MICHAEL KORS HOLDINGS LTD, 10-Q filed on 11/5/2015
Quarterly Report
Document and Entity Information
6 Months Ended
Sep. 26, 2015
Oct. 30, 2015
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 26, 2015 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q2 
 
Entity Registrant Name
MICHAEL KORS HOLDINGS LTD 
 
Entity Central Index Key
0001530721 
 
Current Fiscal Year End Date
--04-02 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
184,050,467 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Sep. 26, 2015
Mar. 28, 2015
Current assets
 
 
Cash and cash equivalents
$ 431,541 
$ 978,922 
Receivables, net
344,135 
363,419 
Inventories
713,731 
519,908 
Deferred tax assets
28,212 
27,739 
Prepaid expenses and other current assets
106,616 
127,443 
Total current assets
1,624,235 
2,017,431 
Property and equipment, net
672,409 
562,934 
Intangible assets, net
69,245 
61,541 
Goodwill
26,215 
14,005 
Deferred tax assets
10,779 
2,484 
Other assets
17,077 
33,498 
Total assets
2,419,960 
2,691,893 
Current liabilities
 
 
Accounts payable
199,152 
142,818 
Accrued payroll and payroll related expenses
44,647 
62,869 
Accrued income taxes
26,550 
25,507 
Short-term debt
5,416 
Deferred tax liabilities
3,594 
3,741 
Accrued expenses and other current liabilities
107,782 
95,146 
Total current liabilities
387,141 
330,081 
Deferred rent
102,635 
88,320 
Deferred tax liabilities
16,277 
10,490 
Long-term debt
4,123 
Other long-term liabilities
21,048 
22,037 
Total liabilities
531,224 
450,928 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Ordinary shares, no par value; 650,000,000 shares authorized; 207,286,133 shares issued and 184,048,990 outstanding at September 26, 2015; 206,486,699 shares issued and 199,656,833 outstanding at March 28, 2015
Treasury shares, at cost (23,237,143 shares at September 26, 2015 and 6,829,866 shares at March 28, 2015)
(1,248,818)
(497,724)
Additional paid-in capital
677,705 
636,732 
Accumulated other comprehensive loss
(81,148)
(66,804)
Retained earnings
2,536,252 
2,168,761 
Total shareholders’ equity of MKHL
1,883,991 
2,240,965 
Noncontrolling interest
4,745 
Total equity
1,888,736 
2,240,965 
Total liabilities and shareholders’ equity
$ 2,419,960 
$ 2,691,893 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
Sep. 26, 2015
Mar. 28, 2015
Statement of Financial Position [Abstract]
 
 
Ordinary shares, par value (in dollars per share)
$ 0 
$ 0 
Ordinary shares, shares authorized (in shares)
650,000,000 
650,000,000 
Ordinary shares, shares issued (in shares)
207,286,133 
206,486,699 
Ordinary shares, shares outstanding (in shares)
184,048,990 
199,656,833 
Treasury shares (in shares)
23,237,143 
6,829,866 
Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Sep. 26, 2015
Sep. 27, 2014
Sep. 26, 2015
Sep. 27, 2014
Income Statement [Abstract]
 
 
 
 
Net sales
$ 1,086,829 
$ 1,009,669 
$ 2,034,088 
$ 1,896,706 
Licensing revenue
43,152 
46,936 
81,868 
79,053 
Total revenue
1,129,981 
1,056,605 
2,115,956 
1,975,759 
Cost of goods sold
465,552 
411,578 
847,892 
759,099 
Gross profit
664,429 
645,027 
1,268,064 
1,216,660 
Selling, general and administrative expenses
345,179 
305,405 
658,638 
571,269 
Depreciation and amortization
46,164 
34,064 
87,717 
63,062 
Total operating expenses
391,343 
339,469 
746,355 
634,331 
Income from operations
273,086 
305,558 
521,709 
582,329 
Other expense (income), net
69 
(1,006)
894 
(1,349)
Interest expense, net
375 
72 
484 
31 
Foreign currency losses
1,442 
2,395 
2,119 
3,548 
Income before provision for income taxes
271,200 
304,097 
518,212 
580,099 
Provision for income taxes
78,382 
97,107 
151,039 
185,393 
Net income
192,818 
206,990 
367,173 
394,706 
Less: Net loss attributable to noncontrolling interest
(318)
(318)
Net income attributable to MKHL
193,136 
206,990 
367,491 
394,706 
Weighted average ordinary shares outstanding:
 
 
 
 
Weighted average shares outstanding, basic (in shares)
188,857,398 
204,464,952 
192,917,209 
204,107,262 
Weighted average shares outstanding, diluted (in shares)
191,524,156 
207,432,250 
195,789,325 
207,304,247 
Net income per ordinary share attributable to MKHL:
 
 
 
 
Net income per ordinary share, basic (in dollars per shares)
$ 1.02 
$ 1.01 
$ 1.90 
$ 1.93 
Net income per ordinary share, diluted (in dollars per shares)
$ 1.01 
$ 1.00 
$ 1.88 
$ 1.90 
Statements of Comprehensive Income:
 
 
 
