Kate Spade & Co - FORM 10-Q - November 2, 2016

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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

October 1, 2016

☐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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

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 October 21, 2016 was 128,131,236 shares.

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KATE SPADE & COMPANY

INDEX TO FORM 10-Q

October 1, 2016

(Unaudited)


		PAGE NUMBER

PART I -	FINANCIAL INFORMATION

Item 1.

	Condensed Consolidated Balance Sheets as of October 1, 2016, January 2, 2016 and October 3, 2015	4

	Condensed Consolidated Statements of Operations for the Nine and Three Month Periods Ended October 1, 2016 and October 3, 2015	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Nine and Three Month Periods Ended October 1, 2016 and October 3, 2015	6

	Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended October 1, 2016 and October 3, 2015	7

	Notes to Condensed Consolidated Financial Statements	8 - 25

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26 - 40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40 - 41

Item 4.	Controls and Procedures	41

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

SIGNATURES		44

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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, 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 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;

issues related to our current level of debt, including an inability to pursue certain business strategies because of the restrictive covenants in the agreements governing our debt and our potential inability to obtain the capital resources needed to operate and grow our business;

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;

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;

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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 the various businesses we have disposed;

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”; 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 2015 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)


	October 1, 2016		January 2, 2016		October 3, 2015
Assets
Current Assets:
Cash and cash equivalents	$	308,101	$	297,851	$	219,659
Accounts receivable — trade, net		69,735		96,850		58,893
Inventories, net		262,622		191,879		248,407
Deferred income taxes		—		1,855		148
Other current assets		36,588		32,390		35,376
Total current assets		677,046		620,825		562,483

Property and Equipment, Net		179,272		173,963		177,333
Goodwill		56,654		48,730		48,790
Intangibles, Net		86,851		86,288		87,204
Deferred Income Taxes		3,755		1,241		53
Other Assets		47,373		44,550		41,438
Total Assets	$	1,050,951	$	975,597	$	917,301

Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term borrowings	$	3,628	$	3,625	$	3,609
Accounts payable		120,633		109,327		132,174
Accrued expenses		117,738		151,680		145,749
Income taxes payable		1,733		1,655		1,236
Total current liabilities		243,732		266,287		282,768

Long-Term Debt		390,604		393,168		393,017
Other Non-Current Liabilities		51,584		52,021		49,998
Deferred Income Taxes		19,900		18,900		18,102
Commitments and Contingencies (Note 7)
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		246,905		224,677		218,540
Retained earnings		1,221,067		1,155,838		1,096,896
Accumulated other comprehensive loss		(22,163)		(30,041)		(32,774)
		1,622,246		1,526,911		1,459,099
Common stock in treasury, at cost — 48,305,998, 48,544,175 and 48,751,968 shares		(1,277,115)		(1,281,690)		(1,285,683)
Total stockholders’ equity		345,131		245,221		173,416
Total Liabilities and Stockholders’ Equity	$	1,050,951	$	975,597	$	917,301

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 OPERATIONS

(In thousands, except per common share data)

(Unaudited)


	Nine Months Ended				Three Months Ended
	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015
	(39 Weeks)		(39 Weeks)		(13 Weeks)		(13 Weeks)

Net Sales	$	910,641	$	813,762	$	316,528	$	277,328

Cost of goods sold		362,526		317,743		128,600		107,514

Gross Profit		548,115		496,019		187,928		169,814

Selling, general & administrative expenses		459,245		503,282		150,826		157,497

Operating Income (Loss)		88,870		(7,263)		37,102		12,317

Other expense, net		(6,075)		(4,778)		(2,735)		(1,560)

Loss on settlement of note receivable		—		(9,873)		—		—

Interest expense, net		(14,853)		(13,982)		(4,920)		(5,274)

Income (Loss) Before Provision (Benefit) for Income Taxes		67,942		(35,896)		29,447		5,483

Provision (benefit) for income taxes		2,964		3,904		(56)		973

Income (Loss) from Continuing Operations		64,978		(39,800)		29,503		4,510

Discontinued operations, net of income taxes		3,057		(4,577)		123		(2,207)

Net Income (Loss)	$	68,035	$	(44,377)	$	29,626	$	2,303

Earnings (Loss) per Share:
Basic
Income (Loss) from Continuing Operations	$	0.51	$	(0.31)	$	0.23	$	0.04
Net Income (Loss)	$	0.53	$	(0.35)	$	0.23	$	0.02

Diluted
Income (Loss) from Continuing Operations	$	0.50	$	(0.31)	$	0.23	$	0.04
Net Income (Loss)	$	0.53	$	(0.35)	$	0.23	$	0.02

Weighted Average Shares, Basic		128,011		127,611		128,101		127,682
Weighted Average Shares, Diluted		129,077		127,611		129,451		128,118

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 (LOSS)

(In thousands)

(Unaudited)


	Nine Months Ended				Three Months Ended
	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015
	(39 Weeks)		(39 Weeks)		(13 Weeks)		(13 Weeks)

Net Income (Loss)	$	68,035	$	(44,377)	$	29,626	$	2,303

Other Comprehensive Income (Loss), Net of Income Taxes:
Cumulative translation adjustment, net of income taxes of $0		8,433		(1,191)		(118)		1,023
Write-off of translation adjustment in connection with liquidation of foreign subsidiaries		1,296		—		101		—
Change in fair value of cash flow hedging derivatives, net of income taxes of $(1,013), $(884), $128 and $(480), respectively		(1,851)		(1,597)		233		(867)
Comprehensive Income (Loss)	$	75,913	$	(47,165)	$	29,842	$	2,459

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)


	Nine Months Ended
	October 1, 2016		October 3, 2015
	(39 Weeks)		(39 Weeks)
Cash Flows from Operating Activities:
Net income (loss)	$	68,035	$	(44,377)
Adjustments to arrive at income (loss) from continuing operations		(3,057)		4,577
Income (loss) from continuing operations		64,978		(39,800)

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization		36,404		36,837
Loss on asset disposals and impairments, including streamlining initiatives, net		2,043		8,631
Share-based compensation		22,228		19,440
Loss on settlement of note receivable		—		9,873
Foreign currency transaction (gains) losses, net		(5,936)		609
Equity losses of equity investees		5,974		4,111
Other, net		40		(248)
Changes in assets and liabilities:
Decrease in accounts receivable - trade, net		29,202		30,588
Increase in inventories, net		(65,467)		(98,924)
(Increase) decrease in other current and non-current assets		(4,215)		7,740
Increase in accounts payable		9,999		46,642
Decrease in accrued expenses and other non-current liabilities		(34,244)		(7,512)
Net change in income tax assets and liabilities		764		1,331
Net cash used in operating activities of discontinued operations		(1,302)		(10,845)
Net cash provided by operating activities		60,468		8,473

Cash Flows from Investing Activities:
Proceeds from sales of property and equipment		—		816
Purchases of property and equipment		(37,031)		(40,775)
Proceeds from sales of joint venture interests, net		(2,350)		19,874
Investments in and advances to equity investees		(6,500)		(5,000)
Payment for joint venture interest		—		(10,000)
Payments for in-store merchandise shops		(1,478)		(4,858)
Net proceeds from settlement of note receivable		—		75,128
Purchase of trademarks		(1,200)		—
Other, net		—		347
Net cash provided by investing activities of discontinued operations		—		668
Net cash (used in) provided by investing activities		(48,559)		36,200

Cash Flows from Financing Activities:
Proceeds from borrowings under revolving credit agreement		—		2,000
Repayment of borrowings under revolving credit agreement		—		(8,000)
Repayment of Term Loan		(3,000)		(3,000)
Principal payments under capital lease obligations		(380)		(339)
Proceeds from exercise of stock options		2,365		2,428
Payment of deferred financing fees		(835)		(1,159)
Net cash used in financing activities		(1,850)		(8,070)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		191		(988)

Net Change in Cash and Cash Equivalents		10,250		35,615
Cash and Cash Equivalents at Beginning of Period		297,851		184,044
Cash and Cash Equivalents at End of Period	$	308,101	$	219,659

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 2015 Annual Report on Form 10-K. Information presented as of January 2, 2016 is derived from audited financial statements.

