Kate Spade & Co - FORM 10-Q

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EX-32.C - EX-32.C - Kate Spade & Co	kate-20170401ex32cf3d3fa.htm
EX-32.B - EX-32.B - Kate Spade & Co	kate-20170401ex32b53b1df.htm
EX-32.A - EX-32.A - Kate Spade & Co	kate-20170401ex32af1a477.htm
EX-31.C - EX-31.C - Kate Spade & Co	kate-20170401ex31c5bea31.htm
EX-31.B - EX-31.B - Kate Spade & Co	kate-20170401ex31b6608a4.htm
EX-31.A - EX-31.A - Kate Spade & Co	kate-20170401ex31a4530ae.htm

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

April 1, 2017

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-10689

KATE SPADE & COMPANY

(Exact name of registrant as specified in its charter)

Delaware		13-2842791
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2 Park Avenue, New York, New York		10016
(Address of principal executive offices)		(Zip Code)

	(212) 354-4900
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ 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 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the Company’s Common Stock, par value $1.00 per share, outstanding at April 21, 2017 was 128,604,671 shares.

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KATE SPADE & COMPANY

INDEX TO FORM 10-Q

April 1, 2017

(Unaudited)


		PAGE NUMBER

PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of April 1, 2017, December 31, 2016 and April 2, 2016	4

	Condensed Consolidated Statements of Income for the Three Month Periods Ended April 1, 2017 and April 2, 2016	5

	Condensed Consolidated Statements of Comprehensive Income for the Three Month Periods Ended April 1, 2017 and April 2, 2016	6

	Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended April 1, 2017 and April 2, 2016	7

	Notes to Condensed Consolidated Financial Statements	8 - 21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 - 31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31 - 32

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

SIGNATURES		34

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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in, or incorporated by reference into, this Form 10-Q, future filings by us with the Securities and Exchange Commission (“SEC”), our press releases, and oral statements made by, or with the approval of, our authorized personnel, that relate to our future performance or future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements are indicated by words or phrases such as “intend,” “anticipate,” “plan,” “estimate,” “target,” “aim,” “forecast,” “project,” “expect,” “believe,” “we are optimistic that we can,” “current visibility indicates that we forecast,” “contemplation” or “currently envisions” and similar phrases.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, which could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:

our review of strategic alternatives and the possibility that such review will not result in a transaction or other strategic alternative of any kind;

our ability to successfully implement our long-term strategic plans;

general economic conditions in the United States, Asia, Europe, Canada and other parts of the world;

our exposure to currency fluctuations;

levels of consumer confidence, consumer spending and purchases of discretionary items, including fashion accessories, apparel and related products such as ours;

changes in the cost of raw materials, occupancy, labor, advertising and transportation which could impact prices of our products;

our ability to expand into markets outside of the United States, including our ability to promote brand awareness in our international markets, find suitable partners in certain of those markets and hire and retain key employees for those markets;

our ability to maintain targeted profit margins and levels of promotional activity;

our ability to optimize our product offerings in order to anticipate and timely respond to constantly changing consumer demands, tastes and fashion trends, across multiple brands, product lines, shopping channels and geographies;

the impact of the highly competitive nature of the markets within which we operate, both within the United States and abroad;

our dependence on cash flows from our operations and financing to continue to have the liquidity necessary to operate and grow our business and repay debt;

restrictions in the credit and capital markets, which would impair our ability to access additional sources of liquidity, if needed;

our ability to expand our retail footprint with profitable store locations;

our ability to implement operational improvements and realize economies of scale in finished product and raw material costs in connection with growth in our business;

our ability to expand into new product categories;

our ability to successfully implement our marketing initiatives;

our dependence on a limited number of large United States department store customers, and the risk of consolidations, restructurings, bankruptcies and other ownership changes in the retail industry and financial difficulties at our larger department store customers;

risks associated with material disruptions in our information technology systems, both owned and licensed, and with our third party e-commerce platforms and operations;

risks associated with data security, including privacy breaches;

risks associated with credit card fraud and identity theft;

our ability to attract and retain talented, highly qualified executives, and maintain satisfactory relationships with our employees;

our ability to adequately establish, defend and protect our trademarks and other proprietary rights;

our reliance on independent foreign manufacturers, including the risk of their failure to comply with legal requirements or our policies regarding applicable safety standards or labor practices;

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risks associated with having a buying/sourcing agreement which results in a single third party foreign buying/sourcing agent for a significant portion of our apparel products;

risks associated with our arrangement to operate our leased Ohio distribution facility with a third party operations and labor management company that provides distribution operations services, including risks related to increased operating expenses and operating under a third party arrangement;

risks associated with severe weather, natural disasters, public health crises, war, terrorism or other catastrophic events;

a variety of legal, regulatory, political, labor and economic risks, including risks related to the importation and exportation of product, tariffs and other trade barriers;

our ability to adapt to and compete effectively in the current quota environment in which general quota has expired on apparel products, but political activity seeking to re-impose quota has been initiated or threatened;

risks associated with third party service providers, both domestic and overseas, including service providers in the area of e-commerce;

limitations on our ability to utilize all or a portion of our United States deferred tax assets if we experience an “ownership change”;

risks associated with the various businesses we have disposed; and

the outcome of current and future litigation and other proceedings in which we are involved.

The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All subsequent written and oral forward-looking statements concerning the matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are qualified by these cautionary statements.

Forward-looking statements are based on current expectations only and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions, including those described in “Item 1A – Risk Factors” in this report as well as in our 2016 Annual Report on Form 10-K. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition, some factors are beyond our control. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KATE SPADE & COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	April 1, 2017		December 31, 2016		April 2, 2016
Assets
Current Assets:
Cash and cash equivalents	$	422,332	$	478,536	$	260,647
Accounts receivable — trade, net		64,336		77,487		68,626
Inventories, net		215,097		167,461		220,666
Deferred income taxes		—		—		1,985
Other current assets		36,871		34,024		31,808
Total current assets		738,636		757,508		583,732

Property and Equipment, Net		159,395		167,192		175,290
Goodwill		52,173		50,045		52,315
Intangibles, Net		85,881		86,703		87,285
Deferred Income Taxes		1,764		2,322		743
Other Assets		54,256		46,549		52,536
Total Assets	$	1,092,105	$	1,110,319	$	951,901

Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term borrowings	$	3,701	$	3,664	$	3,638
Accounts payable		93,390		93,144		99,817
Accrued expenses		103,113		125,434		117,832
Income taxes payable		1,701		2,207		917
Total current liabilities		201,905		224,449		222,204

Long-Term Debt		388,878		389,742		391,317
Other Non-Current Liabilities		46,957		48,685		51,995
Deferred Income Taxes		18,048		17,512		18,844
Commitments and Contingencies (Note 6)
Stockholders’ Equity:
Preferred stock, $0.01 par value, authorized shares — 50,000,000, issued shares — none		—		—		—
Common stock, $1.00 par value, authorized shares — 250,000,000, issued shares — 176,437,234		176,437		176,437		176,437
Capital in excess of par value		258,015		251,816		232,587
Retained earnings		1,295,318		1,306,096		1,165,559
Accumulated other comprehensive loss		(25,396)		(28,160)		(27,011)
		1,704,374		1,706,189		1,547,572
Common stock in treasury, at cost — 47,832,563, 48,261,217 and 48,457,848 shares		(1,268,057)		(1,276,258)		(1,280,031)
Total stockholders’ equity		436,317		429,931		267,541
Total Liabilities and Stockholders’ Equity	$	1,092,105	$	1,110,319	$	951,901

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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KATE SPADE & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per common share data)

(Unaudited)


	Three Months Ended
	April 1, 2017		April 2, 2016
	(13 Weeks)		(13 Weeks)

Net Sales	$	271,225	$	274,422

Cost of goods sold		99,763		104,941

Gross Profit		171,462		169,481

Selling, general & administrative expenses		164,580		151,768

Operating Income		6,882		17,713

Other income (expense), net		607		(247)

Interest expense, net		(4,545)		(4,996)

Income Before Provision for Income Taxes		2,944		12,470

Provision for income taxes		1,750		1,554

Income from Continuing Operations		1,194		10,916

Discontinued operations, net of income taxes		165		720

Net Income	$	1,359	$	11,636

Earnings per Share, Basic:
Income from Continuing Operations	$	0.01	$	0.09
Net Income	$	0.01	$	0.09

Earnings per Share, Diluted:
Income from Continuing Operations	$	0.01	$	0.08
Net Income	$	0.01	$	0.09

Weighted Average Shares, Basic		128,387		127,931
Weighted Average Shares, Diluted		128,954		128,636

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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KATE SPADE & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended
	April 1, 2017		April 2, 2016
	(13 Weeks)		(13 Weeks)

Net Income	$	1,359	$	11,636

Other Comprehensive Income (Loss), Net of Income Taxes:

Cumulative translation adjustment, net of income taxes of $0		3,228		3,978

Write-off of translation adjustment in connection with liquidation of foreign subsidiaries		(198)		—

Change in fair value of cash flow hedging derivatives, net of income taxes of $(128) and $(520), respectively		(266)		(948)

Comprehensive Income	$	4,123	$	14,666

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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KATE SPADE & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	April 1, 2017		April 2, 2016
	(13 Weeks)		(13 Weeks)
Cash Flows from Operating Activities:
Net income	$	1,359	$	11,636
Adjustments to arrive at income from continuing operations		(165)		(720)
Income from continuing operations		1,194		10,916