 
Net income (loss)
192,818 
206,990 
367,173 
394,706 
Foreign currency translation adjustments
(5,586)
(27,671)
4,228 
(24,604)
Net (losses) gains on derivatives
(7,927)
9,094 
(18,561)
10,558 
Comprehensive income
179,305 
188,413 
352,840 
380,660 
Less: Net loss attributable to noncontrolling interest
(318)
(318)
Less: Other comprehensive income attributable to noncontrolling interest
11 
11 
Comprehensive income attributable to MKHL
$ 179,612 
$ 188,413 
$ 353,147 
$ 380,660 
Consolidated Statement of Shareholders' Equity (Unaudited) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Ordinary Shares
Additional Paid-in Capital
Treasury Shares
Accumulated Other Comprehensive Loss
Retained Earnings
Total Equity of MKHL
Non-controlling Interest
Beginning balance at Mar. 28, 2015
$ 2,240,965 
$ 0 
$ 636,732 
$ (497,724)
$ (66,804)
$ 2,168,761 
$ 2,240,965 
$ 0 
Beginning balance (in shares) at Mar. 28, 2015
206,486,699 
206,487,000 
 
 
 
 
 
 
Beginning balance (in shares) at Mar. 28, 2015
(6,829,866)
 
 
(6,830,000)
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Net income (loss)
367,173 
 
 
 
 
367,491 
367,491 
(318)
Other comprehensive (loss) income
(14,333)
 
 
 
(14,344)
 
(14,344)
11 
Comprehensive income
352,840 
 
 
 
 
 
353,147 
(307)
Fair value of noncontrolling interest in MK Panama upon obtaining control
5,052 
 
 
 
 
 
 
5,052 
Forfeitures of restricted shares, net (in shares)
 
(11,000)
 
 
 
 
 
 
Exercise of employee share options (in shares)
809,725 
810,000 
 
 
 
 
 
 
Exercise of employee share options
6,005 
 
6,005 
 
 
 
6,005 
Equity compensation expense
25,864 
 
25,864 
 
 
 
25,864 
Tax benefits on exercise of share options
9,104 
 
9,104 
 
 
 
9,104 
Purchase of treasury shares (in shares)
 
 
 
(16,407,000)
 
 
 
 
Purchase of treasury shares
(751,094)
 
 
(751,094)
 
 
(751,094)
Ending balance at Sep. 26, 2015
$ 1,888,736 
$ 0 
$ 677,705 
$ (1,248,818)
$ (81,148)
$ 2,536,252 
$ 1,883,991 
$ 4,745 
Ending balance (in shares) at Sep. 26, 2015
(23,237,143)
 
 
(23,237,000)
 
 
 
 
Ending balance (in shares) at Sep. 26, 2015
207,286,133 
207,286,000 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Sep. 26, 2015
Sep. 27, 2014
Cash flows from operating activities
 
 
Net income
$ 367,491 
$ 394,706 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
87,717 
63,062 
Equity compensation expense
25,864 
21,579 
Deferred income taxes
(853)
(5,402)
Amortization of deferred rent
1,729 
3,146 
Loss on disposal of fixed assets
1,492 
1,762 
Amortization of deferred financing costs
373 
374 
Tax benefits on exercise of share options
(9,104)
(29,653)
Foreign currency (gains) losses
(687)
3,745 
Loss (income) earned on joint venture
907 
(311)
Net income attributable to noncontrolling interest
(318)
Change in assets and liabilities:
 
 
Receivables, net
14,506 
(38,551)
Inventories
(180,020)
(201,045)
Prepaid expenses and other current assets
2,454 
(65,369)
Other assets
1,992 
(2,664)
Accounts payable
58,669 
42,107 
Accrued expenses and other current liabilities
10,472 
(3,280)
Other long-term liabilities
10,182 
14,647 
Net cash provided by operating activities
392,866 
198,853 
Cash flows from investing activities
 
 
Capital expenditures
(193,451)
(157,403)
Purchase of intangible assets
(9,291)
(12,060)
Cash received, net of cash consideration paid to obtain controlling interest in MK Panama
1,104 
Investments in joint venture
(907)
(2,940)
Net cash used in investing activities
(202,545)
(172,403)
Cash flows from financing activities
 
 
Repurchase of treasury shares
(751,094)
(1,037)
Tax benefits on exercise of share options
9,104 
29,653 
Exercise of employee share options
6,006 
8,143 
Net cash (used in) provided by financing activities
(735,984)
36,759 
Effect of exchange rate changes on cash and cash equivalents
(1,718)
(5,422)
Net (decrease) increase in cash and cash equivalents
(547,381)
57,787 
Beginning of period
978,922 
971,194 
End of period
431,541 
1,028,981 
Supplemental disclosures of cash flow information
 
 
Cash paid for interest
381 
341 
Cash paid for income taxes
133,741 
240,686 
Supplemental disclosure of non-cash investing and financing activities
 