The Company operates its kate spade new york and JACK SPADE 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 brands in North America.

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

Adelington Design Group segment – consists of: (i) exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands and (ii) the licensed LIZWEAR and LIZ CLAIBORNE NEW YORK 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 2016 fiscal year, ending December 31, 2016, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter. The 2015 fiscal year, ending January 2, 2016, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third 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 January 2, 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 third quarter of 2016, 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 January 2, 2016.

The Company completed its annual goodwill impairment tests as of the first day of the third quarter of 2016. No impairment was recognized as of that date.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

On July 3, 2016, the first day of the Company’s third fiscal quarter, the Company prospectively adopted new accounting guidance on the balance sheet classification of deferred taxes, which eliminated the requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. The Company prospectively presents its existing deferred tax balances as noncurrent.

On January 3, 2016, the first day of the Company’s 2016 fiscal year, the Company retrospectively adopted new accounting guidance on debt issuance costs and reclassified the carrying value of its debt issuance costs related to term loans issued under its term loan credit agreement, which mature in April 2021 (collectively, the “Term Loan”) from an asset to a direct reduction of the liability. Accordingly, prior periods have been conformed to the current period’s presentation. As of October 1, 2016, January 2, 2016 and October 3, 2015, the aggregate carrying value of the debt issuance costs related to the Term Loan was $4.1 million, $4.8 million and $5.0 million, respectively.

2. 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 (charges) of $1.7 million and $(1.4) million during the nine months ended October 1, 2016 and October 3, 2015, respectively, and $0.2 million and $0.1 million during the three months ended October 1, 2016 and October 3, 2015, respectively, 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.

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Summarized results of discontinued operations are as follows:


	Nine Months Ended				Three Months Ended
	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015
In thousands	(39 Weeks)		(39 Weeks)		(13 Weeks)		(13 Weeks)

Net sales	$	—	$	175	$	—	$	(12)

Income (loss) before benefit for income taxes	$	1,374	$	(3,468)	$	(69)	$	(2,680)
Benefit for income taxes		—		(269)		—		(328)
Income (loss) from discontinued operations, net of income taxes	$	1,374	$	(3,199)	$	(69)	$	(2,352)

Gain (loss) on disposal of discontinued operations, net of income taxes	$	1,683	$	(1,378)	$	192	$	145

Other

On March 4, 2015, the Company and Lucky Brand Dungarees, LLC (“Lucky Brand LLC”) entered into a transfer and settlement agreement (the “Lucky Brand Note Agreement”) to settle the three-year $85.0 million note issued as part of the consideration for the sale of the Lucky Brand business (the “Lucky Brand Note”) in full, prior to its maturity. Pursuant to the terms of the Lucky Brand Note Agreement, Lucky Brand LLC paid the Company $81.0 million to settle the principal balance of the Lucky Brand Note and related unpaid interest. Giving effect to the Lucky Brand Note Agreement, since the date of issuance, the Company collected aggregate principal and interest under the Lucky Brand Note of $89.0 million. The transactions contemplated by the Lucky Brand Note Agreement closed on March 4, 2015, and the Company recognized a $9.9 million loss on the settlement of the Lucky Brand Note in the first quarter of 2015.

The Company completed substantially all of the closures of its KATE SPADE SATURDAY operations and JACK SPADE retail stores in the second quarter of 2015. Although such dispositions were individually significant, they did not represent a strategic shift in the Company’s operations and were not reflected as discontinued operations. The Company recorded pretax losses of $21.1 million and $3.5 million during the nine and three months ended October 3, 2015, respectively, related to the KATE SPADE SATURDAY and JACK SPADE retail stores that were substantially disposed in the second quarter of 2015.

3. STOCKHOLDERS’ EQUITY

Activity for the nine months ended October 1, 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		—		68,035		—
Exercise of stock options		—		(263)		2,628
Restricted shares issued, net of cancellations and shares withheld for taxes		—		(2,543)		1,947
Share-based compensation		22,228		—		—
Balance as of October 1, 2016	$	246,905	$	1,221,067	$	(1,277,115)

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Activity for the nine months ended October 3, 2015 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 3, 2015	$	199,100	$	1,145,643	$	(1,291,583)
Net loss		—		(44,377)		—
Exercise of stock options		—		(1,919)		4,347
Restricted shares issued, net of cancellations and shares withheld for taxes		—		(2,451)		1,553
Share-based compensation		19,440		—		—
Balance as of October 3, 2015	$	218,540	$	1,096,896	$	(1,285,683)

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


In thousands	October 1, 2016		January 2, 2016		October 3, 2015
Cumulative translation adjustment, net of income taxes of $0	$	(20,325)	$	(30,054)	$	(33,287)
Unrealized (losses) gains on cash flow hedging derivatives, net of income taxes of $(1,005), $8 and $284, respectively		(1,838)		13		513
Accumulated other comprehensive loss, net of income taxes	$	(22,163)	$	(30,041)	$	(32,774)

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the nine months ended October 1, 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		8,433		(1,934)
Amounts reclassified from accumulated other comprehensive (loss) income		1,296		83
Net current-period other comprehensive income (loss)		9,729		(1,851)
Balance as of October 1, 2016	$	(20,325)	$	(1,838)

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the nine months ended October 3, 2015:


			Unrealized Gains
	Cumulative		(Losses) on Cash
	Translation		Flow Hedging
In thousands	Adjustment		Derivatives
Balance as of January 3, 2015	$	(32,096)	$	2,110
Other comprehensive loss before reclassification		(1,191)		(853)
Amounts reclassified from accumulated other comprehensive income		—		(744)
Net current-period other comprehensive loss		(1,191)		(1,597)
Balance as of October 3, 2015	$	(33,287)	$	513

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The following table presents the change in each component of Accumulated other comprehensive loss, net of income taxes for the three months ended October 1, 2016:


			Unrealized (Losses)
	Cumulative		Gains on Cash
	Translation		Flow Hedging
In thousands	Adjustment		Derivatives
Balance as of July 2, 2016	$	(20,308)	$	(2,071)
Other comprehensive loss before reclassification		(118)		(114)
Amounts reclassified from accumulated other comprehensive loss		101		347
Net current-period other comprehensive (loss) income		(17)		233
Balance as of October 1, 2016	$	(20,325)	$	(1,838)

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended October 3, 2015:


			Unrealized Gains
	Cumulative		(Losses) on Cash
	Translation		Flow Hedging
In thousands	Adjustment		Derivatives
Balance as of July 4, 2015	$	(34,310)	$	1,380
Other comprehensive income (loss) before reclassification		1,023		(344)
Amounts reclassified from accumulated other comprehensive income		—		(523)
Net current-period other comprehensive income (loss)		1,023		(867)
Balance as of October 3, 2015	$	(33,287)	$	513

4. INCOME TAXES

During the third quarter of 2016 and 2015, 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’s provision for income taxes for the nine months ended October 1, 2016 and nine and three months ended October 3, 2015 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 Company’s benefit for income taxes for the three months ended October 1, 2016 primarily represented a decrease in current tax on operations in certain jurisdictions.

