Translation
Losses
 
Net Gains
(Losses) on
Derivatives
 
Total
Accumulated Other
Comprehensive
Income (Loss)
Balance at March 30, 2013
$
(4.8
)
 
$
1.3

(1) 
$
(3.5
)
Other comprehensive loss before reclassifications

 
(3.4
)
(2) 
(3.4
)
Less: amounts reclassified from AOCI to earnings

 
(0.5
)
 
(0.5
)
Other comprehensive loss net of tax

 
(2.9
)
(1) 
(2.9
)
Balance at March 29, 2014
(4.8
)
 
(1.6
)
 
(6.4
)
Other comprehensive (loss) income before reclassifications
(91.3
)
 
32.8

(1) 
(58.5
)
Less: amounts reclassified from AOCI to earnings

 
1.9

(2) 
1.9

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

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

(1) 
(66.8
)
Other comprehensive income (loss) before reclassifications
18.5

 
(22.6
)
(1) 
(4.1
)
Less: amounts reclassified from AOCI to earnings

 
9.9

(2) 
9.9

Other comprehensive income (loss) net of tax
18.5

 
(32.5
)
 
(14.0
)
Balance at April 2, 2016
$
(77.6
)
 
$
(3.2
)
(1) 
$
(80.8
)
Less: other comprehensive income attributable to noncontrolling interest
$
0.1

 
$

 
$
0.1

Other comprehensive loss attributable to MKHL
$
(77.7
)
 
$
(3.2
)
 
$
(80.9
)
 
 
(1) 
Accumulated other comprehensive income related to net gains (losses) on derivative financial instruments is net of a tax benefit of $0.3 million as of April 2, 2016 and a tax provision of $3.3 million as of March 28, 2015. Other comprehensive income (loss) before reclassifications related to derivative instruments for Fiscal 2016 and Fiscal 2015 is net of a tax benefit of $2.6 million and a tax provision of $3.7 million, respectively. The tax effect related to all other amounts was not material.
(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. 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 prior period amounts were not material.
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 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, the Michael Kors Holdings Limited Omnibus Incentive Plan (the “2012 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 2, 2016, there were no shares available to grant equity awards under the 2008 Plan. The 2012 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 2, 2016, there were 9,211,143 ordinary shares available for future grants of equity awards under the 2012 Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the 2012 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. Performance-based share options may vest based upon the attainment of one of two performance measures. One performance measure is an individual performance target, which is based upon certain performance targets unique to the individual grantee, and the other measure is a company-wide performance target, which is based on a cumulative minimum growth requirement in consolidated net equity. The individual performance target vests 20% of the total option grant each year the target is satisfied. The individual has ten years in which to achieve 5 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. Options subject to time-based vesting requirements become vested in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such options were awarded.
The following table summarizes the share options activity during Fiscal 2016, and information about options outstanding at April 2, 2016:
 
Number of
Options
 
Weighted
Average
Exercise price
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at March 28, 2015
7,187,003

 
$
23.14

 
 
 
 
Granted
515,430

 
$
47.07

 
 
 
 
Exercised
(1,632,461
)
 
$
7.72

 
 
 
 
Canceled/forfeited
(249,559
)
 
$
52.18

 
 
 
 
Outstanding at April 2, 2016
5,820,413

 
$
28.34

 
4.36
 
$
193.0

Vested or expected to vest at April 2, 2016
5,781,360

 
$
28.34

 
4.36
 
 
Vested and exercisable at April 2, 2016
4,081,064

 
$
17.72

 
3.95
 
$
167.5


There were 1,739,349 unvested options and 4,081,064 vested options outstanding at April 2, 2016. The total intrinsic value of options exercised during Fiscal 2016 and Fiscal 2015 was $70.3 million and $131.6 million, respectively. The cash received from options exercised during Fiscal 2016 and Fiscal 2015 was $12.7 million and $15.3 million, respectively. As of April 2, 2016, the remaining unrecognized share-based compensation expense for nonvested share options was $19.8 million, which is expected to be recognized over the related weighted-average period of approximately 2.19 years.
The weighted average grant date fair value for options granted during Fiscal 2016, Fiscal 2015 and Fiscal 2014, was $14.35, $27.96 and $24.95, respectively. The following table represents assumptions used to estimate the fair value of options:
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Expected dividend yield
0.0
%
 