 
Accrued capital expenditures
$ 28,229 
$ 31,044 
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 Japan, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas and Europe. The Company licenses its trademarks on products such as fragrances, beauty, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties, as well as through geographic licenses.
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements as of September 26, 2015, and for the three and six months ended September 26, 2015 and September 27, 2014, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 28, 2015, as filed with the Securities and Exchange Commission on May 27, 2015, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
The Company 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 consolidated MK Panama into its operations beginning with the second 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 term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three and six months ended September 26, 2015 and September 27, 2014, are based on 13-week and 26-week periods, respectively.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
Seasonality
The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company’s wholesale segment generally experiences its greatest sales in our third and fourth fiscal quarters while its first fiscal quarter experiences the lowest sales. The Company’s retail segment generally experiences greater sales during our third fiscal quarter as a result of Holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to the other three quarters. However, the effects of seasonality are muted by the Company’s recent growth.
Derivative Financial Instruments
The Company uses forward 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 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.
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 thousands, except share and per share data):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Numerator:
 
 
 
 
 
 
 
Net income attributable to MKHL
$
193,136

 
$
206,990

 
$
367,491

 
$
394,706

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
188,857,398

 
204,464,952

 
192,917,209

 
204,107,262

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options, restricted shares/units, and performance restricted share units
2,666,758

 
2,967,298

 
2,872,116

 
3,196,985

Diluted weighted average shares
191,524,156

 
207,432,250

 
195,789,325

 
207,304,247

Basic net income per share
$
1.02

 
$
1.01

 
$
1.90

 
$
1.93

Diluted net income per share
$
1.01

 
$
1.00

 
$
1.88

 
$
1.90


Share equivalents of 3,058,665 shares and 4,870,045 shares, respectively, have been excluded from the above calculations for the three and six months ended September 26, 2015 due to their anti-dilutive effect. During the three and six months ended September 27, 2014, share equivalents of 231,893 shares and 135,720 shares, respectively, have been excluded from the above calculations due to their anti-dilutive effect.
Recent 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.
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 for interim and annual periods beginning after December 15, 2016 and should be applied prospectively, with earlier application permitted. The Company is currently evaluating the impact of ASU 2015-11 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 significant impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU No. 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU No. 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s fiscal year 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is currently evaluating the adoption method and the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
Acquisition of Controlling Interest in a Joint Venture
Acquisition of Controlling Interest in a Joint Venture
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 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 consolidated MK Panama into its operations beginning with 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 preliminary fair values of the assets acquired and liabilities and non-controlling interest assumed as of the date the Company obtained control of MK Panama (in thousands):
 
June 28, 2015
Current assets
$
22,922

Fixed assets
6,374

Customer relationship intangible assets
2,000

Goodwill
12,210

Debt obligations
(9,539
)
Other liabilities
(2,333
)
Total fair value of net assets of MK Panama
31,634

Fair value of preexisting interest in MK Panama
8,107

Non-controlling interest
5,052

Fair value of consideration provided
$
18,475


In connection with this acquisition, the Company recorded non-deductible goodwill of $12.2 million, of which $9.5 million and $2.7 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.
The Company is in the process of finalizing estimates related to the cash and non-cash consideration provided in connection with obtaining controlling interest in MK Panama, which could result in measurement period adjustments.
Receivables, net
Receivables, net
Receivables, net
Receivables, net consist of (in thousands):
 
September 26,
2015
 
March 28,
2015
Trade receivables:
 
 
 
Credit risk assumed by factors/insured
$
348,053

 
$
374,150

Credit risk retained by Company
73,286

 
67,530

Receivables due from licensees
29,584

 
11,763

 
450,923

 
453,443

Less allowances:
(106,788
)
 
(90,024
)
 
$
344,135

 
$
363,419


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 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. Allowances for doubtful accounts were $0.6 million and $0.7 million, at September 26, 2015 and March 28, 2015, respectively.
Property and Equipment, net
Property and Equipment, net
Property and Equipment, net
Property and equipment, net consist of (in thousands):
 
September 26,
2015
 
March 28,
2015
Leasehold improvements
$
355,199

 
$
294,225

In-store shops
219,704

 
189,308

Furniture and fixtures
185,332

 
160,178

Computer equipment and software
130,951

 
104,372

Equipment
78,090

 
73,609

Land
15,099

 

 
984,375

 
821,692

Less: accumulated depreciation and amortization
(406,035
)
 
(337,755
)
 
578,340

 
483,937

Construction-in-progress
94,069

 
78,997

 
$
672,409

 
$
562,934


Depreciation and amortization of property and equipment for the three and six months ended September 26, 2015 was $43.9 million and $83.6 million, respectively. Depreciation and amortization of property and equipment for the three and six months ended September 27, 2014 was $32.2 million and $59.6 million, respectively.
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 thousands):
 