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 $0.7 million and $3.7 million within the next 12 months due to either settlement or the expiration of the statute of limitations. As of October 1, 2016, uncertain tax positions of $9.3 million existed, which would provide an effective rate impact in the future if subsequently recognized.

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5. DEBT AND LINES OF CREDIT

Long-term debt consisted of the following:


In thousands	October 1, 2016		January 2, 2016		October 3, 2015
Term Loan credit facility, due April 2021 (a)	$	386,486	$	388,667	$	388,381
Revolving credit facility		—		—		—
Capital lease obligations		7,746		8,126		8,245
Total debt		394,232		396,793		396,626
Less: Short-term borrowings (b)		3,628		3,625		3,609
Long-term debt	$	390,604	$	393,168	$	393,017

^(a)

The balance as of October 1, 2016, January 2, 2016 and October 3, 2015 included aggregate unamortized debt discount and deferred financing fees of $5.5 million, $6.3 million and $6.6 million, respectively.

^(b)

At October 1, 2016, January 2, 2016 and October 3, 2015, the balance consisted of Term Loan 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 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).

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 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

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days falls below the greater of $20.0 million and 12.5% of the lesser of the aggregate commitments and the borrowing base.

As of October 1, 2016, 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	$	328,616	$	—	$	10,447	$	189,553	$	169,553

^(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.

6. 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	October 1, 2016		January 2, 2016		October 3, 2015
Financial Assets:
Derivatives	$	15	$	1,017	$	1,515
Financial Liabilities:
Derivatives	$	(1,926)	$	(354)	$	(160)

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 2016, based on such fair value hierarchy:



									Total Losses
	Net Carrying		Fair Value Measured and Recorded at						Nine Months		Three Months
	Value as of		Reporting Date Using:						Ended		Ended
In thousands	October 1, 2016		Level 1		Level 2		Level 3		October 1, 2016		October 1, 2016
Property and equipment	$	180	$	—	$	—	$	180	$	1,199	$	1,199

As a result of the Company’s decision to close 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 expenses (“SG&A”) on the accompanying Condensed Consolidated Statement of Operations.

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The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2015, based on such fair value hierarchy:


									Total Losses
	Net Carrying		Fair Value Measured and Recorded at						Nine Months		Three Months
	Value as of		Reporting Date Using:						Ended		Ended
In thousands	October 3, 2015		Level 1		Level 2		Level 3		October 3, 2015		October 3, 2015
Property and equipment	$	—	$	—	$	—	$	—	$	4,180	$	—

As a result of the Company’s decision to close all KATE SPADE SATURDAY retail operations and JACK SPADE retail stores (see Note 2 – Discontinued Operations and Disposals and Note 8 – Streamlining Initiatives) and no longer directly operate its Company-owned stores in Brazil (see Note 8 – Streamlining Initiatives), 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 SG&A on the accompanying Condensed Consolidated Statement of Operations.

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:


	October 1, 2016				January 2, 2016				October 3, 2015
			Carrying				Carrying				Carrying
In thousands	Fair Value		Value		Fair Value		Value		Fair Value		Value
Term Loan credit facility, due April 2021 (a)	$	393,019	$	386,486	$	381,333	$	388,667	$	391,178	$	388,381
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.

7. 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 98 such leases. As of October 1, 2016, the future aggregate payments under these leases amounted to $74.2 million and extended to various dates through 2025.

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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 October 1, 2016, the estimated future minimum lease payments under the noncancelable capital lease were as follows:


In thousands
2016	$	528
2017		2,141
2018		2,194
2019		2,247
2020		2,300
Thereafter		10,781
Total		20,191
Less: Amounts representing interest and executory costs		(12,445)
Net present values		7,746
Less: Capital lease obligations included in short-term debt		(559)
Long-term capital lease obligations	$	7,187

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.

8. STREAMLINING INITIATIVES

In the second quarter of 2015, the Company announced that it signed a distribution agreement for its operations in Latin America, including in Brazil. As part of these actions, the Company completed the closure of its Company-operated stores during the third quarter of 2015 and no longer operates directly in Brazil. The Company recorded charges related to contract terminations, severance, non-cash asset impairment charges and other costs related to these actions. This initiative did not represent a strategic shift and therefore was not presented as discontinued operations.

On January 29, 2015, the Company announced that it is focusing its business on kate spade new york. As part of this business model, the Company discontinued KATE SPADE SATURDAY as a standalone business. The Company also announced a new business model for JACK SPADE to leverage the distribution network of its retail partners and expand its e-commerce platform. As part of these actions, the Company completed the closure of JACK SPADE’s Company-owned stores, as well as the KATE SPADE SATURDAY Company-owned and three partnered store locations. These actions resulted in restructuring charges related to contract assignment and termination costs, severance and non-cash asset impairment charges and were substantially completed in the second quarter of 2015.

As a result of the closure of the Company’s former New York office as well as a reduction of office space in the Company’s office in North Bergen, NJ, the Company recorded charges related to asset impairment, contract terminations and other charges in 2014 and 2015.

The Company expects to pay approximately $1.3 million of accrued streamlining costs in the next 12 months. The Company does not expect any significant restructuring charges. For the nine months ended October 1, 2016, there were no charges incurred associated with the Company’s streamlining initiatives. For the nine months ended October 3, 2015, the Company recorded pretax charges of $33.0 million related to these initiatives, including $12.4 million of payroll and related costs, $11.2 million of contract termination costs, $7.4 million of asset write-downs and $2.0 million of other costs. Approximately $7.7 million of these charges were non-cash during the nine months ended October 3, 2015.

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For the nine and three months ended October 3, 2015, respectively, expenses associated with the Company’s streamlining actions were primarily recorded in SG&A on the accompanying Condensed Consolidated Statements of Operations and impacted reportable segments and Other as follows:


	Nine Months Ended		Three Months Ended
	October 3, 2015		October 3, 2015
In thousands	(39 Weeks)		(13 Weeks)
KATE SPADE North America	$	17,603	$	4,343
KATE SPADE International		9,164		1,517
Adelington Design Group		1,835		(29)
Other (a)		4,423		1,199
Total	$	33,025	$	7,030

^(a)

Other consists of unallocated corporate restructuring costs.

A summary rollforward of the liability for streamlining initiatives is as follows:


			Contract
	Payroll and		Termination
In thousands	Related Costs		Costs		Other Costs		Total
Balance at January 2, 2016	$	2,338	$	4,793	$	3,378	$	10,509
2016 spending		(2,325)		(1,231)		(2,193)		(5,749)
Balance at October 1, 2016	$	13	$	3,562	$	1,185	$	4,760

9. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share (“EPS”).


