10-Q 1 tpr330201910q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
þ          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the Quarterly Period Ended March 30, 2019
or 
¨          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
Commission file number: 1-16153
 
Tapestry, Inc.
(Exact name of registrant as specified in its charter)
Maryland
52-2242751
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10 Hudson Yards, New York, NY 10001
(Address of principal executive offices); (Zip Code) 
(212) 594-1850
(Registrant’s telephone number, including area code) 
 
 
Common Stock, $0.01 par value
TPR
New York Stock Exchange
Title of Each Class
Trading Symbol
Name of each exchange on which registered
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ     
 
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
On April 26, 2019 the Registrant had 290,135,955 outstanding shares of common stock, which is the Registrant’s only class of common stock.
 





TAPESTRY, INC.
INDEX
 

 




In this Form 10-Q, references to “we,” “our,” “us,” "Tapestry" and the “Company” refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Kate Spade," "kate spade new york" or "Stuart Weitzman" refer only to the referenced brand.
SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This document, and the documents incorporated by reference in this document, in our press releases and in oral statements made from time to time by us or on our behalf, contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are based on management’s current expectations, that involve risks and uncertainties that could cause our actual results to differ materially from our current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "may," "will," "should," "expect," "confidence," "trends," "intend," "estimate," "on track," "are positioned to," "on course," "opportunity," "continue," "project," "guidance," "target," "forecast," "anticipated," "plan," "potential," the negative of these terms or comparable terms. The Company's actual results could differ materially from the results contemplated by these forward-looking statements and are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations due to a number of important factors, including but not limited to: (i) our ability to achieve intended benefits, cost savings and synergies from acquisitions; (ii) our ability to upgrade our information technology systems precisely and efficiently; (iii) our ability to successfully execute our growth strategies, including our efforts to expand internationally into a global house of lifestyle brands; (iv) our ability to successfully execute our operational efficiency initiatives; (v) our exposure to international risks, including currency fluctuations and changes in economic or political conditions in the markets where we sell or source our products; (vi) the effect of existing and new competition in the marketplace; (vii) our ability to retain the value of our brands and to respond to changing fashion and retail trends in a timely manner; (viii) our ability to control costs; (ix) the effect of seasonal and quarterly fluctuations on our sales or operating results; (x) our ability to protect against infringement of our trademarks and other proprietary rights; (xi) the risk of cyber security threats and privacy or data security breaches; (xii) the impact of tax legislation; and such other risk factors as set forth in Part II, Item 1A. "Risk Factors" and elsewhere in this report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 ("fiscal year 2018"). The Company assumes no obligation to revise or update any such forward-looking statements for any reason, except as required by law.
 WHERE YOU CAN FIND MORE INFORMATION
Tapestry's quarterly financial results and other important information are available by calling the Investor Relations Department at (212) 629-2618.
Tapestry maintains its website at www.tapestry.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC.



 






TAPESTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 
March 30,
2019
 
June 30,
2018
 
(millions)
 
(unaudited)
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
1,075.3

 
$
1,243.4

Short-term investments
262.0

 
6.6

Trade accounts receivable, less allowances of $4.6 and $1.5, respectively
285.7

 
314.1

Inventories
811.1

 
673.8

Prepaid expenses
87.9

 
82.6

Income tax receivable
40.9

 
25.8

Other current assets
99.5

 
86.3

Total current assets
2,662.4

 
2,432.6

Property and equipment, net
921.6

 
885.4

Long-term investments
0.1

 

Goodwill
1,504.1

 
1,484.3

Intangible assets
1,716.8

 
1,732.9

Deferred income taxes
26.0

 
24.3

Other assets
138.9

 
118.8

Total assets
$
6,969.9

 
$
6,678.3

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
260.6

 
$
264.3

Accrued liabilities
659.0

 
622.9

Accrued income taxes
76.3

 
50.3

Current debt
0.7

 
0.7

Total current liabilities
996.6

 
938.2

Long-term debt
1,601.5

 
1,599.9

Deferred income taxes
245.3

 
206.2

Long-term income taxes payable
155.9

 
222.4

Other liabilities
439.4

 
467.0

Total liabilities
3,438.7

 
3,433.7

 
 
 
 
See Note 16 on commitments and contingencies


 


 
 
 
 
Stockholders' Equity:
 

 
 

Preferred stock: (authorized 25.0 million shares; $0.01 par value per share) none issued

 

Common stock: (authorized 1.0 billion shares; $0.01 par value per share) issued and outstanding - 290.1 million and 288.0 million shares, respectively
2.9

 
2.9

Additional paid-in-capital
3,278.6

 
3,205.5

Retained earnings
340.2

 
119.0

Accumulated other comprehensive income (loss)
(90.5
)
 
(82.8
)
Total stockholders' equity
3,531.2

 
3,244.6

Total liabilities and stockholders' equity
$
6,969.9

 
$
6,678.3

 
See accompanying Notes.

1



TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
 
Nine Months Ended
 
March 30,
2019
 
March 31,
2018
 
 
March 30,
2019
 
March 31,
2018
 
(millions, except per share data)
 
(unaudited)
Net sales
$
1,331.4

 
$
1,322.4

 
 
$
4,513.4

 
$
4,396.3

Cost of sales
415.5

 
414.8

 
 
1,458.9

 
1,549.6

Gross profit
915.9

 
907.6

 
 
3,054.5

 
2,846.7

Selling, general and administrative expenses
810.1

 
748.6

 
 
2,410.3

 
2,363.1

Operating income
105.8

 
159.0

 
 
644.2

 
483.6

Interest expense, net
10.6

 
16.9

 
 
36.9

 
59.6

Income before provision for income taxes
95.2

 
142.1

 
 
607.3

 
424.0

Provision for income taxes
(22.2
)
 
1.8

 
 
112.8

 
238.2

Net income
$
117.4

 
$
140.3

 
 
$
494.5

 
$
185.8

Net income per share:
 

 
 

 
 
 

 
 

Basic
$
0.40

 
$
0.49

 
 
$
1.71

 
$
0.65

Diluted
$
0.40

 
$
0.48

 
 
$
1.70

 
$
0.65

Shares used in computing net income per share:
 

 
 

 
 
 

 
 

Basic
290.0

 
286.2

 
 
289.5

 
284.7

Diluted
290.9

 
290.1

 
 
291.2

 
287.8

Cash dividends declared per common share
$
0.3375

 
$
0.3375

 
 
$
1.0125

 
$
1.0125

 
See accompanying Notes.
 

2



TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
 
Nine Months Ended
 
March 30,
2019
 
March 31,
2018
 
 
March 30,
2019
 
March 31,
2018
 
(millions)
 
(unaudited)
Net income
$
117.4

 
$
140.3

 
 
$
494.5

 
$
185.8

Other comprehensive income (loss), net of tax:
 

 
 

 
 
 

 
 

Unrealized gains (losses) on cash flow hedging derivatives, net
(4.0
)
 
(2.7
)
 
 
(2.7
)
 
(6.8
)
Unrealized gains (losses) on available-for-sale investments, net
0.1

 
(0.1
)
 
 
0.2

 
0.4

Foreign currency translation adjustments
4.9

 
28.7

 
 
(5.2
)
 
46.9

Other comprehensive income (loss), net of tax
1.0

 
25.9

 
 
(7.7
)
 
40.5

Comprehensive income (loss)
$
118.4

 
$
166.2

 
 
$
486.8

 
$
226.3

 
See accompanying Notes.