Adjustments to reconcile income from continuing operations to net cash used in operating activities:
Depreciation and amortization		12,459		11,539
Loss on asset disposals and impairments, including streamlining initiatives, net		6,767		206
Share-based compensation		6,199		7,910
Foreign currency transaction gains, net		(3,924)		(4,325)
Equity losses of equity investees		260		1,241
Other, net		5		31
Changes in assets and liabilities:
Decrease in accounts receivable — trade, net		13,752		29,279
Increase in inventories, net		(46,261)		(26,306)
Increase in other current and non-current assets		(9,727)		(448)
Increase (decrease) in accounts payable		800		(9,589)
Decrease in accrued expenses and other non-current liabilities		(21,517)		(33,368)
Net change in income tax assets and liabilities		(226)		462
Net cash used in operating activities of discontinued operations		(71)		(119)
Net cash used in operating activities		(40,290)		(12,571)

Cash Flows from Investing Activities:
Purchases of property and equipment		(9,903)		(11,822)
Proceeds from sales of joint venture interests, net		—		(2,350)
Investments in and advances to equity investees		—		(6,500)
Payments for in-store merchandise shops		(1,664)		(660)
Purchase of trademarks		—		(1,200)
Other, net		(11)		45
Net cash used in investing activities		(11,578)		(22,487)

Cash Flows from Financing Activities:
Repayment of Term Loan		(1,000)		(2,000)
Principal payments under capital lease obligations		(138)		(123)
Proceeds from exercise of stock options		810		65
Payment of deferred financing fees		(171)		(315)
Withholding taxes on share-based compensation		(5,344)		(761)
Net cash used in financing activities		(5,843)		(3,134)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		1,507		988

Net Change in Cash and Cash Equivalents		(56,204)		(37,204)
Cash and Cash Equivalents at Beginning of Period		478,536		297,851
Cash and Cash Equivalents at End of Period	$	422,332	$	260,647

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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KATE SPADE & COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are in thousands, except per share amounts)

(Unaudited)

1. BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements of Kate Spade & Company and its wholly-owned and majority-owned subsidiaries (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that its disclosures are adequate to make the information presented not misleading. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K. Information presented as of December 31, 2016 is derived from audited financial statements.

On February 16, 2017, the Company’s Board of Directors, together with management and in consultation with its financial advisor and legal counsel, announced that it is conducting a process to explore and evaluate strategic alternatives to further enhance shareholder value. There can be no assurance that this review process will result in a transaction or other strategic alternative of any kind.

The Company operates its kate spade new york and JACK SPADE NEW YORK™ brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. The Company’s Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent the Company’s activities for which separate financial information is available and which is utilized on a regular basis by the Company’s chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying the Company’s reportable segments, the Company considers its management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of its operating segments. As such, the Company configured its operations into the following three reportable segments:

KATE SPADE North America segment – consists of the Company’s kate spade new york and JACK SPADE NEW YORK brands in North America.

KATE SPADE International segment – consists of the Company’s kate spade new york and JACK SPADE NEW YORK brands in International markets (principally in Japan, Asia (excluding Japan), Europe and Latin America).

Adelington Design Group segment – primarily consists of exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands.

In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year. Management has evaluated events or transactions that have occurred from the balance sheet date through the date the Company issued these financial statements.

NATURE OF OPERATIONS

Kate Spade & Company is engaged primarily in the design and marketing of a broad range of accessories and apparel. The Company’s fiscal year ends on the Saturday closest to December 31. The 2017 fiscal year, ending December 30, 2017, reflects a 52-week period, resulting in a 13-week, three-month period for the first quarter. The 2016 fiscal year, ending December 31, 2016, reflects a 52-week period, resulting in a 13-week, three-month period for the first quarter.

PRINCIPLES OF CONSOLIDATION

The Condensed Consolidated Financial Statements include the accounts of the Company. All inter-company balances and transactions have been eliminated in consolidation.

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USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

The Company’s critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations in conformity with US GAAP. These critical accounting policies are applied in a consistent manner throughout all periods presented. The Company’s critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The application of critical accounting policies requires that the Company make estimates and assumptions about future events and apply judgments that affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. The Company continues to monitor the critical accounting policies to ensure proper application of current rules and regulations. During the first quarter of 2017, there were no significant changes in the critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

On January 1, 2017, the first day of the Company’s 2017 fiscal year, the Company adopted new accounting guidance on share-based compensation, including modified retrospective adoption of the recognition of excess tax benefits and tax deficiencies in the statement of income. Upon adoption, all excess tax benefits and tax deficiencies from share-based compensation are recognized as income tax expense or benefit in the statement of income as discrete items in the reporting period in which they occur, regardless of whether the benefit reduces taxes payable in the current period. As a result of the adoption of this guidance, the Company recognized deferred tax assets of $44.3 million for the excess tax benefits that arose directly from tax deductions related to share-based compensation greater than the amounts recognized for financial reporting and also recognized an increase of an equal amount in the valuation allowance against such deferred tax assets. The Company also retrospectively adopted the accounting guidance on the presentation of shares withheld for certain employee taxes paid on the statement of cash flows. The cash paid by the Company when directly withholding shares for tax-withholding purposes is classified as a financing activity on the Condensed Consolidated Statement of Cash Flows for all periods presented. The Company elected to continue to estimate the number of share-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation expense to be recognized in each period.

2. STOCKHOLDERS’ EQUITY

Activity for the three months ended April 1, 2017 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts was as follows:


					Common Stock
	Capital in Excess		Retained		in Treasury,
In thousands	of Par Value		Earnings		at Cost
Balance as of December 31, 2016	$	251,816	$	1,306,096	$	(1,276,258)
Net income		—		1,359		—
Exercise of stock options		—		(1,103)		1,913
Restricted shares issued, net of cancellations and shares withheld for taxes		—		(11,034)		6,288
Share-based compensation		6,199		—		—
Balance as of April 1, 2017	$	258,015	$	1,295,318	$	(1,268,057)

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Activity for the three months ended April 2, 2016 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts was as follows:


					Common Stock
	Capital in Excess		Retained		in Treasury,
In thousands	of Par Value		Earnings		at Cost
Balance as of January 2, 2016	$	224,677	$	1,155,838	$	(1,281,690)
Net income		—		11,636		—
Exercise of stock options		—		(223)		288
Restricted shares issued, net of cancellations and shares withheld for taxes		—		(1,692)		1,371
Share-based compensation		7,910		—		—
Balance as of April 2, 2016	$	232,587	$	1,165,559	$	(1,280,031)

Accumulated other comprehensive (loss) income consisted of the following:


In thousands	April 1, 2017		December 31, 2016		April 2, 2016
Cumulative translation adjustment, net of income taxes of $0	$	(26,132)	$	(29,162)	$	(26,076)
Unrealized gains (losses) on cash flow hedging derivatives, net of income taxes of $385, $513 and $(512), respectively		736		1,002		(935)
Accumulated other comprehensive loss, net of income taxes	$	(25,396)	$	(28,160)	$	(27,011)

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended April 1, 2017:


			Unrealized Gains
	Cumulative		(Losses) on Cash
	Translation		Flow Hedging
In thousands	Adjustment		Derivatives
Balance as of December 31, 2016	$	(29,162)	$	1,002
Other comprehensive income (loss) before reclassification		3,228		(557)
Amounts reclassified from accumulated other comprehensive (loss) income		(198)		291
Net current-period other comprehensive income (loss)		3,030		(266)
Balance as of April 1, 2017	$	(26,132)	$	736

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended April 2, 2016:


			Unrealized Gains
	Cumulative		(Losses) on Cash
	Translation		Flow Hedging
In thousands	Adjustment		Derivatives
Balance as of January 2, 2016	$	(30,054)	$	13
Other comprehensive income (loss) before reclassification		3,978		(725)
Amounts reclassified from accumulated other comprehensive income		—		(223)
Net current-period other comprehensive income (loss)		3,978		(948)
Balance as of April 2, 2016	$	(26,076)	$	(935)

3. INCOME TAXES

During the first quarter of 2017 and 2016, the Company continued to record a full valuation allowance on deferred tax assets in most jurisdictions due to the combination of its history of pretax losses and its inability to carry back tax losses or credits. The Company continues to assess whether any significant changes in circumstances or assumptions have occurred that could materially affect the Company’s ability to realize deferred tax assets. The Company expects to release the valuation allowance when it has sufficient positive evidence, including but not limited to, the magnitude and duration of the Company’s historical losses as compared to recent profits within taxing jurisdictions to overcome such negative evidence.

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The Company’s provision for income taxes for the three months ended April 1, 2017 and April 2, 2016 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.

The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax jurisdictions include the US, Japan, United Kingdom and Canada. The Company is no longer subject to US Federal examination by the Internal Revenue Service (“IRS”) for the years before 2013 and, with a few exceptions, this applies to tax examinations by state authorities as well. Although the years before 2013 are considered to be closed, the IRS and other taxing authorities can also subject the Company’s net operating loss carryforwards to further review when such net operating loss carryforwards are utilized.

The Company expects a reduction in the liability for unrecognized tax benefits, inclusive of interest and penalties, by an amount between $2.5 million and $5.4 million within the next 12 months due to either settlement or the expiration of the statute of limitations. As of April 1, 2017, uncertain tax positions of $9.8 million existed, which would provide an effective rate impact in the future if subsequently recognized.