0.0
%
 
0.0
%
Volatility factor
31.1
%
 
33.2
%
 
46.0
%
Weighted average risk-free interest rate
1.6
%
 
1.5
%
 
1.0
%
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, which is generally three to four years from the date of the grant, net of expected forfeitures.
Restricted share grants generally vest in equal increments on each of the four anniversaries of the date of grant. In addition, the Company grants two types of restricted share unit (“RSU”) awards: time-based RSUs and performance-based RSUs. Time-based RSUs generally vest in full either on the first anniversary of the date of the grant, or in equal increments on each of the four anniversaries of the date of grant. Performance-based RSUs vest in full on the three-year anniversary of the date of grant, subject to the employee’s continued employment during the vesting period and only if certain pre-established cumulative performance targets are met at the end of the three-year performance period. Expense related to performance-based RSUs is recognized ratably over the three-year performance period, net of forfeitures, based on the probability of attainment of the related performance targets. The potential number of shares that may be earned ranges between 0%, if the minimum level of performance is not attained, and 150%, if the level of performance is at or above the pre-determined maximum achievement level.
The following table summarizes restricted share activity under the 2012 Plan during Fiscal 2016:
 
Restricted Shares
 
Number of Unvested
Restricted Shares
 
Weighted
Average Grant
Date Fair Value
Unvested at March 28, 2015
770,592

 
$
68.77

Granted

 
$

Vested
(326,988
)
 
$
50.59

Canceled/forfeited
(53,375
)
 
$
80.55

Unvested at April 2, 2016
390,229

 
$
82.38


The total fair value of restricted shares vested was $14.4 million, $22.8 million and $17.6 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. As of April 2, 2016, the remaining unrecognized share-based compensation expense for non-vested restricted share grants was $22.3 million, which is expected to be recognized over the related weighted-average period of approximately 1.99 years.
The following table summarizes the RSU activity under the 2012 Plan during Fiscal 2016:
 
Service-based
 
Performance-based
 
Number of
Restricted
Share Units
 
Weighted
Average Grant
Date Fair Value
 
Number of
Restricted
Share Units
 
Weighted
Average Grant
Date Fair Value
Unvested at March 28, 2015
35,940

 
$
66.26

 
317,201

 
$
76.69

Granted
1,104,983

 
$
46.76

 
287,476

 
$
47.10

Vested
(18,537
)
 
$
59.69

 

 
$

Canceled/forfeited
(51,328
)
 
$
47.87

 
(24,903
)
 
$
80.72

Unvested at April 2, 2016
1,071,058

 
$
47.13

 
579,774

 
$
61.84


The total fair value of service-based RSUs vested during Fiscal 2016, Fiscal 2015 and Fiscal 2014 was $1.1 million, $0.4 million and $0.2 million, respectively. As of April 2, 2016, the remaining unrecognized share-based compensation expense for non-vested service-based and performance-based RSU grants was $38.3 million and $15.4 million, respectively, which is expected to be recognized over the related weighted-average periods of approximately 3.13 years and 1.58 years, respectively.
Share-Based Compensation Expense
The following table summarizes compensation expense attributable to share-based compensation for Fiscal 2016, Fiscal 2015 and Fiscal 2014 (in millions):
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Share-based compensation expense
$
48.4

 
$
48.9

 
$
29.1

Tax benefits related to share-based compensation expense
$
15.7

 
$
17.5

 
$
11.5


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 2, 2016 is approximately $2.8 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 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 2,
2016
 
March 28,
2015
 
March 29,
2014
U.S.
$
737.5

 
$
814.3

 
$
792.9

Non-U.S.
434.8

 
441.5

 
214.8

Total income before provision for income taxes
$
1,172.3

 
$
1,255.8

 
$
1,007.7


The provision for income taxes was as follows (in millions):
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Current
 
 
 
 
 
U.S. Federal
$
268.0

 
$
277.0

 
$
295.2

U.S. State
14.3

 
49.7

 
50.3

Non-U.S.
54.2

 
41.9

 
30.6

Total current
336.5

 
368.6

 
376.1

Deferred
 
 
 
 
 
U.S. Federal
0.3

 
5.0

 
(24.8
)
U.S. State
1.0

 
0.3

 
(3.6
)
Non-U.S.
(3.2
)
 
0.9

 
(1.5
)
Total deferred
(1.9
)
 