	Nine Months Ended				Three Months Ended
	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015
In thousands, except per share data	(39 Weeks)		(39 Weeks)		(13 Weeks)		(13 Weeks)
Income (loss) from continuing operations	$	64,978	$	(39,800)	$	29,503	$	4,510
Income (loss) from discontinued operations, net of income taxes		3,057		(4,577)		123		(2,207)
Net income (loss)	$	68,035	$	(44,377)	$	29,626	$	2,303

Basic weighted average shares outstanding		128,011		127,611		128,101		127,682
Stock options and nonvested shares (a)		1,066		—		1,350		436
Diluted weighted average shares outstanding		129,077		127,611		129,451		128,118

Earnings (loss) per share:
Basic
Income (loss) from continuing operations	$	0.51	$	(0.31)	$	0.23	$	0.04
Income (loss) from discontinued operations	$	0.02	$	(0.04)	$	—	$	(0.02)
Net income (loss)	$	0.53	$	(0.35)	$	0.23	$	0.02

Diluted
Income (loss) from continuing operations	$	0.50	$	(0.31)	$	0.23	$	0.04
Income (loss) from discontinued operations	$	0.03	$	(0.04)	$	—	$	(0.02)
Net income (loss)	$	0.53	$	(0.35)	$	0.23	$	0.02

^(a)

Because the Company incurred a loss from continuing operations for the nine months ended October 3, 2015, approximately 0.9 million outstanding stock options and approximately 2.0 million outstanding nonvested shares were considered antidilutive for such period, and excluded from the computation of diluted loss per share.

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10. ADDITIONAL FINANCIAL INFORMATION

Condensed Consolidated Statements of Cash Flows Supplementary Disclosures

During the nine months ended October 1, 2016 and October 3, 2015, net income tax payments were $2.2 million and $2.6 million, respectively. During the nine months ended October 1, 2016 and October 3, 2015, the Company made interest payments of $12.7 million and $13.0 million, respectively. The Company received interest payments of $9.4 million for the nine months ended October 3, 2015, including outstanding interest and payment in kind under the Lucky Brand Note. As of October 1, 2016, January 2, 2016 and October 3, 2015, the Company accrued capital expenditures totaling $7.9 million, $8.1 million and $11.1 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. To effectuate the new joint ventures, (i) the Company acquired a 60.0% interest in KSC (in which the Company already owned a 40.0% interest) from E-Land Fashion China Holdings Limited (“E-Land”), its former partner in China, for an aggregate payment of $36.0 million, comprised of $10.0 million to acquire E-Land’s interest in KSC and $26.0 million to terminate related contracts and (ii) the Company received a net $17.4 million from LCJG for their 50.0% interests in the joint ventures, subject to adjustments. As a result, the Company no longer consolidates the operations for the businesses in Hong Kong, Macau and Taiwan, which it acquired on February 5, 2014 and had net sales of approximately $6.4 million in 2015, through the transaction date. Upon closing of the KS HMT joint venture, $16.0 million of goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan and $14.0 million of net assets of KS HMT were reclassified to Investment in unconsolidated subsidiaries, which was included in Other Assets on the accompanying Condensed Consolidated Balance Sheets. The Company concluded the carrying values of the assets and liabilities for Hong Kong, Macau and Taiwan approximated fair value, due in part to the recent acquisition of those territories from Globalluxe Kate Spade HK Limited. Accordingly, no gain or loss was recorded on the formation of KS HMT. The $26.0 million charge incurred in the first quarter of 2015 to terminate contracts associated with the KSC joint venture is recorded in SG&A on the accompanying Condensed Consolidated Statement of Operations.

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 $6.0 million and $4.1 million during the nine months ended October 1, 2016 and October 3, 2015, respectively, and $2.7 million and $1.3 million for the three months ended October 1, 2016 and October 3, 2015, 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 October 1, 2016, January 2, 2016 and October 3, 2015, the Company recorded $30.9 million, $28.1 million and $28.3 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.

11. SEGMENT REPORTING

The Company operates its kate spade new york and JACK SPADE 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 brands in North America.

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Adelington Design Group segment – consists of: (i) exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands and (ii) the licensed LIZWEAR and LIZ CLAIBORNE NEW YORK 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; (iii) losses on asset disposals and impairments; and (iv) the $26.0 million charge incurred in the first quarter of 2015 to terminate contracts with the Company’s former joint venture partner in China. 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 (loss) to its reportable segments, other than adjusted 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
Nine Months Ended October 1, 2016 (39 Weeks)
KATE SPADE North America	$	749,789	82.4%	$	118,938	15.9	%
KATE SPADE International		143,258	15.7%		17,877	12.5	%
Adelington Design Group		17,594	1.9%		4,196	23.8	%
Totals	$	910,641	100.0%

Nine Months Ended October 3, 2015 (39 Weeks)
KATE SPADE North America	$	659,809	81.1%	$	86,566	13.1	%
KATE SPADE International		136,056	16.7%		13,215	9.7	%
Adelington Design Group		17,897	2.2%		2,728	15.2	%
Totals	$	813,762	100.0%


				Adjusted
Dollars in thousands	Net Sales		% to Total	EBITDA		% of Sales
Three Months Ended October 1, 2016 (13 Weeks)
KATE SPADE North America	$	259,734	82.1%	$	46,958	18.1	%
KATE SPADE International		50,958	16.1%		5,287	10.4	%
Adelington Design Group		5,836	1.8%		1,089	18.7	%
Totals	$	316,528	100.0%

Three Months Ended October 3, 2015 (13 Weeks)
KATE SPADE North America	$	228,493	82.4%	$	30,713	13.4	%
KATE SPADE International		42,870	15.5%		4,793	11.2	%
Adelington Design Group		5,965	2.1%		1,127	18.9	%
Totals	$	277,328	100.0%

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The following tables provide a reconciliation to Net Income (Loss):


	Nine Months Ended				Three Months Ended
	October 1, 2016		October 3, 2015		October 1, 2016		October 3, 2015
In thousands	(39 Weeks)		(39 Weeks)		(13 Weeks)		(13 Weeks)
Reportable Segments Adjusted EBITDA:
KATE SPADE North America	$	118,938	$	86,566	$	46,958	$	30,713
KATE SPADE International (a)		17,877		13,215		5,287		4,793
Adelington Design Group		4,196		2,728		1,089		1,127
Total Reportable Segments Adjusted EBITDA		141,011		102,509		53,334		36,633
Depreciation and amortization, net (b)		(33,844)		(34,094)		(11,687)		(11,676)
Charges due to streamlining initiatives (c), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net		(2,043)		(33,824)		(1,199)		(6,871)
Joint venture contract termination fee		—		(26,000)		—		—
Share-based compensation (d)		(22,228)		(19,440)		(6,072)		(6,684)
Adjusted equity loss included in Reportable Segments Adjusted EBITDA (e)		5,974		3,586		2,726		915
Operating Income (Loss)		88,870		(7,263)		37,102		12,317
Other expense, net (a)		(6,075)		(4,778)		(2,735)		(1,560)
Loss on settlement of note receivable		—		(9,873)		—		—
Interest expense, net		(14,853)		(13,982)		(4,920)		(5,274)
Provision (benefit) for income taxes		2,964		3,904		(56)		973
Discontinued operations, net of income taxes		3,057		(4,577)		123		(2,207)
Net Income (Loss)	$	68,035	$	(44,377)	$	29,626	$	2,303

^(a)

Amounts include equity in the adjusted losses of the Company’s equity method investees of $6.0 million and $3.6 million for the nine months ended October 1, 2016 and October 3, 2015, respectively and $2.7 million and $0.9 million for the three months ended October 1, 2016 and October 3, 2015, respectively.

^(b)

Excludes amortization included in Interest expense, net.

^(c)

See Note 8 – Streamlining Initiatives for a discussion of streamlining charges.

^(d)

Includes share-based compensation expense of $0.3 million and $0.1 million for the nine and three months ended October 3, 2015, respectively, that was classified as restructuring.

^(e)

Excludes $0.5 million and $0.4 million of joint venture restructuring expense included in equity losses for the nine and three months ended October 3, 2015, respectively.