4. DEBT AND LINES OF CREDIT

Long-term debt consisted of the following:


In thousands	April 1, 2017		December 31, 2016		April 2, 2016
Term Loan credit facility, due April 2021 (a)	$	385,105	$	385,794	$	386,952
Revolving credit facility		—		—		—
Capital lease obligations		7,474		7,612		8,003
Total debt		392,579		393,406		394,955
Less: Short-term borrowings (b)		3,701		3,664		3,638
Long-term debt	$	388,878	$	389,742	$	391,317

^(a)

The balance as of April 1, 2017, December 31, 2016 and April 2, 2016 included aggregate unamortized debt discount and deferred financing fees of $4.9 million, $5.2 million and $6.0 million, respectively.

^(b)

At April 1, 2017, December 31, 2016 and April 2, 2016, the balance consisted of Term Loan (as defined below) amortization payments and obligations under capital leases.

Term Loan

On April 10, 2014, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”), which provides for term loans (collectively, the “Term Loan”) in an aggregate principal amount of $400.0 million, maturing in April 2021. The Term Loan is subject to amortization payments of $1.0 million per quarter, which commenced on October 1, 2014, with the balance due at maturity. Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to LIBOR (with a floor of 1.0%) plus 3.0% per annum, payable in cash. The Term Loan and other obligations under the Term Loan Credit Agreement are guaranteed by all of the Company’s existing material domestic restricted subsidiaries.

The Term Loan Credit Agreement provides for incremental future term loans and other pari passu lien indebtedness, subject to an overall limit of $100.0 million plus such additional amount that would cause the Company’s consolidated net total secured debt ratio not to exceed 3.75 to 1.0 on a pro forma basis.

The Term Loan is secured (i) on a first-priority basis by a lien on the Company’s KATE SPADE trademarks and certain related rights owned by the Company and the Guarantors (the “Term Priority Collateral”) and (ii) by a second-priority security interest in the Company’s and the Guarantors’ other assets (the “ABL Priority Collateral” and together with the Term Priority Collateral, the “Collateral”), which secure the Company’s amended and restated revolving credit facility (as amended to date, the “ABL Facility”) on a first-priority basis.

The Term Loan is subject to prepayment from the Company’s Excess Cash Flow (subject to reduction based on the Company’s net debt ratio).

The Term Loan Credit Agreement limits the Company’s and its restricted subsidiaries’ ability to, among other things, incur indebtedness, make dividend payments or other restricted payments, create liens, sell assets (including securities of

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the Company’s restricted subsidiaries), permit certain restrictions on dividends and transfers of assets by the Company’s restricted subsidiaries, enter into certain types of transactions with shareholders and affiliates and enter into mergers, consolidations or sales of all or substantially all of the Company’s assets, in each case subject to certain designated exceptions and qualifications. The Term Loan Credit Agreement also contains certain affirmative covenants and events of default that are customary for credit agreements governing term loans.

ABL Facility

The Company’s ABL Facility was entered into on May 16, 2014 and matures in May 2019. Availability under the ABL Facility is the lesser of $200.0 million and a borrowing base consisting of a percentage of eligible cash, accounts receivable and inventory. The ABL Facility also includes a swingline subfacility of $30.0 million, a multicurrency subfacility of $35.0 million and the option to expand the facility by up to $100.0 million under certain specified conditions. A portion of the ABL Facility up to $125.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $40.0 million in the aggregate. The ABL Facility allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the ABL Facility, with a spread based on the aggregate availability under the ABL Facility.

The ABL Facility is guaranteed by substantially all of the Company’s current domestic subsidiaries and certain of the Company’s foreign subsidiaries. The ABL Facility is secured by a first-priority lien on the ABL Priority Collateral and a second-priority lien on the Term Priority Collateral.

The ABL Facility limits the Company’s, and its restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens, undergo certain fundamental changes, make investments, sell certain assets, enter into hedging transactions, make restricted payments and pay certain indebtedness, enter into transactions with affiliates, permit certain restrictions on dividends and transfers of assets by the Company’s restricted subsidiaries and enter into sale and leaseback transactions. These covenants are subject to important exceptions and qualifications, and many of the covenants are subject to an exception based on meeting the fixed charge coverage ratio and/or certain minimum availability tests. The ABL Facility also contains representations and warranties (some of which are brought down to the time of each borrowing made), affirmative covenants and events of default that are customary for asset-based revolving credit agreements.

The agreement governing the ABL Facility requires the Company to maintain pro forma compliance with a fixed charge coverage ratio of 1.0:1.0 on a trailing four-quarter basis if availability under the ABL Facility for three consecutive business days falls below the greater of $15.0 million and 10.0% of the lesser of the aggregate commitments and the borrowing base. The agreement governing the ABL Facility also requires the Company to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if availability under the ABL Facility for three consecutive business days falls below the greater of $20.0 million and 12.5% of the lesser of the aggregate commitments and the borrowing base.

The funds available under the ABL Facility may be used for working capital and for general corporate purposes. The Company currently believes that the financial institutions under the ABL Facility are able to fulfill their commitments, although such ability to fulfill commitments will depend on the financial condition of the Company’s lenders at the time of borrowing.

As of April 1, 2017, availability under the Company’s ABL Facility was as follows:


	Total		Borrowing		Outstanding		Letters of		Available		Excess
In thousands	Facility (a)		Base (a)		Borrowings		Credit Issued		Capacity		Capacity (b)
ABL Facility (a)	$	200,000	$	279,023	$	—	$	8,447	$	191,553	$	171,553

^(a)

Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base that is computed monthly and comprised of the Company’s eligible cash, accounts receivable and inventory.

^(b)

Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the ABL Facility of $20.0 million.

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5. FAIR VALUE MEASUREMENTS

The Company utilizes the following three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value:

Level 1 –	Quoted market prices in active markets for identical assets or liabilities;
Level 2 –	Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 –	Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

The following table presents the financial assets and liabilities the Company measured at fair value on a recurring basis, based on the fair value hierarchy:


	Level 2
In thousands	April 1, 2017		December 31, 2016		April 2, 2016
Financial Assets:
Derivatives	$	1,308	$	2,399	$	137
Financial Liabilities:
Derivatives	$	(523)	$	(413)	$	(967)

The fair values of the Company’s Level 2 derivative instruments were primarily based on observable forward exchange rates. Unobservable quantitative inputs used in the valuation of the Company’s derivative instruments included volatilities, discount rates and estimated credit losses.

The following table presents the non‑financial assets the Company measured at fair value on a non‑recurring basis in 2017, based on such fair value hierarchy:




	Net Carrying		Fair Value Measured and Recorded at						Total Losses for the
	Value as of		Reporting Date Using:						Three Months Ended
In thousands	April 1, 2017		Level 1		Level 2		Level 3		April 1, 2017
Property and equipment	$	3,978	$	—	$	—	$	—	$	6,620

As a result of a decline in the respective future anticipated cash flows of certain kate spade new york retail locations, the Company determined that a portion of the carrying values of such assets exceeded their fair values, resulting in impairment charges, which were recorded in Selling, general & administrative expense (“SG&A”) on the accompanying Condensed Consolidated Statement of Income.

The fair values of the Company’s Level 3 Property and equipment are based on either a market approach or an income approach using the Company’s forecasted cash flows over the estimated useful lives of such assets, as appropriate.

The fair values and carrying values of the Company’s debt instruments are detailed as follows:


	April 1, 2017				December 31, 2016				April 2, 2016
			Carrying				Carrying				Carrying
In thousands	Fair Value		Value		Fair Value		Value		Fair Value		Value
Term Loan credit facility, due April 2021 (a)	$	390,644	$	385,105	$	393,405	$	385,794	$	388,883	$	386,952
ABL Facility (b)		—		—		—		—		—		—

^(a)

Carrying values include aggregate unamortized debt discount and deferred financing fees.

^(b)

Borrowings under the ABL Facility bear interest based on market rate; accordingly its fair value approximates its carrying value.

The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values. The fair values of cash and cash equivalents, receivables and accounts payable approximate their carrying values due to the short-term nature of these instruments.

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6. COMMITMENTS AND CONTINGENCIES

Buying/Sourcing

Pursuant to a buying/sourcing agency agreement, Li & Fung Limited (“Li & Fung”) acts as a global buying/sourcing agent. On March 24, 2015, the Company modified its existing arrangement in order to, among other things, transition the buying/sourcing activities for the Company’s accessories products to an in-house model, beginning with the Spring 2016 collection. The modifications included a reduction of the annual minimum value of inventory purchases and a change in the commission rates for certain products. The Company pays Li & Fung an agency commission based on the cost of product purchases through Li & Fung. The Company is obligated to use Li & Fung as the primary buying/sourcing agent for ready-to-wear apparel products and the Company may use Li & Fung as a buying/sourcing agent with respect to accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. The Company’s agreement with Li & Fung is not exclusive.

Leases

In connection with the disposition of the Lucky Brand business, LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 277 store leases were assigned to or assumed by third parties, for which the Company or certain subsidiaries of the Company may remain secondarily liable for the remaining obligations on 82 such leases. As of April 1, 2017, the future aggregate payments under these leases amounted to $60.7 million and extended to various dates through 2025.

During the second quarter of 2013, the Company entered into a sale-leaseback agreement for its North Bergen, NJ office with a 12-year term and two five-year renewal options. This leaseback was classified as a capital lease and recorded at fair value. As of April 1, 2017, the estimated future minimum lease payments under the noncancelable capital lease were as follows:


In thousands
2017	$	1,614
2018		2,194
2019		2,247
2020		2,300
2021		2,352
Thereafter		8,429
Total		19,136
Less: Amounts representing interest and executory costs		(11,662)
Net present values		7,474
Less: Capital lease obligations included in short-term debt		(591)
Long-term capital lease obligations	$	6,883

Other

The Company is a party to several pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows.