6.2

 
(29.9
)
Total provision for income taxes
$
334.6

 
$
374.8

 
$
346.2


MKHL is incorporated in the British Virgin Islands and is a tax resident of the U.K. However, since the proportion of the U.S. revenues, assets, operating income, and the associated tax provisions is significantly higher than any other single tax jurisdiction within the worldwide group, the reconciliation of the differences between the provision for income taxes and the statutory rate is presented on the basis of the U.S. statutory federal income tax rate of 35%. The following table summarizes the significant differences between the U.S. federal statutory tax rate and the Company’s effective tax rate for financial statement purposes:
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Federal tax at 35% statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State and local income taxes, net of federal benefit
1.2
 %
 
2.4
 %
 
2.3
 %
Differences in tax effects on foreign income
(7.9
)%
 
(8.2
)%
 
(3.9
)%
Foreign tax credit
(0.2
)%
 
(0.4
)%
 
(0.2
)%
Liability for uncertain tax positions
 %
 
0.2
 %
 
0.8
 %
Effect of changes in valuation allowances on deferred tax assets
(0.2
)%
 
(0.1
)%
 
(0.2
)%
Other
0.6
 %
 
0.9
 %
 
0.6
 %
Effective tax rate
28.5
 %
 
29.8
 %
 
34.4
 %

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in millions):
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
Deferred tax assets
 
 
 
Inventories
$
10.5

 
$
11.2

Payroll related accruals
2.2

 
0.4

Deferred rent
37.1

 
30.4

Net operating loss carryforwards
3.4

 
5.9

Stock compensation
30.0

 
23.8

Sales allowances
13.4

 
10.1

Other
12.1

 
11.1

 
108.7

 
92.9

Valuation allowance
(3.4
)
 
(5.7
)
Total deferred tax assets
105.3

 
87.2

 
 
 
 
Deferred tax liabilities
 
 
 
Goodwill and intangibles
(32.9
)
 
(32.7
)
Depreciation
(48.0
)
 
(34.6
)
Other
(3.4
)
 
(3.9
)
Total deferred tax liabilities
(84.3
)
 
(71.2
)
Net deferred tax assets
$
21.0

 
$
16.0


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 $3.3 million, $0.2 million and $0.9 million in Fiscal 2016, Fiscal 2015, and Fiscal 2014, respectively. As a result of the attainment and expectation of achieving profitable operations in certain countries comprising the Company’s European operations and certain state jurisdictions in the U.S., for which deferred tax valuation allowances had been previously established, the Company released valuation allowances amounting to approximately $5.6 million, $2.6 million, and $1.6 million in Fiscal 2016, Fiscal 2015, and Fiscal 2014, respectively.
At April 2, 2016, the Company had non-U.S. net operating loss carryforwards of approximately $11.5 million that will begin to expire in 2024.
As of April 2, 2016 and March 28, 2015, the Company has liabilities related to its uncertain tax positions, including accrued interest, of approximately $18.5 million and $21.2 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$16.8 million, $19.9 million and $18.1 million as of April 2, 2016, March 28, 2015, and March 29, 2014, respectively. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2016, Fiscal 2015, and Fiscal 2014, are presented below (in millions):
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Unrecognized tax benefits beginning balance
$
19.9

 
$
18.1

 
$
6.6

Additions related to prior period tax positions

 
0.4

 
2.5

Additions related to current period tax positions
5.8

 
5.2

 
9.3

Decreases from prior period positions
(5.7
)
 
(3.8
)
 
(0.3
)
Decreases related to audit settlements
(3.2
)
 

 