3



TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
March 30,
2019
 
March 31,
2018
 
(millions)
 
(unaudited)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
 

 
 

Net income
$
494.5

 
$
185.8

Adjustments to reconcile net income to net cash used in operating activities:
 

 
 

Depreciation and amortization
189.8

 
188.6

Provision for bad debt
6.4

 
1.0

Share-based compensation
65.4

 
60.9

Integration and restructuring activities
13.0

 
125.1

Deferred income taxes
41.5

 
(39.3
)
Other non-cash charges, net
(5.5
)
 

Changes in operating assets and liabilities:
 

 
 

Trade accounts receivable
50.9

 
78.6

Inventories
(123.1
)
 
12.0

Accounts payable
(43.5
)
 
(136.7
)
Accrued liabilities
28.5

 
(40.0
)
Other liabilities
(61.2
)
 
168.6

Other assets
(54.5
)
 
(18.1
)
Net cash provided by operating activities
602.2

 
586.5

CASH FLOWS USED IN INVESTING ACTIVITIES
 

 
 

Acquisitions, net of cash acquired
(39.4
)
 
(2,373.2
)
Purchases of investments
(336.4
)
 
(3.5
)
Proceeds from maturities and sales of investments
82.3

 
482.2

Purchases of property and equipment
(184.2
)
 
(186.6
)
Net cash used in investing activities
(477.7
)
 
(2,081.1
)
CASH FLOWS USED IN FINANCING ACTIVITIES
 

 
 

Dividend payments
(292.8
)
 
(287.1
)
Proceeds from issuance of debt

 
1,100.0

Repayment of debt

 
(1,100.0
)
Proceeds from share-based awards
31.6

 
159.9

Taxes paid to net settle share-based awards
(26.1
)
 
(31.2
)
Net cash used in financing activities
(287.3
)
 
(158.4
)
Effect of exchange rate changes on cash and cash equivalents
(5.3
)
 
11.8

Net decrease in cash and cash equivalents
(168.1
)
 
(1,641.2
)
Cash and cash equivalents at beginning of period
1,243.4

 
2,672.9

Cash and cash equivalents at end of period
$
1,075.3

 
$
1,031.7

Supplemental information:
 
 
 
Cash paid for income taxes, net
$
135.3

 
$
68.0

Cash paid for interest
$
45.4

 
$
49.2

Noncash investing activity - property and equipment obligations
$
53.2

 
$
33.8

 

See accompanying Notes.

4

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements
(Unaudited)



1. NATURE OF OPERATIONS
Tapestry, Inc. (the "Company") is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry owns the Coach, Kate Spade and Stuart Weitzman brands. The Company’s primary product offerings, manufactured by third-party suppliers, include women’s and men’s bags, small leather goods, footwear, ready-to-wear including outerwear, watches, weekend and travel accessories, scarves, eyewear, fragrance, jewelry and other lifestyle products.
The Coach segment includes global sales of Coach brand products to customers through Coach operated stores, including the Internet and concession shop-in-shops, sales to wholesale customers and through independent third party distributors.
The Kate Spade segment includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors.
The Stuart Weitzman segment includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors.
2. BASIS OF PRESENTATION AND ORGANIZATION
Interim Financial Statements
These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and are unaudited. In the opinion of management, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading. This report should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018 ("fiscal 2018") and other filings filed with the SEC.
The results of operations, cash flows and comprehensive income for the nine months ended March 30, 2019 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on June 29, 2019 ("fiscal 2019"). 
During the second quarter of fiscal 2019, the Company acquired designated assets of its Kate Spade distributor in Singapore and Malaysia. During the first quarter of fiscal 2019, the Company acquired designated assets of its Stuart Weitzman distributor in Southern China and of its Kate Spade distributor in Australia. During the third quarter of fiscal 2018, the Company acquired designated assets of its Stuart Weitzman distributor in Northern China, entered into an agreement to take operational control of the KS China Co., Limited and KS HMT Co., Limited joint ventures ("Kate Spade Joint Ventures") that operate in mainland China, Hong Kong, Macau and Taiwan in which the Company has 50% interest, and acquired designated assets of its Coach distributor in Australia and New Zealand. During the first quarter of 2018, the Company completed its acquisition of Kate Spade & Company. The results of operations of each acquired entity have been included in the condensed consolidated financial statements since the respective date of each acquisition.
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30. Fiscal 2019 will be a 52-week period. Fiscal 2018 ended on June 30, 2018 and was also a 52-week period. The third quarter of fiscal 2019 ended on March 30, 2019 and the third quarter of fiscal 2018 ended on March 31, 2018. These were 13-week periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes thereto. Actual results could differ from estimates in amounts that may be material to the financial statements.
Significant estimates inherent in the preparation of the condensed consolidated financial statements include reserves for the realizability of inventory; customer returns, end-of-season markdowns and operational chargebacks; useful lives and impairments of long-lived tangible and intangible assets; accounting for income taxes (including the impacts of recently enacted tax legislation) and related uncertain tax positions; accounting for business combinations; the valuation of stock-based compensation awards and related expected forfeiture rates; reserves for restructuring; and reserves for litigation and other contingencies, amongst others.

5

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Principles of Consolidation
These unaudited interim condensed consolidated financial statements include the accounts of the Company and all 100% owned and controlled subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation. Beginning in fiscal 2019, the Company changed its expense reporting to more closely align with the organizational structure and management of the business. Accordingly, certain Selling, general and administrative ("SG&A") expenses that were reported within our reportable segments in fiscal 2018 are now reflected as Corporate expenses. Refer to Note 17, "Segment Information," for further information.
In addition, certain prior year costs related to compensation of the supply chain function for Kate Spade have been reclassified to conform to the current year presentation. These costs amounted to $5.4 million for the fiscal year ended June 30, 2018 and have been reclassified from SG&A expenses to Cost of sales within the Company's Condensed Consolidated Statements of Operations.
3. RECENT ACCOUNTING PROUNOUNCEMENTS
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which provides a single, comprehensive revenue recognition model for all contracts with customers, and contains principles to determine the measurement of revenue and timing of when it is recognized. The model supersedes most existing revenue recognition guidance, and also requires enhanced revenue-related disclosures. The FASB has also issued several related ASUs which provide additional implementation guidance and clarify the requirements of the model.
The Company adopted ASU 2014-09 beginning in the first quarter of fiscal 2019 utilizing the modified retrospective approach. The cumulative effect of initially applying the new standard did not result in a change to opening Retained earnings. Prior year comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Effects of adoption include balance sheet presentation changes including presentation of estimated returned products and refund liabilities on a gross basis, as well as an increase in deferred revenue related to current year licensing contract activity due to a change in the method of recognizing sales-based royalties. These balance sheet presentation changes resulted in an increase of $8.0 million to Other current assets, an increase of $5.4 million to Accrued liabilities and a decrease of $4.6 million to Accounts receivable as of March 30, 2019. Furthermore, the adoption changed the income statement classification of certain items, primarily related to cooperative advertising allowances and other consideration provided to wholesale customers. The following table compares the reported results in fiscal 2019 under the new standard to the amounts that would have been reported if the standard had not been adopted:
 