7. STREAMLINING INITIATIVES

For the three months ended April 1, 2017 and April 2, 2016, there were no charges incurred associated with the Company’s streamlining initiatives. The liability for streamlining initiatives of $2.7 million at April 1, 2017 primarily consisted of contract termination costs. The Company expects to pay approximately $0.2 million of accrued streamlining costs in the next 12 months.

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8. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share.


	Three Months Ended
	April 1, 2017		April 2, 2016
In thousands	(13 Weeks)		(13 Weeks)
Income from continuing operations	$	1,194	$	10,916
Income from discontinued operations, net of income taxes		165		720
Net income	$	1,359	$	11,636

Basic weighted average shares outstanding		128,387		127,931
Stock options and nonvested shares		567		705
Diluted weighted average shares outstanding		128,954		128,636

Earnings per share:
Basic
Income from continuing operations	$	0.01	$	0.09
Income from discontinued operations		—		—
Net income	$	0.01	$	0.09

Diluted
Income from continuing operations	$	0.01	$	0.08
Income from discontinued operations		—		0.01
Net income	$	0.01	$	0.09

9. ADDITIONAL FINANCIAL INFORMATION

Condensed Consolidated Statements of Cash Flows Supplementary Disclosures

During the three months ended April 1, 2017 and April 2, 2016, net income tax payments were $2.0 million and $1.1 million, respectively. During the three months ended April 1, 2017 and April 2, 2016, the Company made interest payments of $4.2 million and $8.3 million, respectively. As of April 1, 2017, December 31, 2016 and April 2, 2016, the Company accrued capital expenditures totaling $4.0 million, $6.8 million and $6.2 million, respectively.

Related Party Transactions

In the first quarter of 2015, the Company and Walton Brown, a subsidiary of The Lane Crawford Joyce Group (“LCJG”), formed two joint ventures focused on growing the Company’s business in Greater China. Following the formation of the joint ventures, both Kate Spade Hong Kong, Limited, a wholly-owned subsidiary of the Company, and Walton Brown each own 50.0% of the shares of KS China Co., Limited (“KSC”) and KS HMT Co., Limited (“KS HMT”), the holding company for the KATE SPADE businesses in Hong Kong, Macau and Taiwan. With an equal partnership structure, the Company and Walton Brown actively manage the businesses together. The joint ventures each have an initial term of 10 years.

The Company accounts for its investments in the joint ventures under the equity method of accounting. The Company’s equity in losses of its equity investees was $0.3 million and $1.2 million during the first quarter of 2017 and 2016, respectively. During the third quarter of 2015, the Company and Walton Brown each loaned $5.0 million to KSC. During the first quarter of 2016, the Company and Walton Brown each made additional loans of $0.7 million to KSC and $5.8 million to KS HMT. As of April 1, 2017, December 31, 2016 and April 2, 2016, the Company recorded $30.4 million, $30.5 million and $35.7 million, respectively, related to its Investments in and advances to unconsolidated subsidiaries, which was included in Other assets on the accompanying Condensed Consolidated Balance Sheets.

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10. SEGMENT REPORTING

The Company operates its kate spade new york and JACK SPADE NEW YORK brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. The Company’s Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent the Company’s activities for which separate financial information is available and which is utilized on a regular basis by the Company’s CODM to evaluate performance and allocate resources. In identifying the Company’s reportable segments, the Company considers its management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of its operating segments. As such, the Company configured its operations into the following three reportable segments:

KATE SPADE North America segment – consists of the Company’s kate spade new york and JACK SPADE NEW YORK brands in North America.

Adelington Design Group segment – primarily consists of exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands.

The Company’s Chief Executive Officer has been identified as the CODM. The Company’s measure of segment profitability is Adjusted EBITDA of each reportable segment. Accordingly, the CODM evaluates performance and allocates resources based primarily on Segment Adjusted EBITDA. Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives, brand-exiting activities and acquisition related costs; and (iii) losses on asset disposals and impairments. The costs of all corporate departments that serve the respective segment are fully allocated, other than non-cash share-based compensation expense. The Company does not allocate amounts reported below Operating income to its reportable segments, other than equity loss in equity method investees. The Company’s definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

The accounting policies of the Company’s reportable segments are the same as those described in Note 1 – Basis of Presentation. Sales are reported based on a destination basis. The Company, as licensor, also licenses to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.


				Adjusted
Dollars in thousands	Net Sales		% to Total	EBITDA		% of Sales
Three Months Ended April 1, 2017 (13 Weeks)
KATE SPADE North America	$	217,398	80.1%	$	22,788	10.5	%
KATE SPADE International		48,976	18.1%		7,778	15.9	%
Adelington Design Group		4,851	1.8%		507	10.5	%
Totals	$	271,225	100.0%

Three Months Ended April 2, 2016 (13 Weeks)
KATE SPADE North America	$	218,677	79.7%	$	24,587	11.2	%
KATE SPADE International		48,883	17.8%		8,537	17.5	%
Adelington Design Group		6,862	2.5%		2,185	31.8	%
Totals	$	274,422	100.0%

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The following table provides a reconciliation to Net Income:


	Three Months Ended
	April 1, 2017		April 2, 2016
In thousands	(13 Weeks)		(13 Weeks)
Reportable Segments Adjusted EBITDA:
KATE SPADE North America	$	22,788	$	24,587
KATE SPADE International (a)		7,778		8,537
Adelington Design Group		507		2,185
Total Reportable Segments Adjusted EBITDA		31,073		35,309
Depreciation and amortization, net (b)		(11,485)		(10,721)
Loss on asset disposals and impairments, net		(6,767)		(206)
Share-based compensation		(6,199)		(7,910)
Equity loss included in Reportable Segments Adjusted EBITDA		260		1,241
Operating Income		6,882		17,713
Other income (expense), net (a)		607		(247)
Interest expense, net		(4,545)		(4,996)
Provision for income taxes		1,750		1,554
Discontinued operations, net of income taxes		165		720
Net Income	$	1,359	$	11,636

^(a)

Amounts include equity in the losses of the Company’s equity method investees of $0.3 million and $1.2 million for the three months ended April 1, 2017 and April 2, 2016, respectively.

^(b)

Excludes amortization included in Interest expense, net.

GEOGRAPHIC DATA:


Dollars in thousands	Net Sales		% to Total
Three Months Ended April 1, 2017 (13 Weeks)
Domestic	$	213,313	78.6	%
International		57,912	21.4	%
Total	$	271,225	100.0	%

Three Months Ended April 2, 2016 (13 Weeks)
Domestic	$	218,190	79.5	%
International		56,232	20.5	%
Total	$	274,422	100.0	%

There were no significant changes in segment assets during the three months ended April 1, 2017.

11. DERIVATIVE INSTRUMENTS

In order to reduce exposures related to changes in foreign currency exchange rates, the Company uses forward contracts and options and may utilize foreign currency collars and swap contracts for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by its businesses in Japan and Canada. As of April 1, 2017, the Company had forward contracts to sell 2.8 billion yen for $25.9 million maturing through June 2018 and 17.6 million Canadian dollars for $13.3 million maturing through April 2018.

The Company uses foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of April 1, 2017, the Company had forward contracts to sell 5.1 billion yen for $45.8 million maturing through June 2017, 14.0 million Euro for $15.1 million maturing through June 2017, 8.0 million British pounds for $10.0 million maturing through June 2017, 5.0 million British pounds for 5.8 million Euro through June 2017, and 5.3 million Canadian dollars for $4.0 million maturing through June 2017. Transaction losses of $2.6 million and $3.1 million related to these derivative instruments were reflected within Other income (expense), net for the three months ended April 1, 2017 and April 2, 2016, respectively.

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The following table summarizes the fair value and presentation in the Condensed Consolidated Financial Statements for derivatives designated as hedging instruments and derivatives not designated as hedging instruments:


	Foreign Currency Contracts Designated as Hedging Instruments
In thousands	Asset Derivatives					Liability Derivatives
	Balance Sheet	Notional				Balance Sheet	Notional
Period	Location	Amount		Fair Value		Location	Amount		Fair Value

April 1, 2017	Other current assets	$	23,300	$	1,176	Accrued expenses	$	15,900	$	187
December 31, 2016	Other current assets		40,300		2,388	Accrued expenses		1,600		5
April 2, 2016	Other current assets		17,432		137	Accrued expenses		16,918		680


	Foreign Currency Contracts Not Designated as Hedging Instruments
In thousands	Asset Derivatives					Liability Derivatives
	Balance Sheet	Notional				Balance Sheet	Notional
Period	Location	Amount		Fair Value		Location	Amount		Fair Value

April 1, 2017	Other current assets	$	15,145	$	132	Accrued expenses	$	65,938	$	336
December 31, 2016	Other current assets		11,500		11	Accrued expenses		43,439		408
April 2, 2016	Other current assets		—		—	Accrued expenses		45,459		287

The following table summarizes the effect of foreign currency exchange contracts designated as hedging instruments on the Condensed Consolidated Financial Statements:

Location of Gain or

Amount of Gain or

(Loss) Reclassified

Amount of Gain or

(Loss) Recognized

from Accumulated

(Loss) Reclassified

(Loss) Recognized in

in Accumulated

OCI into Operations

from Accumulated

Operations on

OCI on Derivative

(Effective and

OCI into Operations

Derivative

In thousands

(Effective Portion)

Ineffective Portion)

(Effective Portion)

(Ineffective Portion)

Three Months Ended April 1, 2017 (13 Weeks)

(841)

Cost of goods sold

(447)

—

Three Months Ended April 2, 2016 (13 Weeks)

(1,124)

Cost of goods sold

344

—

12. SHARE-BASED COMPENSATION

The Company recognizes the cost of all employee share-based awards on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures.