Unrecognized tax benefits ending balance
$
16.8

 
$
19.9

 
$
18.1


The Company classifies interest expense and penalties related to unrecognized tax benefits as components of the provision for income taxes. Interest expense recognized in the consolidated statements of operations for Fiscal 2016, Fiscal 2015, and Fiscal 2014 was approximately $1.7 million, $1.3 million and $0.9 million, respectively.
The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will be reduced by approximately $1.8 million during the next twelve months. However, the outcomes and timing of such events are highly uncertain and changes in the occurrence, expected outcomes, and timing of such events could cause the Company’s current estimate to change materially in the future.
The Company files income tax returns in the U.S., for federal, state, and local purposes, and in certain foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended March 30, 2013.
The Company’s policy with respect to its undistributed earnings of the U.S. and non-U.S. subsidiaries is to consider those earnings to be either indefinitely reinvested or able to be repatriated tax-neutral. Undistributed earnings of subsidiaries considered to be either indefinitely reinvested or able to be repatriated tax-neutral amounted to $2.638 billion at April 2, 2016. Determination of the amount of unrecognized deferred U.S. and non-U.S. income tax liability on those earnings which are indefinitely reinvested is not practicable.
Retirement Plans
Retirement Plans
Retirement Plans
The Company maintains defined contribution plans for employees, who become eligible to participate after three months of service. Features of these plans allow participants to contribute to a plan a percentage of their compensation, up to statutory limits depending upon the country in which a plan operates, and provide for mandatory and/or discretionary matching contributions by the Company, which vary by country. During Fiscal 2016, Fiscal 2015, and Fiscal 2014, the Company recognized expenses of approximately $10.1 million, $5.8 million, and $3.5 million, respectively, related to these retirement plans.
Segment Information
Segment Information
Segment Information
The Company operates its business through three operating segments—Retail, Wholesale and Licensing—which are based on its business activities and organization. The operating segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are net sales or revenue (in the case of Licensing) and operating income for each segment. The Company’s reportable segments represent channels of distribution that offer similar merchandise, customer experience and sales/marketing strategies. The Company’s Retail segment includes sales through the Company owned stores, including “Collection,” “Lifestyle” including “concessions,” and outlet stores located throughout the Americas (U.S., Canada and Latin America), Europe, and Asia, as well as the Company’s e-commerce sales. Products sold through the Retail segment include women’s apparel, accessories (which include handbags and small leather goods such as wallets), men's apparel, footwear and licensed products, such as watches, jewelry, fragrances and beauty, and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout the Americas, Europe and Asia. Products sold through the Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women’s and men’s apparel. We also have wholesale arrangements pursuant to which we sell products to certain of our licensees, including our licensees in Asia (which were previously reported within our Americas wholesale operations). The Licensing segment includes royalties earned on licensed products and use of the Company’s trademarks, and rights granted to third parties for the right to sell the Company’s products in certain geographic regions such as the Middle East, Eastern Europe, throughout all of Asia (excluding Japan), as well as Australia. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Corporate overhead expenses are allocated to the segments based upon specific usage or other allocation methods.
The Company has allocated $13.3 million, $8.0 million and $1.9 million of its recorded $23.2 million goodwill as of April 2, 2016 to its Wholesale, Retail and Licensing segments, respectively. See Note 3 for goodwill recorded upon the Company's acquisition of controlling interest in MK Panama during the second quarter of Fiscal 2016. As of March 28, 2015, the Company's goodwill balance of $14.0 million was allocated $12.1 million and $1.9 million to its Wholesale and Licensing segments, respectively. The Company does not have identifiable assets separated by segment.
The following table presents the key performance information of the Company’s reportable segments (in millions):
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Revenue:
 
 
 
 
 
Net sales: Retail
$
2,394.9

 
$
2,134.6

 
$
1,593.0

Wholesale
2,143.9

 
2,065.1

 
1,577.5

Licensing
173.3

 
171.8

 
140.3

Total revenue
$
4,712.1

 
$
4,371.5

 
$
3,310.8

 
 
 
 
 
 
Income from operations:
 
 
 
 
 
Retail
$
501.4

 
$
557.2

 
$
467.3

Wholesale
584.1

 
610.9

 
459.8

Licensing
89.6

 
88.9

 
81.1

Income from operations
$
1,175.1

 
$
1,257.0

 
$
1,008.2


Depreciation and amortization expense for each segment are as follows (in millions):    
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Depreciation and amortization(1):
 
 
 
 
 
Retail
$
114.5

 
$
84.5

 
$
46.7

Wholesale
67.3

 
53.0

 
32.4

Licensing
1.4

 
0.9

 
0.6

Total depreciation and amortization
$
183.2

 
$
138.4

 
$
79.7

 
 
(1) 
Excluded from the above table are fixed asset impairment charges related to the Company's retail operations of $8.6 million, $0.8 million and $1.3 million, during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. During Fiscal 2016, the Company also recorded fixed asset impairment charges of $0.4 million relating to its wholesale operations and $1.9 million relating to a corporate fixed asset.
Total revenue (based on country of origin) and long-lived assets by geographic location are as follows (in millions):
 
Fiscal Years Ended
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
Revenue:<