Three Months Ended
March 30, 2019
 
Nine Months Ended
March 30, 2019
 
As Reported
 
Impact of Adoption
 
Balances Excluding Adoption
 
As Reported
 
Impact of Adoption
 
Balances Excluding Adoption
 
(millions)
Net sales
$
1,331.4

 
$
(0.2
)
 
$
1,331.6

 
$
4,513.4

 
$
(3.9
)
 
$
4,517.3

Cost of sales
415.5

 
0.8

 
414.7

 
1,458.9

 
1.5

 
1,457.4

Gross profit
915.9

 
(1.0
)
 
916.9

 
3,054.5

 
(5.4
)
 
3,059.9

Selling, general and administrative expenses
810.1

 
(1.4
)
 
811.5

 
2,410.3

 
(3.4
)
 
2,413.7

Operating income
$
105.8

 
$
0.4

 
$
105.4

 
$
644.2

 
$
(2.0
)
 
$
646.2

For further information regarding revenue from contracts with customers, refer to Note 4, "Revenue."
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"). This ASU requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to a third party. The Company adopted ASU 2016-16 beginning in the first quarter of fiscal 2019 utilizing the modified retrospective approach, which resulted in a cumulative adjustment of $20.2 million to its opening Retained earnings balance. Overall, the adoption of ASU 2016-16 did not have a material impact on the Company's condensed consolidated financial statements.

6

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which is intended to increase transparency and comparability among companies that enter into leasing arrangements. This ASU requires recognition of lease assets and lease liabilities on the balance sheet for all leases, as well as a retrospective recognition and measurement of existing impacted leases. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2020. In July 2018, the FASB issued ASU 2018-11, with targeted improvements to the guidance including an additional transition method for the new standard. As a result, the new standard may be applied with a retrospective approach to each prior reporting period or with the initial application at the adoption with a cumulative-effect adjustment in the opening balance of Retained earnings, with various optional practical expedients.
The Company is currently performing a comprehensive evaluation of the impact of adopting this guidance on its consolidated financial statements and notes thereto. Assessment efforts to date have included reviewing the standard's provisions, gathering information to evaluate the landscape of arrangements that may meet the definition of a lease, collecting information from lease contracts, gathering information to assess for potential impairment of right-of-use-assets, evaluating accounting policy elections and updating internal controls over systems and financial reporting. The Company has selected a global software solution to manage and account for all leases, which is currently being implemented.
The Company anticipates it will elect the package of practical expedients intended to ease transition whereby the Company need not assess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any existing leases. The Company also intends to elect the practical expedient to combine non-lease components and lease components. Furthermore, the Company has determined that it will apply the provisions of ASU 2018-11 with the initial application at the adoption date with a cumulative effect adjustment in the opening balance of Retained earnings in the first quarter of fiscal 2020. The Company expects the guidance will result in a significant increase to long-term assets and liabilities on its condensed consolidated balance sheets and does not expect it to have a material impact on the condensed consolidated statements of operations. This guidance is not expected to have a material impact on the Company's liquidity.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)" ("ASU 2018-13"), which is intended to improve the effectiveness of fair value disclosures. The ASU removes or modifies certain disclosure requirements related to fair value information, as well as adds new disclosure requirements for Level 3 fair value measurements. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact that adopting ASU 2018-13 will have on its condensed consolidated financial statements and notes thereto, however, does not expect a material impact resulting from this guidance.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)" ("ASU 2018-15"), which is intended to clarify the accounting for implementation costs of cloud computing arrangements which are deemed to be a service contract rather than a software license. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact that adopting ASU 2018-15 will have on its condensed consolidated financial statements and notes thereto.
4. REVENUE
The Company recognizes revenue primarily from sales of the products of its brands through retail and wholesale channels, including the Internet. The Company also generates revenue from royalties related to licensing its trademarks, as well as sales in ancillary channels. In all cases, revenue is recognized upon the transfer of control of the promised products or services to the customer, which may be at a point in time or over time. Control is transferred when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized is the amount of consideration to which the Company expects to be entitled, including estimation of sale terms that may create variability in the consideration. Revenue subject to variability is constrained to an amount which will not result in a significant reversal in future periods when the contingency that creates variability is resolved.
The Company recognizes revenue in its retail stores, including concession shop-in-shops, at the point-of-sale when the customer obtains physical possession of the products. Internet revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and Internet revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale.

7

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Gift cards issued by the Company are recorded as a liability until redeemed by the customer, at which point revenue is recognized. The Company also uses historical information to estimate the amount of gift card balances that will never be redeemed and recognizes that amount as revenue over time in proportion to actual customer redemptions if the Company does not have a legal obligation to remit unredeemed gift cards to any jurisdiction as unclaimed property.
The Company recognizes revenue within the wholesale channel at the time title passes and risk of loss is transferred to customers, which is generally at the point of shipment of products but may occur upon receipt of the shipment by the customer in certain cases. Payment is generally due 30 to 90 days after shipment. Wholesale revenue is recorded net of estimates for returns, discounts, end-of-season markdowns, cooperative advertising allowances and other consideration provided to the customer. Discounts are based on contract terms with the customer, while cooperative advertising allowances and other consideration may be based on contract terms or negotiated on a case by case basis. Returns and markdowns generally require approval from the Company and are estimated based on historical trends, current season results and inventory positions at the wholesale locations, current market and economic conditions as well as, in select cases, contractual terms. The Company's historical estimates of these variable amounts have not differed materially from actual results.
The Company recognizes licensing revenue over time during the contract period in which licensees are granted access to the Company's trademarks. These arrangements require licensees to pay a sales-based royalty and may include a contractually guaranteed minimum royalty amount. Revenue for contractually guaranteed minimum royalty amounts is recognized ratably over the license year and any excess sales-based royalties are recognized as earned once the minimum royalty threshold is achieved. Payments from the customer are generally due quarterly in an amount based on the licensee's sales of goods bearing the licensed trademarks during the period, which may differ from the amount of revenue recorded during the period thereby generating a contract asset or liability. Contract assets and liabilities and contract costs related to the licensing arrangements are immaterial as the licensing business represents approximately 1% of total net sales in the nine months ended March 30, 2019.
The Company has elected a practical expedient not to disclose the remaining performance obligations that are unsatisfied as of the end of the period related to contracts with an original duration of one year or less and variable consideration related to sales-based royalty arrangements. There are no other contracts with transaction price allocated to remaining performance obligations other than future minimum royalties as discussed above, which are not material.
Other practical expedients elected by the Company include (i) assuming no significant financing component exists for any contract with a duration of one year or less, (ii) accounting for shipping and handling as a fulfillment activity within SG&A expense regardless of the timing of the shipment in relation to the transfer of control and (iii) excluding sales and value added tax from the transaction price.