September 26,
2015
 
March 28,
2015
Prepaid taxes
$
53,251

 
$
60,637

Unrealized gains on forward foreign exchange contracts
2,284

 
25,004

Leasehold incentive receivable
9,501

 
12,289

Prepaid rent
13,763

 
11,681

Other
27,817

 
17,832

 
$
106,616

 
$
127,443


Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 26,
2015
 
March 28,
2015
Other taxes payable
$
20,326

 
$
20,202

Accrued rent
22,590

 
27,058

Advance royalties
7,902

 
5,081

Accrued litigation
767

 
5,539

Accrued advertising
15,891

 
5,653

Professional services
6,024

 
7,347

Accrued samples
34

 
816

Unrealized loss on forward foreign exchange contracts
1,529

 
600

Other
32,719

 
22,850

 
$
107,782

 
$
95,146

Debt Obligations
Debt Obligations
Debt Obligations
Senior Unsecured Revolving Credit Facility
On February 8, 2013, the Company entered into a senior unsecured credit facility (“2013 Credit Facility”). Pursuant to the agreement, the 2013 Credit Facility provides for up to $200.0 million of borrowings, and expires on February 8, 2018. The agreement also provides for loans and letters of credit to the Company’s European subsidiaries of up to $100.0 million. The 2013 Credit Facility contains financial covenants, such as requiring an adjusted leverage ratio of 3.5 to 1.0 (with the ratio being total consolidated indebtedness plus 8 times consolidated rent expense to EBITDA plus consolidated rent expense) and a fixed charge coverage ratio of 2 to 1.0 (with the ratio being EBITDA plus consolidated rent expense to the sum of fixed charges plus consolidated rent expense), restricts and limits additional indebtedness, and restricts the incurrence of additional liens and cash dividends. As of September 26, 2015, the Company was in compliance with all covenants related to this agreement.
Borrowings under the 2013 Credit Facility accrue interest at the rate per annum announced from time to time by the agent based on the rates applicable for deposits in the London interbank market for U.S. dollars or the applicable currency in which the loans are made (the “Adjusted LIBOR”) plus an applicable margin. The applicable margin may range from 1.25% to 1.75%, and is based, or dependent upon, a particular threshold related to the adjusted leverage ratio calculated during the period of borrowing. The 2013 Credit Facility requires an annual facility fee of $0.1 million and an annual commitment fee of 0.25% to 0.35% on the unused portion of the available credit under the facility.
As of September 26, 2015 and March 28, 2015, there were no borrowings outstanding under the 2013 Credit Facility. At September 26, 2015, stand-by letters of credit of $11.0 million were outstanding. The amount available for future borrowings under the agreement was $189.0 million as of September 26, 2015.
See Note 17, Subsequent Events, for the amended and restated senior unsecured revolving credit facility entered into in October 2015.
Debt Obligations of MK Panama
During the second quarter of Fiscal 2016, the Company obtained controlling interest in MK Panama and began to consolidate its financial results into its operations (see Note 3 for additional information). MK Panama's debt obligations are as follows (in thousands):
4.75% loan, due April 6, 2020 from Banco General de Panama
$
1,943

5.0% loan (see Note 15)
2,000

Other
180

Total long-term debt
$
4,123

Borrowings outstanding under revolving line of credit with Banco General de Panama, 4.0% interest rate
5,416

Total debt obligations
$
9,539

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Leases
Future minimum lease payments under the terms of the Company's noncancelable operating lease agreements are as follows (in thousands):
Fiscal years ending:
 
2016
$
101,953

2017
209,354

2018
209,712

2019
203,043

2020
199,937

Thereafter
833,905

 
$
1,757,904


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.
Refer to the Contractual Obligations and Commercial Commitments disclosure within the Liquidity section of the Fiscal 2016 10-Q for detailed disclosure of other lease commitments and contractual obligations as of September 26, 2015.
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 September 26, 2015 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 10. 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 thousands):
 
Fair value at September 26, 2015 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
$

 
$
683

 
$

 
$

 
$
23,590

 
$

Foreign currency forward contracts- Canadian Dollar

 

 

 

 
1,404

 

Foreign currency forward contracts- U.S. Dollar

 
72

 

 

 
(590
)
 

Total
$

 
$
755

 
$

 
$

 
$
24,404

 
$


The Company’s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value. Borrowings under revolving credit agreements are recorded at carrying value, which resembles fair value due to the short-term nature of such borrowings.
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 September 26, 2015 and March 28, 2015 (in thousands):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
September 26,
2015
 
March 28,
2015
 
September 26,
2015
 
March 28,
2015
 
September 26,
2015
 
March 28,
2015
Designated forward currency exchange contracts
$
221,061

 
$
226,090

 
$
2,279

 
$
23,590

 
$
1,529

 
$
522

Undesignated forward currency exchange contracts
420

 
25,788

 
5

 
1,414

 

 
78

Total
$
221,481

 
$
251,878

 
$
2,284

 
$
25,004

 
$
1,529

 
$
600

 
 
 
(1) 
Recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
(2) 
Recorded within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
Changes in the fair value of the effective portion of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations. The following tables summarize the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three-month and six-month periods ended September 26, 2015 and September 27, 2014 (in thousands):
 
Three Months Ended
 
September 26, 2015
 
September 27, 2014
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward currency exchange contracts
$
(6,606
)
 
$
2,430

 
$
9,973

 
$
(249
)
 
Six Months Ended
 
September 26, 2015
 
September 27, 2014
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward currency exchange contracts
$
(18,312
)
 
$
2,382

 
$
10,512

 
$
(1,383
)