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GEOGRAPHIC DATA:


Dollars in thousands	Net Sales		% to Total
Nine Months Ended October 1, 2016 (39 Weeks)
Domestic	$	732,688	80.5	%
International		177,953	19.5	%
Total	$	910,641	100.0	%

Nine Months Ended October 3, 2015 (39 Weeks)
Domestic	$	650,239	79.9	%
International		163,523	20.1	%
Total	$	813,762	100.0	%

Three Months Ended October 1, 2016 (13 Weeks)
Domestic	$	250,323	79.1	%
International		66,205	20.9	%
Total	$	316,528	100.0	%

Three Months Ended October 3, 2015 (13 Weeks)
Domestic	$	223,058	80.4	%
International		54,270	19.6	%
Total	$	277,328	100.0	%

There were no significant changes in segment assets during the nine months ended October 1, 2016.

12. 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 business in Japan. As of October 1, 2016, the Company had forward contracts maturing through December 2017 to sell 2.6 billion yen for $23.9 million. The Company also had option contracts maturing through December 2016 to sell 0.6 billion yen for $5.8 million.

The Company uses foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of October 1, 2016, the Company had forward contracts to sell 5.1 billion yen for $50.3 million maturing through December 2016. Transaction losses of $7.6 million and $0.1 million related to these derivative instruments were reflected within Other expense, net for the nine months ended October 1, 2016 and October 3, 2015, respectively, and $1.4 million and $0.8 million for the three months ended October 1, 2016 and October 3, 2015, respectively.

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
October 1, 2016	Other current assets	$	8,391	$	15	Accrued expenses	$	21,300	$	1,711
January 2, 2016	Other current assets		26,612		1,017	Accrued expenses		—		—
October 3, 2015	Other current assets		32,912		1,515	Accrued expenses		2,200		93

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	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
October 1, 2016	Other current assets	$	—	$	—	Accrued expenses	$	50,274	$	215
January 2, 2016	Other current assets		—		—	Accrued expenses		42,156		354
October 3, 2015	Other current assets		—		—	Accrued expenses		33,303		67

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)

Nine Months Ended October 1, 2016 (39 Weeks)

(2,993)

Cost of goods sold

(129)

—

Nine Months Ended October 3, 2015 (39 Weeks)

(1,326)

Cost of goods sold

1,156

—

Three Months Ended October 1, 2016 (13 Weeks)

(175)

Cost of goods sold

(536)

—

Three Months Ended October 3, 2015 (13 Weeks)

(534)

Cost of goods sold

813

—

13. 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 $22.2 million and $19.4 million for the nine months ended October 1, 2016 and October 3, 2015, respectively, and $6.1 million and $6.6 million for the three months ended October 1, 2016 and October 3, 2015, respectively. Compensation expense for the nine and three months ended October 3, 2015 included $0.3 million and $0.1 million, respectively, that was classified as restructuring.

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.

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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.


	Nine Months Ended
Valuation Assumptions:	October 3, 2015
Weighted-average fair value of options granted	$	15.92
Expected volatility		76.5%
Weighted-average volatility		58.7%
Expected term (in years)		4.2
Dividend yield		-
Risk-free rate		1.9%
Expected annual forfeiture		15.3%

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 expected term provided in the above table represents an option weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2015. 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 October 1, 2016 and changes therein during the nine month period then ended are as follows:


		Weighted		Weighted Average	Aggregate
		Average Exercise		Remaining	Intrinsic Value
	Shares	Price		Contractual Term	(In thousands)
Outstanding January 2, 2016	905,883	$	15.35	3.4	$	5,686
Exercised	(136,875)		17.28			719
Cancelled/expired	(11,348)		24.97
Outstanding at October 1, 2016	757,660	$	14.86	2.6	$	4,948

Vested or expected to vest at October 1, 2016	739,220	$	14.38	2.5	$	4,948

Exercisable at October 1, 2016	632,072	$	11.00	2.0	$	4,948

As of October 1, 2016, there were approximately 0.1 million nonvested stock options. The weighted average grant date fair value per award for nonvested stock options was $15.90.

As of October 1, 2016, there was $1.4 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 1.4 years. The total fair value of shares vested during the nine month periods ended October 1, 2016 and October 3, 2015 was $2.3 million.

Restricted Stock

In 2015, the Company granted 105,245 market share units (“MSUs”) to a group of key executives with an aggregate grant date fair value of $4.6 million that vest 50% on each of the second and third anniversaries of the grant date as part of an annual long-term incentive plan (“LTIP”). The MSUs earned will vary from 30% to 200% of the number of MSUs awarded depending on the actual performance of the Company’s stock price over the vesting periods.

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The fair value for the MSUs granted was calculated using the Monte Carlo simulation model. For the nine months ended October 3, 2015, the following assumptions were used in determining fair value:


	Nine Months Ended
Valuation Assumptions:	October 3, 2015
Weighted-average fair value	$	43.35
Expected volatility		43.2%
Dividend yield		—
Risk-free rate		1.1% to 1.7%
Weighted-average expected annual forfeiture		5.0%

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 Total Shareholder Return (“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.

In 2015, the other portion of the LTIP consisted of an award of 243,419 performance shares that vest on the third anniversary of the grant date. The performance shares have a grant date fair value of $9.1 million that was calculated using a Monte Carlo simulation model. For the nine months ended October 1, 2016 and October 3, 2015, the following assumptions were used in determining fair value:


	Nine Months Ended
Valuation Assumptions:	October 1, 2016			October 3, 2015
Weighted-average fair value	$	25.99		$	37.47
Expected volatility		42.5	%		41.6	%
Dividend yield		—			—
Risk-free rate		1.0	%		1.0	%
Weighted-average expected annual forfeiture		3.6	%		4.1	%

A summary of award activity under restricted stock plans as of October 1, 2016 and changes therein during the nine month period then ended are as follows:


		Weighted
		Average Grant
	Shares	Date Fair Value
Nonvested stock at January 2, 2016	1,924,250	$	44.31
Granted	1,146,862		24.14
Vested (a)	(124,516)		38.27
Cancelled (a)	(98,942)		40.34
Nonvested stock at October 1, 2016 (b)	2,847,654	$	36.59

Expected to vest as of October 1, 2016	2,643,853	$	37.03

^(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 MSUs 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 October 1, 2016, there was $33.4 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 1.8 years. The total fair value of shares vested during the nine month periods ended October 1, 2016 and October 3, 2015 was $4.8 million and $2.2 million, respectively.

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14. RECENT ACCOUNTING PRONOUNCEMENTS

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 March 2016, new accounting guidance was issued on share-based compensation, which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The impact on the financial statements upon adoption of the new guidance will depend on unpredictable future events, including the timing and value realized upon vesting of shares versus the fair value when those shares were granted, as well as the Company’s valuation allowance on deferred tax assets.

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 July 2015, new accounting guidance on accounting for inventory was issued, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The adoption of the new guidance will not affect the Company’s financial position, results of operations or cash flows.

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

Business Segments

We operate our kate spade new york and JACK SPADE 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 brands in North America.