8

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Disaggregated Net Sales
The following table disaggregates the Company's net sales into geographies that depict how economic factors may impact the revenues and cash flows for the periods presented. Each geography presented includes net sales related to the Company's directly operated channels, global travel retail business and to wholesale customers, including distributors, in locations within the specified geographic area.    
 
North America
 
Greater China(1)
 
Other Asia(2)
 
Other(3)
 
Total
 
(millions)
Three Months Ended March 30, 2019
 
 
 
 
 
 
 
 
 
Coach
$
484.0

 
$
213.7

 
$
212.8

 
$
54.5

 
$
965.0

Kate Spade
205.1

 
13.6

 
43.8

 
18.6

 
281.1

Stuart Weitzman
45.8

 
18.0

 
6.3

 
15.2

 
85.3

Total
$
734.9

 
$
245.3

 
$
262.9

 
$
88.3

 
$
1,331.4

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Coach
$
501.9

 
$
211.0

 
$
203.7

 
$
52.7

 
$
969.3

Kate Spade
197.6

 
12.1

 
38.8

 
20.8

 
269.3

Stuart Weitzman
52.2

 
8.1

 
5.8

 
17.7

 
83.8

Total
$
751.7

 
$
231.2

 
$
248.3

 
$
91.2

 
$
1,322.4

 
 
 
 
 
 
 
 
 
 
Nine Months Ended March 30, 2019
 
 
 
 
 
 
 
 
 
Coach
$
1,788.1

 
$
577.2

 
$
627.9

 
$
181.1

 
$
3,174.3

Kate Spade
812.3

 
37.4

 
118.9

 
66.3

 
1,034.9

Stuart Weitzman
170.4

 
57.1

 
18.5

 
58.2

 
304.2

Total
$
2,770.8

 
$
671.7

 
$
765.3

 
$
305.6

 
$
4,513.4

 
 
 
 
 
 
 
 
 
 
Nine Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Coach
$
1,803.3

 
$
561.8

 
$
578.9

 
$
178.6

 
$
3,122.6

Kate Spade
784.3

 
12.4

 
106.1

 
70.0

 
972.8

Stuart Weitzman
196.4

 
24.7

 
13.8

 
66.0

 
300.9

Total
$
2,784.0

 
$
598.9

 
$
698.8

 
$
314.6

 
$
4,396.3

 
(1) 
Greater China includes mainland China, Hong Kong, Macau and Taiwan.
(2) 
Other Asia includes Japan, Australia, New Zealand, South Korea, Thailand and other countries within Asia.
(3) 
Other sales primarily represents sales in Europe, the Middle East and royalties related to licensing.
Deferred Revenue
Deferred revenue results from cash payments received or receivable from customers prior to the transfer of the promised goods or services, and is primarily related to unredeemed gift cards, net of breakage which has been recognized. Additional deferred revenue may result from sales-based royalty payments received or receivable which exceed the revenue recognized during the contractual period. The balance of such amounts as of March 30, 2019 and June 30, 2018 was $29.7 million and $29.1 million, respectively, which were primarily recorded within Accrued liabilities on the Company's Condensed Consolidated Balance Sheets and are generally expected to be recognized as revenue within a year. For the nine months ended March 30, 2019, net sales of $16.6 million were recognized from amounts recorded as deferred revenue as of June 30, 2018.

9

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




5. INTEGRATION AND ACQUISITION COSTS
During the three and nine months ended March 30, 2019, the Company incurred integration costs of $20.6 million and $55.3 million, respectively. The charges recorded in Cost of sales for the three and nine months ended March 30, 2019 were $5.0 million and $9.1 million, respectively. Of the amount recorded to Cost of sales, $4.3 million and $5.4 million was recorded in the Kate Spade segment, $0.0 million and $2.0 million was recorded in the Coach segment and $0.7 million and $1.7 million was recorded in the Stuart Weitzman segment, respectively. The charges recorded to SG&A expenses for the three and nine months ended March 30, 2019 were $15.6 million and $46.2 million, respectively. Of the amount recorded to SG&A expenses, $7.0 million and $18.4 million was recorded within Corporate, $0.1 million and $12.2 million was recorded in the Stuart Weitzman segment and $3.0 million and $10.1 million was recorded in the Kate Spade segment, respectively. The charges recorded to SG&A expenses in the Coach segment were $5.5 million for the three and nine months ended March 30, 2019. Of the total costs of $55.3 million, $13.0 million were non-cash charges related to purchase accounting adjustments, inventory-related charges and organization-related costs.
The Company estimates that it will incur approximately $25-35 million in pre-tax charges, of which the majority are expected to be cash charges, for the remainder of fiscal 2019.
During the three and nine months ended March 31, 2018, the Company incurred integration and acquisition-related costs of $22.4 million and $271.3 million, respectively. The charges recorded in Cost of sales for the three and nine months ended March 31, 2018 were $4.1 million and $110.9 million, respectively. Of the amount recorded to Cost of sales for the three and nine months ended March 31, 2018$1.0 million and $106.4 million were recorded in the Kate Spade segment and $2.1 million and $3.5 million were recorded within the Stuart Weitzman segment, respectively. The charges recorded to Cost of sales in the Coach segment were $1.0 million for the three and nine months ended March 31, 2018. The charges recorded in SG&A expenses for the three and nine months ended March 31, 2018 were $18.3 million and $160.4 million, respectively. Of the amount recorded to SG&A expenses, $9.1 million and $106.6 million was recorded in the Kate Spade segment, $4.3 million and $47.1 million was recorded within Corporate and $4.7 million and $6.5 million was recorded in the Stuart Weitzman segment, respectively. The charges recorded to SG&A expenses in the Coach segment were $0.2 million for the three and nine months ended March 31, 2018. Of the total costs of $271.3 million, $124.3 million were non-cash charges related to purchase accounting adjustments, inventory, organization-related costs and asset write-offs.
Refer to Note 7, "Acquisitions," for more information.
A summary of the integration and acquisition charges is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
 
 
(millions)
Purchase accounting adjustments(1)
 
$
3.9

 
$
6.0

 
$
9.3

 
$
76.2

Acquisition costs(2)
 
0.3

 
1.3

 
1.0

 
42.0

Inventory-related charges(3)
 
1.0

 
(1.7
)
 
(0.4
)
 
36.2

Contractual payments(4)
 
(0.6
)
 

 
6.6

 
50.6

Organization-related costs(5)
 
12.8

 
7.3

 
18.6

 
35.0

Other(6)
 
3.2

 
9.5

 
20.2

 
31.3

Total
 
$
20.6

 
$
22.4

 
$
55.3

 
$
271.3

 
(1) 
Purchase accounting adjustments primarily relate to the short-term impact of the amortization of fair value adjustments.
(2) 
Acquisition costs primarily relate to deal fees associated with the acquisitions.
(3) 
Inventory-related charges primarily relate to reserves for the destruction of certain on-hand inventory and non-cancelable inventory purchase commitments related to raw materials.
(4) 
Contractual payments primarily relate to contract termination charges for the three and nine months ended March 30, 2019. For the nine months ended March 31, 2018, these payments primarily relate to severance and related costs as a result of pre-existing agreements with certain Kate Spade executives which became effective upon the closing of the acquisition.
(5) 
Organization-related costs primarily relate to severance charges.