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.
The Company recognized losses related to changes in the fair value of undesignated forward foreign currency exchange contracts of $0.4 million and $1.4 million, respectively, during the three-month and six-month periods ended September 26, 2015, and gains of $1.0 million and $0.2 million, respectively, during the three-month and six-month periods ended September 27, 2014, within foreign currency gains (losses) in the Company’s consolidated statement of operations.
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. During the six months ended September 26, 2015, the Company repurchased 16,384,737 shares at a cost of $750.0 million under its share-repurchase program through open market transactions. As of September 26, 2015, the remaining availability under the Company’s share repurchase program was $258.1 million.
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 million of the Company's ordinary shares and extended the program through March 2018.
The Company also has in place a “withhold to cover” repurchase program, which allows the Company to withhold ordinary shares from certain executive officers to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards. During the six-month periods ended September 26, 2015 and September 27, 2014, the Company withheld 22,540 shares and 11,022 shares, respectively, at a cost of $1.1 million and $1.0 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
The following table details changes in the components of accumulated other comprehensive income, net of taxes for the six-month periods ended September 26, 2015 and September 27, 2014, respectively (in thousands):
 
Foreign Currency
Translation
Income (Loss)
 
Net Gains
(Losses) on
Derivatives (1)
 
Total
Accumulated Other
Comprehensive
Income (Loss)
Balance at March 29, 2014
$
(4,775
)
 
$
(1,598
)
 
$
(6,373
)
Other comprehensive income (loss) before reclassifications
(24,604
)
 
9,347

 
(15,257
)
Less: amounts reclassified from AOCI to earnings (2)

 
(1,211
)
 
(1,211
)
Other comprehensive income net of tax
(24,604
)
 
10,558

 
(14,046
)
Balance at September 27, 2014
$
(29,379
)
 
$
8,960

 
$
(20,419
)
 
 
 
 
 
 
Balance at March 28, 2015
$
(96,068
)
 
$
29,264

 
(66,804
)
Other comprehensive income (loss) before reclassifications
4,228

 
(16,337
)
 
(12,109
)
Less: amounts reclassified from AOCI to earnings (2)

 
2,224

 
2,224

Other comprehensive income (loss) net of tax
4,228

 
(18,561
)
 
(14,333
)
Balance at September 26, 2015
$
(91,840
)
 
$
10,703

 
$
(81,137
)
Less: other comprehensive income attributable to noncontrolling interest
11

 

 
11

Other comprehensive income attributable to MKHL
$
(91,851
)
 
$
10,703

 
$
(81,148
)
 
 
(1) 
Accumulated other comprehensive income balance related to net gains on derivative financial instruments as of September 26, 2015 and March 28, 2015 is net of tax provisions of $1.2 million and $3.3 million, respectively. Other comprehensive loss before reclassifications related to derivative financial instruments for the six months ended September 26, 2015 and September 27, 2014 is net of tax benefits of $2.0 million and $1.1 million, respectively.
(2) 
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within Cost of goods sold in the Company’s consolidated statements of operations. The related tax effects recorded within income tax expense in the Company’s consolidated statements of operations 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 September 26, 2015, 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 September 26, 2015, there were 9,107,017 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 five individual performance vesting tranches. The company-wide performance target must be achieved over the ten-year term. Performance is measured at the end of the term, and any unvested options vest if the target is achieved. The Company-wide performance target is established at the time of the grant. The target metrics underlying individual performance vesting requirements are established for each recipient each year up until such time as the grant is fully vested. Options subject to time-based vesting requirements become vested in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such options were awarded.
The following table summarizes the share option activity during the six months ended September 26, 2015:
 
Number of
Options
 
Weighted
Average
Exercise price
Outstanding at March 28, 2015
7,187,003

 
$
23.14

Granted
513,864

 
$
47.09

Exercised
(809,725
)
 
$
7.29

Canceled/forfeited
(130,838
)
 
$
28.47

Outstanding at September 26, 2015
6,760,304

 
$
26.76


The weighted average grant date fair value for options granted during the three and six month periods ended September 26, 2015 was $12.01 and $14.36, respectively, and for the three and six month periods ended September 27, 2014 was $26.63 and $28.66 respectively. The following table represents assumptions used to estimate the fair value of options:
 
Three Months Ended
 
Six Months Ended
 
September 26
2015
 
September 27
2014
 
September 26
2015
 
September 27
2014
Expected dividend yield
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Volatility factor
30.9
%
 
33.1
%
 
31.1
%
 
33.3
%
Weighted average risk-free interest rate
1.5
%
 
1.6
%
 
1.6
%
 
1.5
%
Expected life of option
4.75 years

 
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 the restricted share activity during the six months ended September 26, 2015:
 
Restricted Shares
 
Number of Unvested
Restricted Shares
 
Weighted
Average Grant
Date Fair Value
Unvested at March 28, 2015
770,592

 
$
68.77

Granted

 
$

Vested
(148,691
)
 
$
81.00

Canceled/forfeited
(20,975
)
 
$
72.67

Unvested at September 26, 2015
600,926

 
$
65.60

The following table summarizes the restricted share unit activity during the six months ended September 26, 2015:
 
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
998,942

 
$
46.54

 
287,476

 
$
47.10

Vested
(10,684
)
 
$
56.16

 

 
$

Canceled/forfeited
(15,619
)
 
$
46.58

 

 
$

Unvested at September 26, 2015
1,008,579

 
$
47.14

 
604,677

 
$
62.62


The following table summarizes compensation expense attributable to share-based compensation for the three months and six months ended September 26, 2015 and September 27, 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Share-based compensation expense
$
13,358