The Company issues stock options, restricted shares, restricted share units and shares with performance features to employees under share-based compensation plans. Stock options are issued at the current market price, have a three-year vesting period and a contractual term of 7 years.

Compensation expense for restricted shares, including shares with performance features, is measured at fair value on the date of grant based on the number of shares granted and the quoted market price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.

Compensation expense for restricted share units with performance features and a market condition is measured at fair value, subject to the market condition on the date of grant and based on the number of shares expected to vest subject to the performance condition. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.

Compensation expense related to the Company’s share-based payment awards totaled $6.2 million and $7.9 million for the three months ended April 1, 2017 and April 2, 2016, respectively.

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Stock Options

The Company grants stock options to certain domestic and international employees. These options are subject to transfer restrictions and risk of forfeiture until earned by continuing employment. Stock options are issued at the current market price and have a three-year vesting period and a contractual term of 7 years.

The Company utilizes the Trinomial lattice pricing model to estimate the fair value of options granted. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates and to allow for actual exercise behavior of option holders.

Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option. The Company utilizes historical optionee behavioral data to estimate the option exercise and termination rates that are used in the valuation model. The expected term represents an estimate of the period of time options are expected to remain outstanding. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.

A summary of award activity under stock option plans as of April 1, 2017 and changes therein during the three month period then ended are as follows:


		Weighted		Weighted Average	Aggregate
		Average Exercise		Remaining	Intrinsic Value
	Shares	Price		Contractual Term	(In thousands)
Outstanding December 31, 2016	720,160	$	15.26	2.5	$	5,281
Exercised	(100,000)		8.10			1,274
Outstanding at April 1, 2017	620,160	$	16.42	2.5	$	6,099

Vested or expected to vest at April 1, 2017	609,345	$	16.11	2.5	$	6,097

Exercisable at April 1, 2017	533,234	$	13.58	2.1	$	6,083

As of April 1, 2017, there were approximately 0.1 million nonvested stock options. The weighted average grant date fair value per award for nonvested stock options was $15.69.

As of April 1, 2017, there was $0.9 million of total unrecognized compensation cost related to nonvested stock options granted under the Company’s stock option plans. That expense is expected to be recognized over a weighted average period of 1.0 year. The total fair value of shares vested during the three month periods ended April 1, 2017 and April 2, 2016 was $0.6 million and $0.7 million, respectively.

Restricted Stock

In 2017, the Company granted 343,886 performance shares that vest on the third anniversary of the grant date. The number of performance shares earned will vary from zero to 200% of the number of awards granted depending on the Company’s Total Shareholder Return (“TSR”) ranking relative to the TSR’s of the Bloomberg Intelligence Global Luxury Goods Index constituents. The performance shares have a grant date fair value of $13.4 million that was calculated using a Monte Carlo simulation model.

In 2016, the Company granted 452,922 performance shares that vest on the third anniversary of the grant date. The number of performance shares earned will vary from zero to 200% of the number of awards granted depending on the Company’s TSR ranking relative to the TSR’s of the S&P Mid-Cap 400 constituents as well as an earnings-based performance condition. The performance shares have a grant date fair value of $11.8 million that was calculated using a Monte Carlo simulation model.


	Three Months Ended
Valuation Assumptions:	April 1, 2017		April 2, 2016
Weighted-average fair value	$	39.10	$	25.99
Expected volatility		48.6%		42.5%
Dividend yield		—		—
Risk-free rate		1.5%		1.0%
Weighted-average expected annual forfeiture		3.6%		3.6%

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A summary of award activity under restricted stock plans as of April 1, 2017 and changes therein during the three month period then ended are as follows:


		Weighted
		Average Grant
	Shares	Date Fair Value
Nonvested stock at December 31, 2016	2,880,155	$	36.33
Granted	1,081,910		28.63
Vested (a)	(527,997)		46.01
Cancelled (a)	(356,307)		46.24
Nonvested stock at April 1, 2017	3,077,761	$	30.81

Expected to vest as of April 1, 2017 (b)	2,192,491	$	31.75

^(a)

Includes market share units granted to a group of key executives with the vesting of such units measured by the performance of the Company’s stock price over the vesting period.

^(b)

Excludes the potential impact of the performance share multiplier, which will vary from 30% to 200% of the number of market share units awarded depending on the actual performance of the Company’s stock price over the vesting periods and zero to 200% of the number of LTIP awards granted depending on the Company’s TSR relative to the TSR of the S&P Mid-Cap 400 Index.

As of April 1, 2017, there was $43.1 million of total unrecognized compensation cost related to nonvested stock awards granted under restricted stock plans. That expense is expected to be recognized over a weighted average period of 2.2 years. The total fair value of shares vested during the three month periods ended April 1, 2017 and April 2, 2016 was $24.3 million and $3.7 million, respectively.

13. DISCONTINUED OPERATIONS AND DISPOSALS

The Company completed the sale of Lucky Brand in February of 2014 and substantially completed the wind-down operations of the Juicy Couture business in the second quarter of 2014.

The Company recorded pretax income of $1.2 million during the three months ended April 2, 2016, to reflect the estimated difference between the carrying value of the net assets disposed and their estimated fair value, less costs to dispose, including transaction costs.

Summarized results of discontinued operations are as follows:


	Three Months Ended
	April 1, 2017		April 2, 2016
In thousands	(13 Weeks)		(13 Weeks)

Income (loss) before benefit for income taxes	$	85	$	(498)
Benefit for income taxes		(47)		—
Income (loss) from discontinued operations, net of income taxes	$	132	$	(498)

Gain on disposal of discontinued operations, net of income taxes	$	33	$	1,218

14. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, new accounting guidance was issued on intangibles, which simplifies the measurement of goodwill impairment testing. Under the new guidance, annual or interim goodwill impairment testing will be performed by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value and any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for interim and annual

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goodwill impairment tests beginning on or after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its financial statements.

In August 2016, new accounting guidance was issued which clarifies the classification of certain cash receipts and payments on the statement of cash flows. This guidance is effective for interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its financial statements.

In February 2016, new accounting guidance was issued on lease transactions. The guidance was issued to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and disclosing key information about leasing arrangements. This guidance is effective for interim and annual periods beginning on or after December 15, 2018. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its financial statements.

In May 2014, new accounting guidance on the accounting for revenue recognition was issued, which requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, this guidance was updated, which defers the effective date by one year and permits early adoption for interim and annual periods beginning on or after December 15, 2016. This guidance is effective for interim and annual periods beginning on or after December 15, 2017. The Company is continuing to evaluate the impact of the adoption of the new accounting guidance on its financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Recent Developments and Operational Initiatives

In the first quarter of 2017, the Board of Directors, together with management, began conducting a process to explore and evaluate strategic alternatives to further enhance shareholder value. We have retained a financial advisor and legal counsel to assist us with our exploration of strategic alternatives. The Board of Directors is proceeding in a timely manner, but has not set a definitive timetable for completion of this process. There can be no assurance that this review process will result in a transaction or other strategic alternative of any kind, or if a transaction is undertaken, as to its terms or timing. As previously disclosed, we do not intend to disclose developments or provide updates on the progress or status of this process until the Board of Directors deems further disclosure is appropriate or required.

In the first quarter of 2017, we entered into an agreement to open a kate spade new york flagship store in Paris, France, which is expected to open during the second quarter of 2017.

For a discussion of certain risks relating to our recent initiatives, see “Item 1A — Risk Factors” in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Business Segments

We operate our kate spade new york and JACK SPADE NEW YORK brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. Our Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying our reportable segments, we considered our management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of our operating segments. As such, we configured our operations into the following three reportable segments:

KATE SPADE North America segment – consists of our kate spade new york and JACK SPADE NEW YORK brands in North America.

KATE SPADE International segment – consists of our kate spade new york and JACK SPADE NEW YORK brands in International markets (principally in Japan, Asia (excluding Japan), Europe and Latin America).

Adelington Design Group segment – primarily consists of exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands.

We, as licensor, also license to third parties the right to produce and market products bearing certain Company-owned trademarks.

Market Environment

The industries in which we operate have historically been subject to cyclical variations, including recessions in the general economy. Our results are dependent on a number of factors impacting consumer spending, including, but not limited to, general economic and business conditions; consumer confidence; wages and employment levels; the housing market; levels of perceived and actual consumer wealth; consumer debt levels; availability of consumer credit; credit and interest rates; fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the performance of the financial, equity and credit markets; tariffs and other trade barriers; taxes; general political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping and selling environments, including tourist dependent markets.

Macroeconomic challenges and uncertainty continue to affect consumer spending; job growth remains inconsistent, with stagnating real wages in certain markets in which we operate; consumer retail traffic remains inconsistent and the retail environment remains promotional. Furthermore, economic conditions in international markets in which we operate, including Asia, the United Kingdom and the remainder of continental Europe, remain uncertain and volatile. Economic

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conditions outside of our markets may also have a negative impact on the markets in which we operate. We are focusing on initiatives that drive margin improvement and continue to grow the kate spade new york brand through product category and geographic expansion across our four category pillars: women’s, men’s, children’s and home.