10

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




(6) 
Other charges primarily relate to professional fees and asset write-offs.
6. RESTRUCTURING ACTIVITIES
Operational Efficiency Plan
During the fourth quarter of fiscal 2016, the Company announced a plan (the “Operational Efficiency Plan”) to enhance organizational efficiency, update core technology platforms and optimize international supply chain and office locations. The Operational Efficiency Plan was adopted as a result of a strategic review of the Company’s corporate structure which focused on creating an agile and scalable business model.
During the three and nine months ended March 31, 2018, the Company incurred charges of $2.9 million and $9.5 million, respectively, primarily due to technology infrastructure costs. Total cumulative charges incurred under the Operational Efficiency Plan were $87.4 million. These charges were recorded as Corporate expenses within SG&A expenses within the Company's Condensed Consolidated Statements of Operations. The plan was concluded at the end of fiscal 2018.
There were no remaining liabilities under the Company's Operational Efficiency Plan as of March 30, 2019. The balance of $1.4 million as of June 30, 2018 is included within Accrued liabilities on the Company's Condensed Consolidated Balance Sheets.
7. ACQUISITIONS
Fiscal 2019 Acquisitions
Distributor Acquisitions
During the nine months ended March 30, 2019, the Company acquired designated assets of its Stuart Weitzman distributor in Southern China and of its Kate Spade distributor in Australia, Malaysia and Singapore.
The aggregate purchase consideration for the acquisitions was $39.7 million, $39.4 million of which was cash consideration paid during the first nine months of fiscal 2019 and the remaining is related to non-cash consideration. Of the total purchase consideration of $39.7 million, $18.6 million of net assets were recorded at their fair values. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as non-tax deductible goodwill in the amount of $21.1 million, of which $8.4 million was assigned to the Stuart Weitzman segment and $12.7 million was assigned to the Kate Spade segment.
The purchase price allocation for these assets acquired and liabilities assumed is substantially complete, however may be subject to change as additional information is obtained during the acquisition measurement period. The pro forma results are not presented for these acquisitions as they are immaterial.
Fiscal 2018 Acquisitions
Kate Spade and Company Acquisition
On July 11, 2017, the Company completed its acquisition of Kate Spade & Company for $18.50 per share for a total purchase price of $2.40 billion. As a result, Kate Spade became a wholly owned subsidiary of the Company.
The aggregate cash paid in connection with the acquisition of Kate Spade was $2.39 billion (or $2.32 billion net of cash acquired). Consideration also included $5.3 million as a result of the conversion of unvested equity awards held by Kate Spade employees. The Company funded the acquisition through cash on-hand, as well as debt proceeds. Refer to Note 12, "Debt," for information regarding the Company's outstanding debt.
The Company accounted for the acquisition of Kate Spade under the acquisition method of accounting for business combinations. Accordingly, the cost was allocated to the underlying net assets based on their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, which consists largely of the synergies expected from the acquisition.

11

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




The purchase price allocation for the assets acquired and liabilities assumed is complete. The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date:
Assets Acquired and Liabilities Assumed
Fair Value at Acquisition Date
 
Measurement Period Adjustments
 
Adjusted
Fair Value
 
(millions)
Cash and cash equivalents
$
71.8

 
$

 
$
71.8

Trade accounts receivable
62.8

 

 
62.8

Inventories(1)
310.1

 

 
310.1

Prepaid expenses and other current assets
33.9

 
(1.2
)
 
32.7

Property and equipment
175.5

 

 
175.5

Goodwill(2)(3)
916.1

 
(16.1
)
 
900.0

Brand intangible asset(4)
1,300.0

 

 
1,300.0

Other intangible assets(5)
119.2

 

 
119.2

Other assets
59.0

 
11.1

 
70.1

Total assets acquired
3,048.4

 
(6.2
)
 
3,042.2

Accounts payable and accrued liabilities
233.3

 

 
233.3

Deferred income taxes(6)
333.0

 
(7.3
)
 
325.7

Other liabilities(7) 
84.8

 
1.1

 
85.9

Total liabilities assumed
651.1

 
(6.2
)
 
644.9

Total purchase price
2,397.3

 

 
2,397.3

 
 
 
 
 
 
Less: Cash acquired
(71.8
)
 

 
(71.8
)
 
 
 
 
 
 
Total purchase price, net of cash acquired
$
2,325.5

 
$

 
$
2,325.5

 
(1) Included a step-up adjustment of $67.5 million, which was amortized over 4 months.
(2) The majority of the goodwill balance is not deductible for tax purposes.
(3) The Company assigned $324.0 million of goodwill associated with the Kate Spade acquisition to Coach brand reporting units based upon the analysis of expected synergies, including the allocation of corporate synergies to the brands.
(4) The brand intangible asset, of which the majority is not deductible for tax purposes, was valued based on the multi-period excess earnings method.
(5) The components of other intangible assets included favorable lease rights of $72.2 million (amortized over the remainder of the underlying lease terms), customer relationships of $45.0 million (amortized over 15 years) and order backlog of $2.0 million (amortized over 6 months). Favorable lease rights were valued based on a comparison of market participant information and Company-specific lease terms. The customer relationship intangible asset was valued using the excess earnings method, which discounts the estimated after-tax cash flows associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing base. The order backlog intangible asset was valued using the excess earnings method, which discounts the estimated after-tax cash flows associated with open customer orders as of the acquisition date.
(6)
The Company acquired $200.1 million of net deferred tax assets related to Kate Spade historical federal and state net operating losses, net of a $39.3 million valuation allowance, which the Company expects to be able to utilize. The deferred tax adjustments resulting from the step-up in basis of acquired assets, most notably the brand intangible asset, resulted in an overall deferred tax liability.
(7) 
Included an adjustment for unfavorable lease rights of $49.5 million (amortized over the remainder of the underlying lease terms).