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

Adelington Design Group segment – consists of: (i) exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands and (ii) the licensed LIZWEAR and LIZ CLAIBORNE NEW YORK 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 dampen 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 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 opening kate spade new york retail

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locations in North America; expanding product categories within our existing network as well as new channels, continuing e-commerce expansion and entering into local licenses to meet customer needs in Japan; focusing on our e-commerce site as a global flagship to influence purchases both online and in our retail stores; 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 increased marketing that leverages customer relationship management capability and focuses on acquiring full price customers to support those efforts; (iii) delivering the world of kate spade new york to our customer seamlessly across channels through a channel agnostic approach, while using our e-commerce site as a global flagship, offering our broadest product assortment across our category pillars and improving delivery speed to our consumer through a buy anywhere, receive anywhere model; and (iv) increasing product accessibility and improving our speed-to-market capabilities through micro-assorting and localization at the store level, focusing on regional product, volume and climate to better assort by market taste and provide our consumer what she wants, when she wants it.

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 2015 Annual Report on Form 10-K.

Recent Developments and Operational Initiatives

In September 2016, we entered into a global licensing agreement with Perfume Center of America, Inc. (“PCA”) for the design, development and distribution of kate spade new york fragrances through 2023. Upon transition of the business to PCA, we will earn royalty income under this arrangement and no longer sell fragrance products through our wholesale channel.

In the fourth quarter of 2015, we launched kate spade new york e-commerce websites in Germany, Italy, Spain and the Netherlands. In the third quarter of 2015, we launched our e-commerce website in France.

In the second quarter of 2015, we signed a distribution agreement for our operations in Latin America, including in Brazil. As part of these actions, we closed our Company-operated stores in Brazil during the third quarter of 2015 and no longer operate directly in Brazil.

In the first quarter of 2015, we entered a global licensing agreement with Fossil Group, Inc. (“Fossil”) for the design, development and distribution of kate spade new york watches through 2025. The first collection of watches designed, developed and distributed in collaboration with us launched in the third quarter of 2016. Accordingly, we now earn royalty income under the agreement with Fossil and no longer sell watches through our wholesale channel.

In the first quarter of 2015 we:

acquired the 60.0% interest in KS China Co., Limited (“KSC”) owned by E-Land Fashion China Holdings, Limited (“E-Land”) for $36.0 million, including a contract termination payment of $26.0 million; and

converted the reacquired businesses in Hong Kong, Macau and Taiwan and the KATE SPADE business in China into 50.0% owned joint ventures with Walton Brown, a subsidiary of The Lane Crawford Joyce Group (“LCJG”), a leading luxury retail, brand management and distribution company in Asia, and received a net $17.4 million from LCJG for their interests in the joint ventures, subject to adjustments.

On January 29, 2015, we announced the discontinuation of KATE SPADE SATURDAY as a standalone business. We also announced a new business model for JACK SPADE to leverage the distribution network of its retail partners and expand its e-commerce platform. As part of these actions, substantially all of KATE SPADE SATURDAY’s Company-owned and three partnered store locations were closed by the end of the second quarter of 2015. We also closed JACK SPADE’s Company-owned stores by the end of the second quarter of 2015.

For a discussion of certain risks relating to our recent initiatives, see “Item 1A — Risk Factors” in the Annual Report on Form 10-K.

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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. The initiatives relating to the KATE SPADE SATURDAY business, the JACK SPADE Company-owned stores and our directly operated business in Brazil did not represent a strategic shift in our operations and therefore were not reported as discontinued operations.

Overall Results for the Nine Months Ended October 1, 2016

Net Sales

Net sales for the first nine months of 2016 were $910.6 million, an increase of $96.8 million or 11.9%, compared to 2015 net sales of $813.8 million. The increase primarily reflected increases in net sales in our KATE SPADE North America segment and our KATE SPADE International segment. The increase in net sales compared to the first nine months of 2015 includes period-over-period decreases of (i) $26.2 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil and (ii) $6.4 million related to the conversion of the Hong Kong, Macau and Taiwan entities to a joint venture. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $6.6 million.

Gross Profit and Income (Loss) from Continuing Operations

Gross profit for the first nine months of 2016 was $548.1 million, an increase of $52.1 million compared to 2015, primarily due to increased net sales in our KATE SPADE North America segment and our KATE SPADE International segment. Our gross profit rate decreased from 61.0% in 2015 to 60.2% in 2016, which was primarily driven by a decrease in gross profit rate in our KATE SPADE North America segment outlet stores. The decrease in gross profit rate was partially offset by: (i) the dilutive impact on the 2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and JACK SPADE brick and mortar stores, which were substantially completed in the second quarter of 2015; (ii) an increase in penetration of our KATE SPADE North America e-commerce operations; and (iii) an increase in gross profit rate related to our KATE SPADE North America specialty retail stores.

We recorded income from continuing operations of $65.0 million in the first nine months of 2016, as compared to a loss from continuing operations of $(39.8) million in 2015. The period-over-period change primarily reflected: (i) an increase in gross profit; (ii) a decrease in Selling, general & administrative expenses (“SG&A”); and (iii) the absence in 2016 of a loss on settlement of note receivable of $9.9 million that was recorded in 2015.

Balance Sheet

We ended the first nine months of 2016 with a net debt position (total debt less cash and cash equivalents and marketable securities) of $86.1 million as compared to $177.0 million at the end of the first nine months of 2015. The $90.9 million decrease in our net debt primarily reflected: (i) the generation of $163.0 million of cash from continuing operating activities over the past 12 months; (ii) the funding of $53.1 million of capital and in-store shop expenditures over the last 12 months; and (iii) the funding of aggregate loans of $6.5 million to the KSC and KS HMT Co., Limited (“KS HMT”) joint ventures.

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RESULTS OF OPERATIONS

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

NINE MONTHS ENDED OCTOBER 1, 2016 COMPARED TO NINE MONTHS ENDED OCTOBER 3, 2015

The following table sets forth our operating results for the nine months ended October 1, 2016 (comprised of 39 weeks) compared to the nine months ended October 3, 2015 (comprised of 39 weeks):


	Nine Months Ended				Variance
	October 1, 2016		October 3, 2015
Dollars in millions	(39 Weeks)		(39 Weeks)		$		%

Net Sales	$	910.6	$	813.8	$	96.8		11.9	%

Gross Profit		548.1		496.0		52.1		10.5	%

Selling, general & administrative expenses		459.2		503.3		44.1		8.8	%

Operating Income (Loss)		88.9		(7.3)		96.2		*

Other expense, net		(6.0)		(4.8)		(1.2)		(27.1)	%

Loss on settlement of note receivable		—		(9.9)		9.9		*

Interest expense, net		(14.9)		(14.0)		(0.9)		(6.2)	%

Provision for income taxes		3.0		3.8		0.8		24.1	%

Income (Loss) from Continuing Operations		65.0		(39.8)		104.8		*

Discontinued operations, net of income taxes		3.0		(4.6)		7.6		*

Net Income (Loss)	$	68.0	$	(44.4)	$	112.4		*

*Not meaningful.

Net Sales

Net sales results for our segments are provided below:

KATE SPADE North America net sales were $749.8 million, a 13.6% increase compared to 2015 net sales of $659.8 million, primarily reflecting increases across all channels of our kate spade new york brand. The increase in net sales compared to the first nine months of 2015 includes a period-over-period decrease of $13.0 million related to the KATE SPADE SATURDAY brand as we substantially completed the wind-down in the second quarter of 2015 and a decrease in our JACK SPADE brand due to the closure of our brick and mortar stores as we reposition the brand.

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We ended the first nine months of 2016 with 108 kate spade new york specialty retail stores and 67 outlet stores, reflecting the net addition of 7 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 nine months of 2016 was approximately 392 thousand square feet, a 9.9% increase compared to 2015; and

— Sales productivity was $1,000 per average square foot for the first nine months of 2016, an increase of 1.2% compared to the first nine months of 2015, on a constant currency basis. Sales productivity was $990 for the first nine months of 2015, on a reported basis.