Competitive Profile

We operate in global fashion markets that are intensely competitive and subject to, among other things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As we anticipate that the global economic uncertainty will continue into the foreseeable future, we will continue to carefully manage liquidity and spending.

In summary, the measure of our success in the future will depend on our ability to continue to navigate through an uncertain macroeconomic environment with challenging market conditions, execute on our strategic vision, including attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve, sourcing the manufacture and distribution of our products on a competitive and efficient basis, and continuing to drive profitable growth. We have established the following operating and financial goals to further develop kate spade new york into a global lifestyle brand: (i) driving top line growth by focusing on our handbag business and elevating our brand voice while incorporating relevant trends and technology; expanding product categories within our existing network, including footwear, tech, menswear and athleisure; and expanding our presence in selected geographies through a partnered approach that requires little capital and is expected to be accretive to operating margins; (ii) driving quality of sale initiatives with continued moderation of promotions across channels and expanded assortments to balance access and aspiration; (iii) delivering the world of kate spade new york to our customer seamlessly across channels through a channel‑agnostic approach, while leveraging our e‑commerce site as a global flagship, offering our broadest product assortment across our category pillars and improving delivery speed to our consumer by continuing to enhance our buy anywhere, receive anywhere model; and (iv) increased marketing that leverages customer relationship management capability and focuses on real-time, personalized customer insight.

Reference is also made to the other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices as set forth in this report, including, without limitation, under “Statement Regarding Forward-Looking Statements” and “Item 1A – Risk Factors” in this Form 10-Q and our 2016 Annual Report on Form 10-K.

Discontinued Operations

The activities of our former Lucky Brand and Juicy Couture businesses have been segregated and reported as discontinued operations for all periods presented.

Overall Results for the Three Months Ended April 1, 2017

Net Sales

Gross Profit and Income from Continuing Operations

Gross profit for the first three months of 2017 was $171.5 million, an increase of $2.0 million compared to 2016, primarily due to increased direct-to-consumer net sales in our KATE SPADE North America segment. Our gross profit rate increased from 61.8% in 2016 to 63.2% in 2017, which was primarily driven by an increase in penetration of our KATE SPADE North America e-commerce operations, operational efficiencies and controlled promotional activity.

We recorded income from continuing operations of $1.2 million in the first three months of 2017, as compared to income from continuing operations of $10.9 million in 2016. The period-over-period change primarily reflected an increase in Selling, general & administrative expenses (“SG&A”), partially offset by an increase in gross profit.

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Balance Sheet

We ended the first three months of 2017 with a net cash position (cash and cash equivalents and marketable securities less total debt) of $29.8 million as compared to a net debt position (total debt less cash and cash equivalents and marketable securities) of $134.3 million at the end of the first three months of 2016. The $164.1 million increase in our net cash position primarily reflected: (i) the generation of $223.6 million of cash from continuing operating activities over the past 12 months; and (ii) the funding of $48.2 million of capital and in-store shop expenditures over the last 12 months.

RESULTS OF OPERATIONS

As discussed above, we present our results based on three reportable segments.

THREE MONTHS ENDED APRIL 1, 2017 COMPARED TO THREE MONTHS ENDED APRIL 2, 2016

The following table sets forth our operating results for the three months ended April 1, 2017 (comprised of 13 weeks) compared to the three months ended April 2, 2016 (comprised of 13 weeks):


	Three Months Ended				Variance
	April 1, 2017		April 2, 2016
Dollars in millions	(13 Weeks)		(13 Weeks)		$		%

Net Sales	$	271.2	$	274.4	$	(3.2)		(1.2)	%

Gross Profit		171.5		169.5		2.0		1.2	%

Selling, general & administrative expenses		164.6		151.8		(12.8)		(8.4)	%

Operating Income		6.9		17.7		(10.8)		(61.1)	%

Other income (expense), net		0.6		(0.2)		0.8		*

Interest expense, net		(4.5)		(5.0)		0.5		9.0	%

Provision for income taxes		1.8		1.6		(0.2)		(12.6)	%

Income from Continuing Operations		1.2		10.9		(9.7)		(89.1)	%

Discontinued operations, net of income taxes		0.2		0.7		(0.5)		(77.1)	%

Net Income	$	1.4	$	11.6	$	(10.2)		(88.3)	%

*Not meaningful.

Net Sales

Net sales for the first three months of 2017 were $271.2 million, a decrease of $3.2 million or 1.2%, compared to 2016 net sales of $274.4 million. The decrease primarily reflected reduced net sales in our Adelington Design Group segment and our KATE SPADE North America segment, partially offset by an increase in net sales in our KATE SPADE International segment. Including e-commerce net sales, kate spade new york comparable direct-to-consumer sales decreased by 2.4% in the first three months of 2017; excluding e-commerce net sales, kate spade new york comparable direct-to-consumer sales decreased by 8.1% in the first three months of 2017.

Net sales results for our segments are provided below:

KATE SPADE North America net sales were $217.4 million, a 0.6% decrease compared to 2016 net sales of $218.7 million, primarily reflecting a decrease in net sales of our kate spade new york wholesale operations, partially offset by increases in our kate spade new york direct-to-consumer and licensing operations.

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We ended the first three months of 2017 with 109 kate spade new york specialty retail stores and 68 outlet stores, reflecting the net addition of 4 kate spade new york specialty retail stores and 4 outlet stores over the last 12 months. Key operating metrics for our kate spade new york North America retail operations included the following:

— Average retail square footage in the first three months of 2017 was approximately 411 thousand square feet, a 7.5% increase compared to 2016; and

— Sales productivity was $251 per average square foot for the first three months of 2017, a decrease of 7.3% compared to the first three months of 2016, on a constant currency basis. Sales productivity was $270 for the first three months of 2016, on a reported basis.

KATE SPADE International net sales were $49.0 million, a 0.2% increase compared to 2016 net sales of $48.9 million, primarily driven by an increase in net sales in our Japan and Europe operations, partially offset by a decrease in net sales to our international distributors.

We ended the first three months of 2017 with 27 kate spade new york specialty retail stores, 14 outlet stores and 53 concessions, reflecting the net addition over the last 12 months of 3 specialty retail stores. Key operating metrics for our kate spade new york International retail operations in Japan and Europe included the following:

— Average retail square footage, including concessions, in the first three months of 2017 was approximately 88 thousand square feet, an 8.2% increase compared to 2016; and

— Sales productivity was $373 per average square foot in the first three months of 2017, a decrease of 6.0% compared to the first three months of 2016, on a constant currency basis. Sales productivity was $396 for the first three months of 2016, on a reported basis.

Adelington Design Group net sales were $4.9 million for the first three months of 2017, a decrease of $2.0 million, or 29.3%, compared to 2016, primarily related to a $1.6 million decrease in the licensed MONET and LIZ CLAIBORNE brands and a $0.4 million decrease in our licensed LIZWEAR brand.

Comparable direct-to-consumer net sales are calculated as follows:

New stores become comparable after 14 full fiscal months of operations (on the first day of the 15th full fiscal month);

Except in unusual circumstances, closing stores become non-comparable one full fiscal month prior to the scheduled closing date;

A remodeled store will be changed to non-comparable when there is a 20.0% or more increase/decrease in its selling square footage (effective at the start of the fiscal month when construction begins). The store becomes comparable again after 14 full fiscal months from the re-open date;

A store that relocates becomes non-comparable when the new location is materially different from the original location (in respect to selling square footage and/or traffic patterns);

Stores that are acquired are not comparable until they have been reflected in our results for a period of 12 months; and

E-commerce sales are comparable after 12 full fiscal months from the website launch date (on the first day of the 13th full month).

We provide comparable direct-to-consumer net sales as a key operating metric because we consider it an important supplemental measure of performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Our definition of comparable direct-to-consumer net sales may not be comparable to similarly titled measures of other companies.

We evaluate sales productivity based on net sales per average square foot, which is defined as net sales divided by the average of beginning and end of period gross square feet and excludes e-commerce net sales.

Gross Profit

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Expenses related to warehousing activities, including receiving, storing, picking, packing and general warehousing charges are included in SG&A; accordingly, our gross profit may not be directly comparable to others who may include these expenses as a component of cost of goods sold.

Selling, General & Administrative Expenses

SG&A increased $12.8 million, or 8.4%, to $164.6 million in the first three months of 2017 compared to the first three months of 2016. The increase in SG&A reflected the following:

A $9.5 million increase in SG&A in our KATE SPADE North America segment, primarily related to $6.6 million of impairment charges associated with certain kate spade new york retail locations and an increase in expenses related to direct-to-consumer expansion, reflecting increased e-commerce fees, rent and other store operating expenses;

Fees and expenses of $2.4 million incurred in 2017 related to our review of strategic alternatives;

A $1.1 million increase in SG&A in our KATE SPADE International segment, primarily reflecting: (i) increased advertising expenses; (ii) increased compensation related expenses; and (iii) increased rent and other store operating expenses; and

A $0.2 million decrease in SG&A in our Adelington Design Group segment.

SG&A as a percentage of net sales was 60.7% in 2017, compared to 55.3% in 2016.

Operating Income

Operating income for the first three months of 2017 was $6.9 million (2.5% of net sales) compared to $17.7 million (6.5% of net sales) in 2016.