12

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Distributor Acquisitions and Kate Spade Joint Ventures Operational Control
During the third quarter of fiscal 2018, the Company acquired designated assets of its Stuart Weitzman distributor in Northern China, entered into an agreement to take operational control of the Kate Spade Joint Ventures that operate in mainland China, Hong Kong, Macau and Taiwan in which the Company has 50% interest, and acquired designated assets of its Coach distributor in Australia and New Zealand.
The aggregate purchase consideration for the three acquisitions was $153.7 million, of which $106.9 million is cash consideration and the remaining is related to non-cash consideration. Of the cash consideration, $61.5 million (or $55.6 million net of cash acquired) was paid during fiscal 2018 and the remaining will be paid in the future. Of the total purchase consideration of $153.7 million, $50.0 million of net assets were recorded at their fair values, and the excess of the purchase consideration over the fair value of the net assets acquired was recorded as non-tax deductible goodwill in the amount of $103.7 million. Of this amount, $52.8 million, $49.3 million and $1.6 million were assigned to the Company's Kate Spade, Stuart Weitzman and Coach segments, respectively. During the fourth quarter of fiscal 2018, there were measurement period adjustments of $2.3 million and $0.5 million, related to the Kate Spade and Stuart Weitzman segments, respectively, which decreased Goodwill.
The purchase price allocation for these assets acquired and liabilities assumed is complete. The pro forma results are not presented for these acquisitions as they are immaterial.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of the Company’s goodwill by segment is as follows:
 
Coach
 
Kate Spade
 
Stuart Weitzman
 
Total
 
(millions)
Balance at June 30, 2018
$
654.8

 
$
627.0

 
$
202.5

 
$
1,484.3

Foreign exchange impact
1.0

 
(1.2
)
 
(1.1
)
 
(1.3
)
Acquisition of goodwill(1)

 
12.7

 
8.4

 
21.1

Balance at March 30, 2019
$
655.8

 
$
638.5

 
$
209.8

 
$
1,504.1

 
(1) 
Refer to Note 7, "Acquisitions," for further information.
Intangible Assets
Intangible assets consist of the following:
 
March 30, 2019
 
June 30, 2018
 
Gross
Carrying
Amount
 
Accum.
Amort.
 
Net
 
Gross
Carrying
Amount
 
Accum.
Amort.
 
Net
 
(millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
100.5

 
$
(22.4
)
 
$
78.1

 
$
100.5

 
$
(17.3
)
 
$
83.2

Order backlog

 

 

 
2.0

 
(2.0
)
 

Favorable lease rights
97.0

 
(35.1
)
 
61.9

 
97.3

 
(24.4
)
 
72.9

Total intangible assets subject to amortization
197.5

 
(57.5
)
 
140.0

 
199.8

 
(43.7
)
 
156.1

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
1,576.8

 

 
1,576.8

 
1,576.8

 

 
1,576.8

Total intangible assets
$
1,774.3

 
$
(57.5
)
 
$
1,716.8

 
$
1,776.6

 
$
(43.7
)
 
$
1,732.9


13

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




As of March 30, 2019, the expected amortization expense for intangible assets is as follows:
 
 Amortization Expense
 
(millions)
Remainder of fiscal 2019
$
5.2

Fiscal 2020
19.7

Fiscal 2021
18.1

Fiscal 2022
16.4

Fiscal 2023
15.3

Fiscal 2024
13.3

Fiscal 2025 and thereafter
52.0

Total
$
140.0

The expected amortization expense above reflects remaining useful lives ranging from approximately 11.1 to 13.3 years for customer relationships and the remaining lease terms ranging from approximately 3 month to 16.1 years for favorable lease rights.
9. STOCKHOLDERS' EQUITY
A reconciliation of stockholders' equity is presented below:
 
Shares of
Common
Stock
 
Common Stock
 
Additional
Paid-in-
Capital
 
Retained Earnings / (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders'
Equity
 
(millions, except per share data)
Balance at July 1, 2017
281.9

 
$
2.8

 
$
2,978.3

 
$
107.7

 
$
(86.9
)
 
$
3,001.9

Net loss

 

 

 
(17.7
)
 

 
(17.7
)
Other comprehensive income

 

 

 

 
5.6

 
5.6

Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
2.3

 

 
17.5

 

 

 
17.5

Share-based compensation

 

 
23.3

 

 

 
23.3

Additional paid-in-capital as part of purchase consideration

 

 
5.3

 

 

 
5.3

Dividends declared ($0.3375 per share)

 

 

 
(95.9)

 

 
(95.9)

Balance at September 30, 2017
284.2

 
$
2.8

 
$
3,024.4

 
$
(5.9
)
 
$
(81.3
)
 
$
2,940.0

Net income

 

 

 
63.2

 

 
63.2

Other comprehensive income

 

 

 

 
9.0

 
9.0

Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
0.6

 

 
12.6

 

 

 
12.6

Share-based compensation

 

 
20.7

 

 

 
20.7

Dividends declared ($0.3375 per share)

 

 

 
(96.1
)
 

 
(96.1
)
Balance at December 30, 2017
284.8

 
$
2.8

 
$
3,057.7

 
$
(38.8
)
 
$
(72.3
)
 
$
2,949.4

Net income

 

 

 
140.3

 

 
140.3

Other comprehensive income

 

 

 

 
25.9

 
25.9

Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
3.0

 
0.1

 
96.5

 

 

 
96.6

Share-based compensation

 

 
22.8

 

 

 
22.8

Additional paid-in-capital as part of purchase consideration

 

 

 

 

 

Dividends declared ($0.3375 per share)

 

 

 
(97.0
)
 

 
(97.0
)
Balance at March 31, 2018
287.8

 
$
2.9

 
$
3,177.0

 
$
4.5

 
$
(46.4
)
 
$
3,138.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

14

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




 
Shares of
Common
Stock
 
Common Stock
 
Additional
Paid-in-
Capital
 
Retained Earnings / (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders'
Equity
 
(millions, except per share data)
Balance at June 30, 2018
288.0

 
$
2.9

 
$
3,205.5

 
$
119.0

 
$
(82.8
)
 
$
3,244.6

Net income

 

 

 
122.3

 

 
122.3

Other comprehensive loss

 

 

 

 
(5.3
)
 
(5.3
)
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
1.8

 

 
3.2

 

 

 
3.2

Share-based compensation

 

 
22.4

 

 

 
22.4

Dividends declared ($0.3375 per share)

 

 

 
(97.8
)
 

 
(97.8
)
Cumulative adjustment from adoption of new accounting standard
(see Note 3)

 

 

 
20.2

 

 
20.2

Balance at September 29, 2018
289.8

 
$
2.9

 
$
3,231.1

 
$
163.7

 
$
(88.1
)
 
$
3,309.6

Net income

 

 

 
254.8

 

 
254.8

Other comprehensive loss

 

 

 

 
(3.4
)
 
(3.4
)
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
0.2

 

 
3.7

 

 

 
3.7

Share-based compensation

 

 
21.5

 

 

 
21.5

Dividends declared ($0.3375 per share)

 

 

 
(97.8
)
 

 
(97.8
)
Balance at December 29, 2018
290.0

 
$
2.9

 
$
3,256.3

 
$
320.7

 
$
(91.5
)
 
$
3,488.4

Net income

 

 

 
117.4

 

 
117.4

Other comprehensive income

 

 

 

 
1.0

 
1.0

Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
0.1

 

 
(1.2
)
 

 

 
(1.2
)
Share-based compensation

 

 
23.5

 

 

 
23.5

Dividends declared ($0.3375 per share)

 

 

 
(97.9
)
 