 
$
13,425

 
$
25,864

 
$
21,579

Tax benefits related to share-based compensation expense
$
5,279

 
$
4,843

 
$
10,274

 
$
7,844


Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rate to date. The estimated value of future forfeitures for equity grants as of September 26, 2015 is approximately $2.2 million.
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 executive management 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 Japan, 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), 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, Latin America and the Caribbean, 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 $14.8 million, $9.5 million and $1.9 million of its recorded $26.2 million goodwill 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. 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 thousands):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Revenue:
 
 
 
 
 
 
 
Net sales: Retail
$
532,815

 
$
495,579

 
$
1,056,115

 
$
975,821

Wholesale
554,014

 
514,090

 
977,973

 
920,885

Licensing
43,152

 
46,936

 
81,868

 
79,053

Total revenue
$
1,129,981

 
$
1,056,605

 
$
2,115,956

 
$
1,975,759

Income from operations:
 
 
 
 
 
 
 
Retail
$
99,959

 
$
127,334

 
$
220,833

 
$
270,023

Wholesale
156,880

 
156,672

 
263,190

 
274,324

Licensing
16,247

 
21,552

 
37,686

 
37,982

Income from operations
$
273,086

 
$
305,558

 
$
521,709

 
$
582,329


Depreciation and amortization expense for each segment are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Depreciation and amortization:
 
 
 
 
 
 
 
Retail
$
28,399

 
$
22,022

 
$
53,490

 
$
39,987

Wholesale
17,412

 
11,723

 
33,514

 
22,498

Licensing
353

 
319

 
713

 
577

Total depreciation and amortization
$
46,164

 
$
34,064

 
$
87,717

 
$
63,062


Total revenue (as recognized based on country of origin), and long-lived assets by geographic location of the consolidated Company are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Revenues:
 
 
 
 
 
 
 
       The Americas (U.S., Canada and L. America)(1)
$
838,215

 
$
802,226

 
$
1,565,510

 
$
1,521,115

Europe
243,371

 
237,924

 
460,184

 
423,421

Other regions
48,395

 
16,455

 
90,262

 
31,223

Total revenues
$
1,129,981

 
$
1,056,605

 
$
2,115,956

 
$
1,975,759


 
As of
 
September 26,
2015
 
March 28,
2015
Long-lived assets:
 
 
 
       The Americas (U.S., Canada and Latin America)(1)
$
495,411

 
$
443,816

Europe
228,076

 
169,243

Other regions
18,167

 
11,416

Total Long-lived assets
$
741,654

 
$
624,475

 
 
(1) 
Net revenues earned in the U.S. were $786.5 million and $1,471.3 million, respectively, during the three months and six months ended September 26, 2015 and were $752.8 million and $1,427.1 million, respectively, during the three months and six months ended September 27, 2014. Long-lived assets located in the U.S. as of September 26, 2015 and March 28, 2015 were $462.1 million and $418.8 million, respectively.
Non-cash Investing Activities
Non-cash Investing Activities
Non-cash Investing Activities
Significant non-cash investing activities during the six months ended September 26, 2015 included $15.5 million of non-cash consideration comprised of liabilities owed to the Company, which were converted into additional equity interest in MK Panama. Significant non-cash investing activities also included the non-cash allocation of the fair value of the net assets acquired in connection with the Company obtaining controlling interest in MK Panama. See Note 3 for additional information.
There were no other significant non-cash investing or financing activities during the fiscal periods presented.
Subsequent Events
Subsequent Events
Subsequent Events
Senior Unsecured 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 existing 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 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.
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.
Summary of Significant Accounting Policies (Policies)
The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements as of September 26, 2015, and for the three and six months ended September 26, 2015 and September 27, 2014, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 28, 2015, as filed with the Securities and Exchange Commission on May 27, 2015, in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year.
The Company 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 consolidated MK Panama into its operations beginning with the second quarter of Fiscal 2016.
The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term “Fiscal Year” or “Fiscal” refers to the 52-week or 53-week period, ending on that day. The results for the three and six months ended September 26, 2015 and September 27, 2014, are based on 13-week and 26-week periods, respectively.
The preparation of financial statements in accordance with U.S. GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.
The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company’s wholesale segment generally experiences its greatest sales in our third and fourth fiscal quarters while its first fiscal quarter experiences the lowest sales. The Company’s retail segment generally experiences greater sales during our third fiscal quarter as a result of Holiday season sales. In the aggregate, the Company’s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to the other three quarters. However, the effects of seasonality are muted by the Company’s recent growth.
The Company uses forward 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 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.
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 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.
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 for interim and annual periods beginning after December 15, 2016 and should be applied prospectively, with earlier application permitted. The Company is currently evaluating the impact of ASU 2015-11 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 significant impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU No. 2014-09 requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU No. 2014-09 by one year, making it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company’s fiscal year 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is currently evaluating the adoption method and the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
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 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.
Summary of Significant Accounting Policies (Tables)
Components of Calculation of Basic Net Income Per Ordinary Share and Diluted Net Income Per Ordinary Share
The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands, except share and per share data):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Numerator:
 
 
 
 
 
 
 
Net income attributable to MKHL
$
193,136

 
$
206,990

 
$
367,491

 
$
394,706

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares
188,857,398

 
204,464,952

 
192,917,209

 
204,107,262

Weighted average dilutive share equivalents:
 