Other Income (Expense), Net

Other income (expense), net amounted to $0.6 million and $(0.2) million in the three months ended April 1, 2017 and April 2, 2016, respectively, and consisted primarily of (i) foreign currency transaction gains and losses and (ii) equity in the losses of KS China Co., Limited (“KSC”) and KS HMT Co., Limited (“KS HMT”) of $0.3 million and $1.2 million, respectively.

Interest Expense, Net

Interest expense, net was $4.5 million and $5.0 million for the three months ended April 1, 2017 and April 2, 2016, respectively, primarily reflecting an increase in interest income in 2017.

Provision for Income Taxes

The income tax provision of $1.8 million and $1.6 million for the three months ended April 1, 2017 and April 2, 2016, respectively, primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions. We continue to assess whether any significant changes in circumstances or assumptions have occurred that could materially affect our ability to realize deferred tax assets. We expect to release the valuation allowance when we have sufficient positive evidence, including but not limited to, the magnitude and duration of our historical losses as compared to recent profits within taxing jurisdictions to overcome such negative evidence. Until then, we continue to maintain a valuation allowance against our net deferred tax assets, exclusive of our deferred tax liability for indefinite lived intangibles.

Income from Continuing Operations

Income from continuing operations in the first quarter of 2017 was $1.2 million, or 0.4% of net sales, compared to $10.9 million, or 4.0% of net sales in the first quarter of 2016. Earnings per share (“EPS”), Basic from continuing operations was $0.01 in 2017 and $0.09 in 2016. EPS, Diluted from continuing operations was $0.01 in 2017 and $0.08 in 2016.

Discontinued Operations, Net of Income Taxes

Income from discontinued operations in the first quarter of 2017 was $0.2 million, reflecting income from discontinued operations of $0.2 million. Income from discontinued operations in the first quarter of 2016 was $0.7 million, reflecting a gain on disposal of discontinued operations of $1.2 million and a $(0.5) million loss from discontinued operations. EPS, Basic from discontinued operations was flat in 2017 and 2016. EPS, Diluted from discontinued operations was flat in 2017 and $0.01 in 2016.

Net Income

Net income in the first quarter of 2017 was $1.4 million compared to $11.6 million in the first quarter of 2016. EPS, Basic and Diluted was $0.01 in 2017 and $0.09 in 2016.

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Segment Adjusted EBITDA

Our Chief Executive Officer has been identified as the CODM. Our measure of segment profitability is Adjusted EBITDA of each reportable segment. Accordingly, the CODM evaluates performance and allocates resources based primarily on Segment Adjusted EBITDA. Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives, brand-exiting activities and acquisition related costs; and (iii) losses on asset disposals and impairments. The costs of all corporate departments that serve the respective segment are fully allocated, other than non-cash share-based compensation expense. We do not allocate amounts reported below Operating income to our reportable segments, other than equity loss in our equity method investees. Our definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Segment Adjusted EBITDA for our reportable segments is provided below.


	Three Months Ended				Variance
	April 1, 2017		April 2, 2016
Dollars in thousands	(13 Weeks)		(13 Weeks)		$		%
Reportable Segments Adjusted EBITDA:
KATE SPADE North America	$	22,788	$	24,587	$	(1,799)	(7.3)	%
KATE SPADE International (a)		7,778		8,537		(759)	(8.9)	%
Adelington Design Group		507		2,185		(1,678)	(76.8)	%
Total Reportable Segments Adjusted EBITDA		31,073		35,309
Depreciation and amortization, net (b)		(11,485)		(10,721)
Loss on asset disposals and impairments, net		(6,767)		(206)
Share-based compensation		(6,199)		(7,910)
Equity loss included in Reportable Segments Adjusted EBITDA		260		1,241
Operating Income		6,882		17,713
Other income (expense), net (a)		607		(247)
Interest expense, net		(4,545)		(4,996)
Provision for income taxes		1,750		1,554
Discontinued operations, net of income taxes		165		720
Net Income	$	1,359	$	11,636

^(a)

Amounts include equity in the losses of our equity method investees of $0.3 million and $1.2 million in 2017 and 2016, respectively.

^(b)

Excludes amortization included in Interest expense, net.

A discussion of Segment Adjusted EBITDA of our reportable segments for the three months ended April 1, 2017 and April 2, 2016 follows:

KATE SPADE North America Adjusted EBITDA for the first quarter of 2017 was $22.8 million (10.5% of net sales), compared to $24.6 million (11.2% of net sales) in 2016. The period-over-period decrease reflected an increase in SG&A primarily related to direct-to-consumer expansion, reflecting increased e-commerce fees, rent and other store operating expenses. The increase in SG&A was partially offset by an increase in gross profit, as discussed above.

KATE SPADE International Adjusted EBITDA for the first quarter of 2017 was $7.8 million (15.9% of net sales), compared to $8.5 million (17.5% of net sales) in 2016. The period-over-period decrease reflected (i) an increase in SG&A, primarily reflecting an increased advertising expenses, increased compensation related expenses and increased rent and other store operating expenses; and (ii) a decrease in gross profit, partially offset by a reduction in equity losses of our equity method investees.

Adelington Design Group Adjusted EBITDA for the first quarter of 2017 was $0.5 million (10.5% of net sales), compared to Adjusted EBITDA of $2.2 million (31.8% of net sales) in 2016. The decrease in Adjusted EBITDA primarily reflected a reduction in gross profit.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements

Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores

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and normal maintenance activities; (iii) invest in our information systems, including our e-commerce platform; (iv) fund operational and contractual obligations; and (v) potentially repurchase or retire debt obligations.

Sources and Uses of Cash

Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents, as well as borrowings through our lines of credit.

Term Loan. The outstanding balance of the term loans in an aggregate principal amount of $400.0 million maturing in April 2021 (collectively, the “Term Loan”), as provided under a term loan credit agreement that we entered into on April 10, 2014 (the “Term Loan Credit Agreement”) is required to be prepaid in an amount equal to 50.0% of our Excess Cash Flow (as defined in the Term Loan Credit Agreement) with respect to each fiscal year ending on or after January 2, 2016. The percentage of Excess Cash Flow that must be so applied is reduced to 25.0% if our consolidated net total debt ratio is less than 2.75 to 1.0 and to 0% if our consolidated net total debt ratio is less than 2.25 to 1.0. Lenders may elect not to accept mandatory prepayments. No such prepayment was required with respect to the fiscal year ended December 31, 2016.

ABL Facility. Based on our forecast of borrowing availability under the amended and restated revolving credit facility due May 2019 (as amended to date, the “ABL Facility”), we anticipate that our existing cash and cash equivalents, cash flows from operations and, if necessary, the projected borrowing availability under our ABL Facility will be sufficient to fund our liquidity requirements for at least the next 12 months.

The sufficiency and availability of our projected sources of liquidity may be adversely affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which will be impacted by retailer and consumer acceptance of our products, general economic conditions and the level of consumer discretionary spending; (ii) the status of, and any adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing availability under the ABL Facility and to comply with other covenants included in our debt and credit facilities; (iv) the financial wherewithal of our larger department store and specialty retail store customers; and (v) interest rate and exchange rate fluctuations.

We may, from time to time, explore various initiatives to improve our liquidity, including issuance of debt securities, sales of various assets, additional cost reductions and other measures. In addition, where conditions permit, we may also, from time to time, seek to retire, exchange or purchase our outstanding debt in privately-negotiated transactions or otherwise. We may not be able to successfully complete any such actions.

Cash and Debt Balances. We ended the first three months of 2017 with $422.3 million in cash and marketable securities, compared to $260.6 million at the end of the first three months of 2016 and with $392.6 million of debt outstanding at the end of the first three months of 2017, compared to $395.0 million at the end of the first three months of 2016. The $164.1 million increase in our net cash position primarily reflected: (i) the generation of $223.6 million of cash from continuing operating activities over the past 12 months; and (ii) the funding of $48.2 million of capital and in-store shop expenditures over the last 12 months.

Accounts Receivable decreased $4.3 million, or 6.3%, at April 1, 2017 compared to April 2, 2016, primarily reflecting a period-over-period decrease in wholesale net sales. Accounts receivable decreased $13.2 million, or 17.0%, at April 1, 2017 compared to December 31, 2016, primarily reflecting the timing of wholesale shipments.

Inventories decreased $5.6 million, or 2.5% at April 1, 2017 compared to April 2, 2016, primarily related to: (i) improved inventory management; (ii) improved efficiencies with the buy online, ship from store capabilities; and (iii) the continued growth of our licensing business. Inventories increased $47.6 million, or 28.4%, compared to December 31, 2016, primarily due to timing of wholesale shipments.

Borrowings. We had no outstanding borrowings under our ABL Facility at April 1, 2017 and April 2, 2016.

Net cash used in operating activities of our continuing operations was $40.2 million in the first three months of 2017, compared to $12.5 million in the first three months of 2016. This $27.7 million period-over-period change was primarily related to an increase in cash outflows related to working capital items and reduced earnings in 2017 compared to 2016 (excluding depreciation and amortization, foreign currency gains and losses, impairment charges and other non-cash

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items). The operating activities of our discontinued operations used $0.1 million of cash in the three months ended April 1, 2017 and April 2, 2016.

Net cash used in investing activities of our continuing operations was $11.6 million in the first three months of 2017, compared to $22.5 million in the first three months of 2016. Net cash used in investing activities in the three months ended April 1, 2017 primarily reflected the use of $11.6 million for capital and in-store shop expenditures. Net cash used in investing activities in the three months ended April 2, 2016 primarily reflected: (i) the use of $12.5 million for capital and in-store shop expenditures; (ii) the use of $6.5 million for loans to the KSC and KS HMT joint ventures; and (iii) a purchase price adjustment payment of $2.4 million to The Lane Crawford Joyce Group.