KATE SPADE International net sales were $143.3 million, a 5.3% increase compared to 2015 net sales of $136.1 million, primarily driven by an increase in net sales in our Japan and Europe operations, partially offset by an $11.5 million decrease related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil and a $6.4 million decrease related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $7.8 million.

We ended the first nine months of 2016 with 25 kate spade new york specialty retail stores, 14 outlet stores and 54 concessions, reflecting the net addition over the last 12 months of 5 specialty retail stores, 2 concession stores and 1 outlet store. 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 nine months of 2016 was approximately 85 thousand square feet, a 17.8% increase compared to 2015; and

— Sales productivity was $1,111 per average square foot in the first nine months of 2016, a decrease of 13.6% compared to the first nine months of 2015, on a constant currency basis. Sales productivity was $1,176 for the first nine months of 2015, on a reported basis.

Adelington Design Group net sales were $17.6 million for the first nine months of 2016, a decrease of $0.3 million, or 1.7%, compared to 2015, primarily related to a $2.0 million decrease in our LIZWEAR brand and a $1.7 million decrease in the exited TRIFARI, TRINA TURK and Kensie brands, partially offset by a $3.4 million increase in the MONET and LIZ CLAIBORNE brands.

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.

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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gross profit rate decreased from 61.0% in 2015 to 60.2% in 2016, which was primarily driven by a decrease in gross profit rate in our KATE SPADE North America segment outlet stores. The decrease in gross profit rate was partially offset by: (i) the dilutive impact on the 2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and JACK SPADE brick and mortar stores, which were substantially completed in the second quarter of 2015; (ii) an increase in penetration of our KATE SPADE North America e-commerce operations; and (iii) an increase in gross profit rate related to our KATE SPADE North America specialty retail stores.

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 decreased $44.1 million, or 8.8%, to $459.2 million in the first nine months of 2016 compared to the first nine months of 2015. The decrease in SG&A reflected the following:

The absence of $32.7 million of expenses incurred in 2015 associated with our streamlining initiatives, brand-exiting activities and acquisition related costs;

The absence of a $26.0 million charge incurred in 2015 to terminate contracts with our former joint venture partner in China;

An $8.1 million decrease in SG&A in our KATE SPADE International segment, including a reduction associated with the wind-down of our Company-owned stores in Brazil;

A $1.7 million decrease in SG&A in our Adelington Design Group segment; and

A $24.4 million increase in SG&A in our KATE SPADE North America segment, primarily related to direct-to-consumer expansion reflecting increased e-commerce fees, rent and other store operating expenses.

SG&A as a percentage of net sales was 50.4% in 2016, compared to 61.8% in 2015.

Operating Income (Loss)

Operating income for the first nine months of 2016 was $88.9 million (9.8% of net sales) compared to an operating loss of $(7.3) million ((0.9)% of net sales) in 2015.

Other Expense, Net

Other expense, net amounted to $6.0 million and $4.8 million in the nine months ended October 1, 2016 and October 3, 2015, respectively, and consisted primarily of (i) equity in the losses of KSC and KS HMT of $6.0 million and $4.1 million, respectively, and (ii) foreign currency transaction gains and losses.

Loss on Settlement of Note Receivable

In the first nine months of 2015, we recognized a $9.9 million loss related to the prepayment discount on the settlement of the Lucky Brand Note (see Note 2 of Notes to Condensed Consolidated Financial Statements).

Interest Expense, Net

Interest expense, net was $14.9 million for the nine months ended October 1, 2016 and $14.0 million for the nine months ended October 3, 2015, primarily reflecting a net reduction of interest income of $1.5 million, driven by $2.1 million associated with the prepayment of the Lucky Brand Note in the first quarter of 2015.

Provision for Income Taxes

The income tax provision of $3.0 million and $3.8 million for the nine months ended October 1, 2016 and October 3, 2015, 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.

Income (Loss) from Continuing Operations

Income from continuing operations in the first nine months of 2016 was $65.0 million, or 7.1% of net sales compared to a loss from continuing operations of $(39.8) million in the first nine months of 2015, or (4.9)% of net sales. Earnings per share (“EPS”), Basic from continuing operations was $0.51 in 2016 and $(0.31) in 2015. EPS, Diluted from continuing operations was $0.50 in 2016 and $(0.31) in 2015.

Discontinued Operations, Net of Income Taxes

Income from discontinued operations in the first nine months of 2016 was $3.0 million, reflecting a gain on disposal of discontinued operations of $1.7 million and income from discontinued operations of $1.3 million. Loss from discontinued operations in the first nine months of 2015 was $(4.6) million, reflecting a loss on disposal of discontinued operations of

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$(1.4) million and a $(3.2) million loss from discontinued operations. EPS, Basic from discontinued operations was $0.02 in 2016 and $(0.04) in 2015. EPS, Diluted from discontinued operations was $0.03 in 2016 and $(0.04) in 2015.

Net Income (Loss)

Net income in the first nine months of 2016 was $68.0 million compared to net loss of $(44.4) million in the first nine months of 2015. EPS, Basic and Diluted was $0.53 in 2016 and $(0.35) in 2015.

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; (iii) losses on asset disposals and impairments; and (iv) the $26.0 million charge incurred in the first nine months of 2015 to terminate contracts with our former joint venture partner in China. 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 (loss) to our reportable segments, other than adjusted 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.


	Nine Months Ended				Variance
	October 1, 2016		October 3, 2015
Dollars in thousands	(39 Weeks)		(39 Weeks)		$		%
Reportable Segments Adjusted EBITDA:
KATE SPADE North America	$	118,938	$	86,566	$	32,372	37.4%
KATE SPADE International (a)		17,877		13,215		4,662	35.3%
Adelington Design Group		4,196		2,728		1,468	53.8%
Total Reportable Segments Adjusted EBITDA		141,011		102,509
Depreciation and amortization, net (b)		(33,844)		(34,094)
Charges due to streamlining initiatives (c), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net		(2,043)		(33,824)
Joint venture contract termination fee		—		(26,000)
Share-based compensation (d)		(22,228)		(19,440)
Adjusted equity loss included in Reportable Segments Adjusted EBITDA (e)		5,974		3,586
Operating Income (Loss)		88,870		(7,263)
Other expense, net (a)		(6,075)		(4,778)
Loss on settlement of note receivable		—		(9,873)
Interest expense, net		(14,853)		(13,982)
Provision for income taxes		2,964		3,904
Discontinued operations, net of income taxes		3,057		(4,577)
Net Income (Loss)	$	68,035	$	(44,377)

^(a)

Amounts include equity in the adjusted losses of our equity method investees of $6.0 million and $3.6 million in 2016 and 2015, respectively.

^(b)

Excludes amortization included in Interest expense, net.

^(c)

See Note 8 of Notes to Condensed Consolidated Financial Statements for a discussion of streamlining charges.

^(d)

Includes share-based compensation expense of $0.3 million in 2015 that was classified as restructuring.

^(e)

Excludes $0.5 million of joint venture restructuring expense included in equity losses for the nine months ended October 3, 2015.

A discussion of Segment Adjusted EBITDA of our reportable segments for the nine months ended October 1, 2016 and October 3, 2015 follows:

KATE SPADE North America Adjusted EBITDA for the first nine months of 2016 was $118.9 million (15.9% of net sales), compared to $86.6 million (13.1% of net sales) in 2015. The period-over-period increase reflected an increase in gross profit, as discussed above, partially offset by an increase in SG&A related to direct-to-consumer expansion, including an increase in e-commerce fees, rent and other store operating expenses.