 
(97.9
)
Balance at March 30, 2019
290.1

 
$
2.9

 
$
3,278.6

 
$
340.2

 
$
(90.5
)
 
$
3,531.2


15

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




The components of accumulated other comprehensive income (loss) ("AOCI"), as of the dates indicated, are as follows:
 
Unrealized Gains (Losses) on Cash
Flow
Hedging Derivatives(1)
 
Unrealized Gains
(Losses) on Available-
for-Sale Investments
 
Cumulative
Translation
Adjustment
 
Other(2)
 
Total
 
(millions)
Balances at July 1, 2017
$
3.0

 
$
(0.4
)
 
$
(89.1
)
 
$
(0.4
)
 
$
(86.9
)
Other comprehensive income (loss) before reclassifications
(4.8
)
 
0.5

 
46.9

 


 
42.6

Less: income reclassified from accumulated other comprehensive income to earnings
2.0

 
0.1

 

 

 
2.1

Net current-period other comprehensive income (loss)
(6.8
)
 
0.4

 
46.9

 

 
40.5

Balances at March 31, 2018
$
(3.8
)
 
$

 
$
(42.2
)
 
$
(0.4
)
 
$
(46.4
)
 
 
 
 
 
 
 
 
 
 
Balances at June 30, 2018
$
1.4

 
$

 
$
(85.3
)
 
$
1.1

 
$
(82.8
)
Other comprehensive income (loss) before reclassifications
(0.4
)
 
0.2

 
(5.2
)
 

 
(5.4
)
Less: losses reclassified from accumulated other comprehensive income to earnings
2.3

 

 

 

 
2.3

Net current-period other comprehensive income (loss)
(2.7
)
 
0.2

 
(5.2
)
 

 
(7.7
)
Balances at March 30, 2019
$
(1.3
)
 
$
0.2

 
$
(90.5
)
 
$
1.1

 
$
(90.5
)
 
(1) 
The ending balances of AOCI related to cash flow hedges are net of tax of $0.0 million and $1.6 million as of March 30, 2019 and March 31, 2018, respectively. The amounts reclassified from AOCI are net of tax of ($1.5) million and ($1.7) million as of March 30, 2019 and March 31, 2018, respectively.
(2)
Other represents the accumulated loss on the Company's minimum pension liability adjustment. The balances at March 30, 2019 and March 31, 2018 are net of tax of $(0.6) million and $0.2 million, respectively. 
10. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and restricted stock units and any other potentially dilutive instruments, only in the periods in which such effects are dilutive under the treasury stock method.

16

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
 
(millions, except per share data)
Net income
$
117.4

 
$
140.3

 
$
494.5

 
$
185.8

 
 
 
 
 
 
 
 
Weighted-average basic shares
290.0

 
286.2

 
289.5

 
284.7

Dilutive securities:
 

 
 

 
 

 
 

Effect of dilutive securities
0.9

 
3.9

 
1.7

 
3.1

Weighted-average diluted shares
290.9

 
290.1

 
291.2

 
287.8

 
 
 
 
 
 
 
 
Net income per share:
 

 
 

 
 

 
 

Basic
$
0.40

 
$
0.49

 
$
1.71

 
$
0.65

Diluted
$
0.40

 
$
0.48

 
$
1.70

 
$
0.65

Earnings per share amounts have been calculated based on unrounded numbers. Options to purchase shares of the Company's common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. In addition, the Company has outstanding restricted stock unit awards that are issuable only upon the achievement of certain performance goals. Performance-based restricted stock unit awards are included in the computation of diluted shares only to the extent that the underlying performance conditions (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of March 30, 2019 and March 31, 2018, there were 11.3 million and 4.2 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based restricted stock unit awards, which were excluded from the diluted share calculations.
11. SHARE-BASED COMPENSATION
The following table shows the share-based compensation expense and the related tax benefits recognized in the Company's Condensed Consolidated Statements of Operations for the periods indicated: 
 
Three Months Ended
 
Nine Months Ended
 
March 30,
2019(1)
 
March 31,
2018(1)
 
March 30,
2019(1)
 
March 31,
2018(1)
 
(millions)
Share-based compensation expense
$
23.5

 
$
22.8

 
$
67.4

 
$
66.8

Income tax benefit related to share-based compensation expense
4.4

 
5.9

 
12.6

 
17.8

 
(1) 
During the three and nine months ended March 30, 2019, the Company incurred $1.2 million and $2.0 million of share-based compensation expense related to its integration efforts, respectively. During the three and nine months ended March 31, 2018, the Company incurred $0.4 million and $5.1 million of share-based compensation expense related to its integration efforts, respectively. During the three months ended March 31, 2018, there was no share-based compensation expense under the Operational Efficiency Plan. There was $0.8 million of share-based compensation expense incurred under the Operational Efficiency Plan for the nine months ended March 31, 2018.

17

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Stock Options
A summary of stock option activity during the nine months ended March 30, 2019 is as follows:
 
Number of
Options
Outstanding
 
(millions)
Outstanding at June 30, 2018
12.5

Granted
1.5

Exercised
(0.8
)
Forfeited or expired
(0.5
)
Outstanding at March 30, 2019
12.7

The weighted-average grant-date fair value of options granted during the nine months ended March 30, 2019 and March 31, 2018 was $9.77 and $7.75, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:
 
March 30,
2019
 
March 31,
2018
Expected term (years)
5.0

 
5.1

Expected volatility
30.3
%
 
28.4
%
Risk-free interest rate
3.1
%
 
1.8
%
Dividend yield
3.1
%
 
3.3
%
Service-based Restricted Stock Unit Awards ("RSUs")
A summary of service-based RSU activity during the nine months ended March 30, 2019 is as follows:
 
Number of
Non-vested RSUs
 
(millions)
Non-vested at June 30, 2018
3.5

Granted
1.7

Vested
(1.6
)
Forfeited
(0.2
)
Non-vested at March 30, 2019
3.4

The weighted-average grant-date fair value of share awards granted during the nine months ended March 30, 2019 and March 31, 2018 was $49.87 and $43.31, respectively.
Performance-based Restricted Stock Unit Awards ("PRSUs")
A summary of PRSU activity during the nine months ended March 30, 2019 is as follows:
 
Number of
Non-vested PRSUs
 
(millions)
Non-vested at June 30, 2018
0.9

Granted
0.3

Change due to performance condition achievement
(0.1
)
Vested
(0.2
)
Forfeited

Non-vested at March 30, 2019
0.9


18

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




The PRSU awards included in the non-vested amount are based on certain Company-specific financial metrics. The effect of the change due to performance condition on the non-vested amount is recognized at the conclusion of the performance period, which may differ from the date on which the award vests.
The weighted-average grant-date fair value per share of PRSU awards granted during the nine months ended March 30, 2019 and March 31, 2018 was $50.35 and $41.22, respectively.
12. DEBT
The following table summarizes the components of the Company’s outstanding debt:
 
March 30,
2019
 
June 30,
2018
 
(millions)
Current debt:
 
 
 