Net cash used in financing activities was $5.8 million in the first three months of 2017, compared to $3.1 million in the first three months of 2016. The $2.7 million period-over-period change primarily reflected an increase in withholding taxes on share-based compensation.

Commitments and Capital Expenditures

Pursuant to a buying/sourcing agency agreement, Li & Fung Limited (“Li & Fung”) acts as a global buying/sourcing agent. On March 24, 2015, we modified the existing arrangement in order to, among other things, transition the buying/sourcing activities for our accessories products to an in-house model, beginning with our Spring 2016 collection. The modifications included a reduction of the annual minimum value of inventory purchases and a change in the commission rates for certain products. We pay Li & Fung an agency commission based on the cost of our product purchases through Li & Fung. We are obligated to use Li & Fung as our primary buying/sourcing agent for our ready-to-wear apparel products and we may use Li & Fung as a buying/sourcing agent with respect to our accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. Our agreement with Li & Fung is not exclusive.

In connection with the disposition of the Lucky Brand business, LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 277 store leases were assigned to or assumed by third parties, for which we or certain of our subsidiaries may remain secondarily liable for the remaining obligations on 82 such leases. As of April 1, 2017, the future aggregate payments under these leases amounted to $60.7 million and extended to various dates through 2025.

On December 3, 2014, Mexx Canada Company filed for bankruptcy protection from its creditors under Canadian bankruptcy laws. Although an inactive and insolvent subsidiary of ours may be secondarily liable under approximately 36 leases that were assigned to Mexx Canada Company in connection with the disposal of the Mexx business, we do not currently believe that these circumstances will require payments by us for liabilities under the leases. The amount of our potential liability, if any, with respect to these leases cannot be determined at this time.

We expect capital expenditures and working capital cash needs to be financed with available cash and cash provided by operating activities.

Debt consisted of the following:


In thousands	April 1, 2017		December 31, 2016		April 2, 2016
Term Loan credit facility (a)	$	385,105	$	385,794	$	386,952
ABL Facility		—		—		—
Capital lease obligations		7,474		7,612		8,003
Total debt	$	392,579	$	393,406	$	394,955

^(a)

For information regarding our debt and credit instruments, refer to Note 4 of Notes to Condensed Consolidated Financial Statements.

Availability under the ABL Facility is an amount equal to the lesser of $200.0 million and a borrowing base that is computed monthly and comprised of our eligible cash, accounts receivable and inventory. The ABL Facility also includes a swingline subfacility of $30.0 million, a multicurrency subfacility of $35.0 million and the option to expand the facility by up to $100.0 million under certain specified conditions. A portion of the facility provided under the ABL Facility of up

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to $125.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $40.0 million in the aggregate.

As of April 1, 2017, availability under our ABL Facility was as follows:


							Letters of
	Total		Borrowing		Outstanding		Credit		Available		Excess
In thousands	Facility (a)		Base (a)		Borrowings		Issued		Capacity		Capacity (b)
ABL Facility (a)	$	200,000	$	279,023	$	—	$	8,447	$	191,553	$	171,553

^(a)

Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base that is computed monthly and comprised of eligible cash, accounts receivable and inventory.

^(b)

Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the ABL Facility of $20.0 million.

Off-Balance Sheet Arrangements

As of April 1, 2017, we had not entered into any off-balance sheet arrangements.

Hedging Activities

Our operations are exposed to risks associated with fluctuations in foreign currency exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates, we use forward contracts and options and may utilize foreign currency collars and swap contracts to hedge the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by our businesses in Japan and Canada. As of April 1, 2017, we had forward contracts to sell 2.8 billion yen for $25.9 million maturing through June 2018 and 17.6 million Canadian dollars for $13.3 million maturing through April 2018.

We use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of April 1, 2017, we had forward contracts to sell 5.1 billion yen for $45.8 million maturing through June 2017, 14.0 million Euro for $15.1 million maturing through June 2017, 8.0 million British pounds for $10.0 million maturing through June 2017, 5.0 million British pounds for 5.8 million Euro through June 2017, and 5.3 million Canadian dollars for $4.0 million maturing through June 2017. Transaction losses of $2.6 million and $3.1 million related to these derivative instruments were reflected within Other income (expense), net for the three months ended April 1, 2017 and April 2, 2016, respectively.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements. These estimates and assumptions also affect the reported amounts of revenues and expenses.

Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There were no significant changes in our critical accounting policies during the three months ended April 1, 2017. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Due to the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.

Estimates by their nature are based on judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.

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ACCOUNTING PRONOUNCEMENTS

For a discussion of recently adopted and recently issued accounting pronouncements, see Notes 1 and 14 of Notes to Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We finance our capital needs through available cash and cash equivalents, operating cash flows, letters of credit and our ABL Facility. Our floating rate Term Loan and ABL Facility expose us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates.

We do not speculate on the future direction of interest rates. As of April 1, 2017, December 31, 2016 and April 2, 2016, our exposure to changing market rates related to our ABL Facility and the Term Loan credit facility was as follows:


Dollars in millions	April 1, 2017			December 31, 2016			April 2, 2016
ABL Facility	$	—		$	—		$	—
Average interest rate		—			—			—

Term Loan credit facility	$	390.0		$	391.0		$	393.0
Average interest rate		4.00	%		4.00	%		4.00

The Term Loan interest is based on LIBOR (with a floor of 1.0%) plus 3.0% per annum. A ten percent change in the average rate would increase the Term Loan interest expense by approximately $1.6 million dollars per annum. The LIBOR rate was below the floor of 1.0% during the three months ended April 1, 2017.

We transact business in multiple currencies, resulting in exposure to exchange rate fluctuations. We mitigate the risks associated with changes in foreign currency exchange rates through the use of foreign exchange forward contracts and options to hedge transactions denominated in foreign currencies. Gains and losses on contracts which hedge specific foreign currency denominated commitments are recognized in the period in which the underlying hedged item affects earnings.

As of April 1, 2017, we had forward contracts with net notional amounts of $114.1 million. As of April 1, 2017, we also had forward contracts of Euro exposure with net notional amounts of 5.8 million Euro. Unrealized (losses) gains for outstanding foreign currency forward contracts and option contracts were $1.3 million. A sensitivity analysis to changes in foreign currency when measured against the US dollar indicated that if the US dollar uniformly weakened by 10.0% against all of the hedged currency exposures, the fair value of these instruments would decrease by $8.0 million at April 1, 2017. Conversely, if the US dollar uniformly strengthened by 10.0% against all of the hedged currency exposures, the fair value of these instruments would increase by $6.2 million at April 1, 2017. Any resulting changes in the fair value of the instruments would be partially offset by changes in the underlying balance sheet positions. We do not hedge all transactions denominated in foreign currency.

We are exposed to credit related losses if the counterparties to our derivative instruments fail to perform their obligations. We systemically measure and assess such risk as it relates to the credit ratings of these counterparties, all of which currently have satisfactory credit ratings and therefore we do not expect to realize losses associated with counterparty default.

ITEM 4. CONTROLS AND PROCEDURES

Our management, under the supervision and with the participation of our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, evaluated our disclosure controls and procedures at the end of our first fiscal quarter. Our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that, as of April 1, 2017, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 1, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to various pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows.

ITEM 1A. RISK FACTORS

You should carefully consider the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2016, in addition to other information included in this Quarterly Report on Form 10-Q, including under the section entitled, “Statement Regarding Forward-Looking Statements,” and in other documents we file with the SEC, in evaluating the Company and its business. If any of the risks occur, our business, financial condition, liquidity and results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may impact our business.

There have not been any material changes during the quarter ended April 1, 2017 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes information about purchases by the Company during the three months ended April 1, 2017 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:


					Maximum
					Approximate
				Total Number of	Dollar Value of
				Shares Purchased as	Shares that May
	Total Number			Part of Publicly	Yet Be Purchased
	of Shares			Announced Plans or	Under the Plans or
	Purchased	Average Price		Programs	Programs
Period	(In thousands)	Paid Per Share		(In thousands)	(In thousands)(a)
January 1, 2017 — January 28, 2017	—	$	—	—	$	28,749
January 29, 2017 — March 4, 2017	—		—	—		28,749
March 5, 2017 — April 1, 2017	—		—	—		28,749
Total — 13 Weeks Ended April 1, 2017	—	$	—	—	$	28,749

^(a)

The Company initially announced the authorization of a share buyback program in December 1989. Since its inception, the Company’s Board of Directors has authorized the purchase under the program of an aggregate of $2.275 billion of the Company’s stock. The ABL Facility currently restricts the Company’s ability to repurchase stock.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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31(a)		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(b)		Certification of President and Chief Operating Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(c)		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32(a)*		Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(b)*		Certification of President and Chief Operating Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(c)*		Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		Taxonomy Extension Presentation Linkbase Document.

*A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and forwarded to the SEC or its staff upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: May 1, 2017



KATE SPADE & COMPANY

By:	/s/ Thomas Linko	By:	/s/ George M. Carrara
	THOMAS LINKO		GEORGE M. CARRARA
	Chief Financial Officer		President and
	(principal financial officer and		Chief Operating Officer
	principal accounting officer)

Kate Spade & Co - FORM 10-Q - May 1, 2017

Attached files

Kate Spade & Co Reports