 
 
 
 
 
 
Share options, restricted shares/units, and performance restricted share units
2,666,758

 
2,967,298

 
2,872,116

 
3,196,985

Diluted weighted average shares
191,524,156

 
207,432,250

 
195,789,325

 
207,304,247

Basic net income per share
$
1.02

 
$
1.01

 
$
1.90

 
$
1.93

Diluted net income per share
$
1.01

 
$
1.00

 
$
1.88

 
$
1.90

Acquisition of Controlling Interest in a Joint Venture (Tables)
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed including Non-Controlling Interest
The following table summarizes the preliminary fair values of the assets acquired and liabilities and non-controlling interest assumed as of the date the Company obtained control of MK Panama (in thousands):
 
June 28, 2015
Current assets
$
22,922

Fixed assets
6,374

Customer relationship intangible assets
2,000

Goodwill
12,210

Debt obligations
(9,539
)
Other liabilities
(2,333
)
Total fair value of net assets of MK Panama
31,634

Fair value of preexisting interest in MK Panama
8,107

Non-controlling interest
5,052

Fair value of consideration provided
$
18,475

Receivables, net (Tables)
Receivables, net
Receivables, net consist of (in thousands):
 
September 26,
2015
 
March 28,
2015
Trade receivables:
 
 
 
Credit risk assumed by factors/insured
$
348,053

 
$
374,150

Credit risk retained by Company
73,286

 
67,530

Receivables due from licensees
29,584

 
11,763

 
450,923

 
453,443

Less allowances:
(106,788
)
 
(90,024
)
 
$
344,135

 
$
363,419

Property and Equipment, net (Tables)
Schedule of Property and Equipment, Net
Property and equipment, net consist of (in thousands):
 
September 26,
2015
 
March 28,
2015
Leasehold improvements
$
355,199

 
$
294,225

In-store shops
219,704

 
189,308

Furniture and fixtures
185,332

 
160,178

Computer equipment and software
130,951

 
104,372

Equipment
78,090

 
73,609

Land
15,099

 

 
984,375

 
821,692

Less: accumulated depreciation and amortization
(406,035
)
 
(337,755
)
 
578,340

 
483,937

Construction-in-progress
94,069

 
78,997

 
$
672,409

 
$
562,934

Current Assets and Current Liabilities (Tables)
Prepaid expenses and other current assets consist of the following (in thousands):
 
September 26,
2015
 
March 28,
2015
Prepaid taxes
$
53,251

 
$
60,637

Unrealized gains on forward foreign exchange contracts
2,284

 
25,004

Leasehold incentive receivable
9,501

 
12,289

Prepaid rent
13,763

 
11,681

Other
27,817

 
17,832

 
$
106,616

 
$
127,443

Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 26,
2015
 
March 28,
2015
Other taxes payable
$
20,326

 
$
20,202

Accrued rent
22,590

 
27,058

Advance royalties
7,902

 
5,081

Accrued litigation
767

 
5,539

Accrued advertising
15,891

 
5,653

Professional services
6,024

 
7,347

Accrued samples
34

 
816

Unrealized loss on forward foreign exchange contracts
1,529

 
600

Other
32,719

 
22,850

 
$
107,782

 
$
95,146

Debt Obligations (Tables)
Schedule of Debt for MK Panama
MK Panama's debt obligations are as follows (in thousands):
4.75% loan, due April 6, 2020 from Banco General de Panama
$
1,943

5.0% loan (see Note 15)
2,000

Other
180

Total long-term debt
$
4,123

Borrowings outstanding under revolving line of credit with Banco General de Panama, 4.0% interest rate
5,416

Total debt obligations
$
9,539

Commitments and Contingencies (Tables)
Future Minimum Lease Payments
Future minimum lease payments under the terms of the Company's noncancelable operating lease agreements are as follows (in thousands):
Fiscal years ending:
 
2016
$
101,953

2017
209,354

2018
209,712

2019
203,043

2020
199,937

Thereafter
833,905

 
$
1,757,904

Fair Value of Financial Instruments (Tables)
Schedule of Contracts Measured and Recorded at Fair Value on Recurring and Categorized in Level 2 of Fair Value Hierarchy
All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in thousands):
 
Fair value at September 26, 2015 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
$

 
$
683

 
$

 
$

 
$
23,590

 
$

Foreign currency forward contracts- Canadian Dollar

 

 

 

 
1,404

 

Foreign currency forward contracts- U.S. Dollar

 
72

 

 

 
(590
)
 

Total
$

 
$
755

 
$

 
$

 
$
24,404

 
$

Derivative Financial Instruments (Tables)
The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of September 26, 2015 and March 28, 2015 (in thousands):
 
 
 
 
 
Fair Values
 
Notional Amounts
 
Current Assets (1)
 
Current Liabilities (2)
 
September 26,
2015
 
March 28,
2015
 
September 26,
2015
 
March 28,
2015
 
September 26,
2015
 
March 28,
2015
Designated forward currency exchange contracts
$
221,061

 
$
226,090

 
$
2,279

 
$
23,590

 
$
1,529

 
$
522

Undesignated forward currency exchange contracts
420

 
25,788

 
5

 
1,414

 