Capital lease obligations
$
0.7

 
$
0.7

Total current debt
$
0.7

 
$
0.7

 
 
 
 
Long-term debt:
 
 
 
4.250% Senior Notes due 2025
$
600.0

 
$
600.0

3.000% Senior Notes due 2022
400.0

 
400.0

4.125% Senior Notes due 2027
600.0

 
600.0

Note Payable
11.4

 
11.4

Capital lease obligations
5.6

 
6.0

Total long-term debt
1,617.0

 
1,617.4

Less: Unamortized discount and debt issuance costs on Senior Notes
(15.5
)
 
(17.5
)
Total long-term debt, net
$
1,601.5

 
$
1,599.9

During the three and nine months ended March 30, 2019, the Company recognized interest expense related to its debt of $16.7 million and $50.1 million, respectively. During the three and nine months ended March 31, 2018, the Company recognized interest expense related to its debt of $18.9 million and $68.6 million, respectively. 
Revolving Credit Facility
On May 30, 2017, the Company entered into a definitive credit agreement whereby Bank of America, N.A., as administrative agent, the other agents party thereto, and a syndicate of banks and financial institutions have made available to the Company a $900.0 million revolving credit facility, including sub-facilities for letters of credit, with a maturity date of May 30, 2022 (the “Revolving Credit Facility”). The Revolving Credit Facility may be used to finance the working capital needs, capital expenditures, permitted investments, share purchases, dividends and other general corporate purposes of the Company and its subsidiaries (which may include commercial paper back-up). Letters of credit and swing line loans may be issued under the Revolving Credit Facility as described below. There were no outstanding borrowings on the Revolving Credit Facility as of March 30, 2019.
Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made plus, in each case, an applicable margin. The applicable margin will be determined by reference to a grid, as defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus 600% of consolidated lease expense to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid.
4.250% Senior Notes due 2025
On March 2, 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the “2025 Senior Notes”). Interest is payable semi-annually on April 1 and October 1 beginning October 1, 2015. Prior to January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2025 Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled

19

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




payments of principal and interest thereon that would have been payable in respect of the 2025 Senior Notes calculated as if the maturity date of the 2025 Senior Notes was January 1, 2025 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined in the indenture for the 2025 Senior Notes) plus 35 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date. On and after January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to 100% of the principal amount of the 2025 Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date.
3.000% Senior Notes due 2022
On June 20, 2017, the Company issued $400.0 million aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at 99.505% of par (the "2022 Senior Notes"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to June 15, 2022 (one month prior to the scheduled maturity date), the Company may redeem the 2022 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2022 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2022 Senior Notes calculated as if the maturity date of the 2022 Senior Notes was June 15, 2022 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 25 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
4.125% Senior Notes due 2027
On June 20, 2017, the Company issued $600.0 million aggregate principal amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to April 15, 2027 (the date that is three months prior to the scheduled maturity date), the Company may redeem the 2027 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2027 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2027 Senior Notes calculated as if the maturity date of the 2027 Senior Notes was April 15, 2027 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 30 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
At March 30, 2019 and June 30, 2018, the total fair value of the 2025, 2022 and 2027 Senior Notes was $1.57 billion and $1.56 billion, respectively, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as a Level 2 measurement within the fair value hierarchy.
Note Payable
As a result of taking operational control of the Kate Spade Joint Ventures, the Company has an outstanding Note Payable of $11.4 million as of March 30, 2019 and June 30, 2018 to the other partner of the Kate Spade Joint Ventures, to be paid in fiscal 2021.
Capital Lease Obligations
As a result of the Company's sale-leaseback agreement for its office building in North Bergen, NJ, the Company has total capital lease obligations of $0.7 million recorded within Current debt as of March 30, 2019 and June 30, 2018 and $5.6 million and $6.0 million recorded within Long-term debt on the Company's Condensed Consolidated Balance Sheets as of March 30, 2019 and June 30, 2018, respectively. The remaining lease obligations will be amortized through May 1, 2025.
13. FAIR VALUE MEASUREMENTS
The Company categorizes its assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. 
Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. 

20

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not have any Level 3 investments.
The following table shows the fair value measurements of the Company’s financial assets and liabilities at March 30, 2019 and June 30, 2018:
 
Level 1
 
Level 2
 
March 30,
2019
 
June 30,
2018
 
March 30,
2019
 
June 30,
2018
 
(millions)
Assets:
 

 
 

 
 

 
 

Cash equivalents(1)
$
400.8

 
$
592.5

 
$
0.4

 
$
0.4

Short-term investments:
 
 
 
 
 
 
 
Time deposits(2)

 

 
0.6

 
0.6

Commercial paper(2)

 

 
20.8

 

Government securities - U.S.(2)
103.4

 

 

 

Corporate debt securities - U.S.(2)

 

 
94.5

 

Corporate debt securities - non U.S.(2)

 

 
33.3

 

Other

 

 
9.4

 
6.0

Long-term investments:
 
 
 
 
 
 
 
Other

 

 
0.1

 

Derivative assets:
 
 
 
 
 
 
 
Inventory-related instruments(3)

 

 
2.9

 
5.6

Intercompany loan hedges(3)

 

 

 
0.3

Liabilities:
 

 
 

 
 

 
 

Derivative liabilities:
 

 
 
 
 

 
 
Inventory-related instruments(3)

 

 
5.3

 
2.3

Intercompany loan hedges(3)

 

 

 
0.1

 
(1) 
Cash equivalents consist of money market funds and time deposits with maturities of three months or less at the date of purchase. Due to their short term maturity, management believes that their carrying value approximates fair value.
(2) 
Short-term investments are recorded at fair value, which approximates their carrying value, and are primarily based upon quoted vendor or broker priced securities in active markets.
(3) 
The fair value of these hedges is primarily based on the forward curves of the specific indices upon which settlement is based and includes an adjustment for the counterparty’s or Company’s credit risk.
Refer to Note 12, "Debt," for the fair value of the Company's outstanding debt instruments.
Non-Financial Assets and Liabilities 
The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering market participant assumptions. Refer to Note 7, "Acquisitions," for further discussion of the approaches used in valuing acquired assets and assumed liabilities.

21

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




14. INVESTMENTS
The following table summarizes the Company’s U.S. dollar-denominated investments, recorded within the Company's Condensed Consolidated Balance Sheets as of March 30, 2019 and June 30, 2018:
 
March 30, 2019
 
June 30, 2018
 
Short-term
 
Long-term
 
Total
 
Short-term
 
Long-term
 
Total
 
(millions)
Available-for-sale investments:
 

 
 

 
 

 
 

 
 

 
 

Commercial paper(1)
$
20.8

 
$

 
$
20.8

 
$

 
$

 
$

Government securities - U.S.(2)
103.4

 

 
103.4

 

 

 

Corporate debt securities - U.S.(2)
94.5

 

 
94.5

 

 

 

Corporate debt securities - non-U.S.(2)
33.3

 

 
33.3

 

 

 

Available-for-sale investments, total
$
252.0

 
$

 
$
252.0

 
$

 
$

 
$