 
78

Total
$
221,481

 
$
251,878

 
$
2,284

 
$
25,004

 
$
1,529

 
$
600

 
 
 
(1) 
Recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
(2) 
Recorded within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.
The following tables summarize the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three-month and six-month periods ended September 26, 2015 and September 27, 2014 (in thousands):
 
Three Months Ended
 
September 26, 2015
 
September 27, 2014
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward currency exchange contracts
$
(6,606
)
 
$
2,430

 
$
9,973

 
$
(249
)
 
Six Months Ended
 
September 26, 2015
 
September 27, 2014
 
Pre-Tax Loss
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Gain
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
 
Pre-Tax Gain
Recognized
in OCI
(Effective Portion)
 
Pre-Tax Loss
Reclassified from
Accumulated OCI
into Earnings
(Effective Portion)
Forward currency exchange contracts
$
(18,312
)
 
$
2,382

 
$
10,512

 
$
(1,383
)
Accumulated Other Comprehensive Income (Tables)
Changes in Components of Accumulated Other Comprehensive Income, Net of Taxes
The following table details changes in the components of accumulated other comprehensive income, net of taxes for the six-month periods ended September 26, 2015 and September 27, 2014, respectively (in thousands):
 
Foreign Currency
Translation
Income (Loss)
 
Net Gains
(Losses) on
Derivatives (1)
 
Total
Accumulated Other
Comprehensive
Income (Loss)
Balance at March 29, 2014
$
(4,775
)
 
$
(1,598
)
 
$
(6,373
)
Other comprehensive income (loss) before reclassifications
(24,604
)
 
9,347

 
(15,257
)
Less: amounts reclassified from AOCI to earnings (2)

 
(1,211
)
 
(1,211
)
Other comprehensive income net of tax
(24,604
)
 
10,558

 
(14,046
)
Balance at September 27, 2014
$
(29,379
)
 
$
8,960

 
$
(20,419
)
 
 
 
 
 
 
Balance at March 28, 2015
$
(96,068
)
 
$
29,264

 
(66,804
)
Other comprehensive income (loss) before reclassifications
4,228

 
(16,337
)
 
(12,109
)
Less: amounts reclassified from AOCI to earnings (2)

 
2,224

 
2,224

Other comprehensive income (loss) net of tax
4,228

 
(18,561
)
 
(14,333
)
Balance at September 26, 2015
$
(91,840
)
 
$
10,703

 
$
(81,137
)
Less: other comprehensive income attributable to noncontrolling interest
11

 

 
11

Other comprehensive income attributable to MKHL
$
(91,851
)
 
$
10,703

 
$
(81,148
)
 
 
(1) 
Accumulated other comprehensive income balance related to net gains on derivative financial instruments as of September 26, 2015 and March 28, 2015 is net of tax provisions of $1.2 million and $3.3 million, respectively. Other comprehensive loss before reclassifications related to derivative financial instruments for the six months ended September 26, 2015 and September 27, 2014 is net of tax benefits of $2.0 million and $1.1 million, respectively.
(2) 
Reclassified amounts relate to the Company’s forward foreign currency exchange contracts for inventory purchases and are recorded within Cost of goods sold in the Company’s consolidated statements of operations. The related tax effects recorded within income tax expense in the Company’s consolidated statements of operations were not material.
Share-Based Compensation (Tables)
The following table summarizes the share option activity during the six months ended September 26, 2015:
 
Number of
Options
 
Weighted
Average
Exercise price
Outstanding at March 28, 2015
7,187,003

 
$
23.14

Granted
513,864

 
$
47.09

Exercised
(809,725
)
 
$
7.29

Canceled/forfeited
(130,838
)
 
$
28.47

Outstanding at September 26, 2015
6,760,304

 
$
26.76

The following table represents assumptions used to estimate the fair value of options:
 
Three Months Ended
 
Six Months Ended
 
September 26
2015
 
September 27
2014
 
September 26
2015
 
September 27
2014
Expected dividend yield
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Volatility factor
30.9
%
 
33.1
%
 
31.1
%
 
33.3
%
Weighted average risk-free interest rate
1.5
%
 
1.6
%
 
1.6
%
 
1.5
%
Expected life of option
4.75 years

 
4.75 years

 
4.75 years

 
4.75 years

The following table summarizes the restricted share activity during the six months ended September 26, 2015:
 
Restricted Shares
 
Number of Unvested
Restricted Shares
 
Weighted
Average Grant
Date Fair Value
Unvested at March 28, 2015
770,592

 
$
68.77

Granted

 
$

Vested
(148,691
)
 
$
81.00

Canceled/forfeited
(20,975
)
 
$
72.67

Unvested at September 26, 2015
600,926

 
$
65.60

The following table summarizes the restricted share unit activity during the six months ended September 26, 2015:
 
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
998,942

 
$
46.54

 
287,476

 
$
47.10

Vested
(10,684
)
 
$
56.16

 

 
$

Canceled/forfeited
(15,619
)
 
$
46.58

 

 
$

Unvested at September 26, 2015
1,008,579

 
$
47.14

 
604,677

 
$
62.62

The following table summarizes compensation expense attributable to share-based compensation for the three months and six months ended September 26, 2015 and September 27, 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Share-based compensation expense
$
13,358

 
$
13,425