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KATE SPADE International Adjusted EBITDA for the first nine months of 2016 was $17.9 million (12.5% of net sales), compared to $13.2 million (9.7% of net sales) in 2015. The period-over-period increase reflected a decrease in SG&A primarily associated with the wind-down of our Company-owned stores in Brazil and increased gross profit, partially offset by increased equity losses in our equity method investees.

Adelington Design Group Adjusted EBITDA for the first nine months of 2016 was $4.2 million (23.8% of net sales), compared to Adjusted EBITDA of $2.7 million (15.2% of net sales) in 2015. The increase in Adjusted EBITDA reflected reduced SG&A, partially offset by decreased gross profit.

THREE MONTHS ENDED OCTOBER 1, 2016 COMPARED TO THREE MONTHS ENDED OCTOBER 3, 2015

The following table sets forth our operating results for the three months ended October 1, 2016 (comprised of 13 weeks) compared to the three months ended October 3, 2015 (comprised of 13 weeks):


	Three Months Ended				Variance
	October 1, 2016		October 3, 2015
Dollars in millions	(13 Weeks)		(13 Weeks)		$		%

Net Sales	$	316.5	$	277.4	$	39.1		14.1	%

Gross Profit		187.9		169.8		18.1		10.7	%

Selling, general & administrative expenses		150.8		157.5		6.7		4.2	%

Operating Income		37.1		12.3		24.8		*

Other expense, net		(2.8)		(1.6)		(1.2)		(75.4)	%

Interest expense, net		(4.9)		(5.3)		0.4		6.7	%

(Benefit) provision for income taxes		(0.1)		0.9		1.0		*

Income from Continuing Operations		29.5		4.5		25.0		*

Discontinued operations, net of income taxes		0.1		(2.2)		2.3		*

Net Income	$	29.6	$	2.3	$	27.3		*

* Not meaningful.

Net Sales

Net sales for the third quarter of 2016 were $316.5 million, an increase of $39.1 million, or 14.1%, compared to the third quarter of 2015, primarily reflecting increases in net sales in our KATE SPADE North America segment and our KATE SPADE International segment. The increase in net sales compared to 2015 includes a quarter-over-quarter decrease of $2.1 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $4.0 million. Comparable direct-to-consumer net sales for kate spade new york, including e-commerce, increased by 6.7% in the third quarter of 2016; excluding e-commerce net sales, comparable direct-to-consumer net sales were flat compared to the third quarter of 2015.

 KATE SPADE North America net sales were $259.7 million for the third quarter of 2016, a 13.7% increase compared to 2015, reflecting increases across all channels of our kate spade new york brand. The increase in net sales compared to the third quarter of 2015 includes a quarter-over-quarter decrease of $0.2 million related to the wind-down operations of KATE SPADE SATURDAY and JACK SPADE brick and mortar stores. Key operating metrics for our kate spade new york North America retail operations included the following:

— Average retail square footage in the third quarter of 2016 was approximately 403 thousand square feet, a 9.6% increase compared to 2015; and

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— Sales productivity was $354 per average square foot for the third quarter of 2016, an increase of 1.2% compared to the third quarter of 2015, on a constant currency basis. Sales productivity was $350 for the third quarter of 2015, on a reported basis.

 KATE SPADE International net sales were $51.0 million for the third quarter of 2016, an 18.9% increase compared to 2015, primarily driven by an increase in net sales in our Japan and Europe operations. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $3.9 million. The increase in net sales compared to the third quarter of 2015 includes a quarter-over-quarter decrease of $1.9 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil. Key operating metrics for our kate spade new york International retail operations in Japan and Europe included the following:

— Average retail square footage in the third quarter of 2016 was approximately 87 thousand square feet, a 16.6% increase compared to 2015; and

— Sales productivity was $365 per average square foot for the third quarter of 2016, a decrease of 16.7% compared to the third quarter of 2015, on a constant currency basis. Sales productivity was $381 for the third quarter of 2015, on a reported basis.

 Adelington Design Group net sales were $5.8 million for the third quarter of 2016, a decrease of $0.1 million, or 2.2%, compared to 2015, primarily related to a $1.0 million decrease in our LIZWEAR brand, partially offset by a $0.9 million increase in the MONET and LIZ CLAIBORNE brands.

Gross Profit

Gross profit in the third quarter of 2016 was $187.9 million (59.4% of net sales), compared to $169.8 million (61.2% of net sales) in the third quarter of 2015. The increase in gross profit is primarily due to increased net sales in our KATE SPADE North America and KATE SPADE International segments. The decrease in gross profit rate was primarily driven by a reduced gross profit rate in our KATE SPADE North America segment outlet stores and, to a lesser extent, in our KATE SPADE International segment. The decrease in gross profit rate was partially offset by an increase in gross profit rate related to our KATE SPADE North America specialty retail stores and an increase in penetration of our KATE SPADE North America e-commerce operations.

Selling, General & Administrative Expenses

SG&A decreased $6.7 million, or 4.2%, to $150.8 million in the third quarter of 2016 compared to the third quarter of 2015. The decrease in SG&A reflected the following:

The absence of $6.7 million of expenses incurred in 2015 associated with our streamlining initiatives, brand-exiting activities and acquisition related costs;

A $1.4 million decrease in SG&A in our KATE SPADE International segment;

A $0.1 million decrease in SG&A in our Adelington Design Group segment; and

A $1.5 million increase in SG&A in our KATE SPADE North America segment, primarily related to direct-to-consumer expansion reflecting: (i) increased rent and other store operating expenses; and (ii) increased e-commerce fees, partially offset by a reduction in payroll related expenses.

SG&A as a percentage of net sales was 47.7% in the third quarter of 2016, compared to 56.8% in 2015.

Operating Income

Operating income for the third quarter of 2016 was $37.1 million (11.7% of net sales) compared to $12.3 million (4.4% of net sales) in 2015.

Other Expense, Net

Other expense, net amounted to $2.8 million and $1.6 million in the three months ended October 1, 2016 and October 3, 2015, respectively. Other expense, net consisted primarily of: (i) equity in the losses of KSC and KS HMT of $2.7 million and $1.3 million, respectively, and (ii) foreign currency transaction gains and losses.

Interest Expense, Net

Interest expense, net was $4.9 million for the three months ended October 1, 2016, as compared to $5.3 million for the three months ended October 3, 2015, primarily reflecting an increase in interest income of $0.2 million.

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(Benefit) Provision for Income Taxes

The income tax benefit of $(0.1) million for the three months ended October 1, 2016 primarily represented a decrease in current tax on operations in certain jurisdictions. The income tax provision of $0.9 million for the three months ended October 3, 2015 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.

Income from Continuing Operations

Income from continuing operations in the third quarter of 2016 was $29.5 million, or 9.3% of net sales, compared to $4.5 million in the third quarter of 2015, or 1.6% of net sales. EPS, Basic and Diluted from continuing operations was $0.23 in 2016 and $0.04 in 2015.

Discontinued Operations, Net of Income Taxes

Income from discontinued operations in the third quarter of 2016 was $0.1 million, reflecting a gain on disposal of discontinued operations of $0.2 million and a loss from discontinued operations of $(0.1) million. Loss from discontinued operations in the third quarter of 2015 was $(2.2) million, reflecting a loss from discontinued operations of $(2.3) million and a gain on disposal of discontinued operations of $0.1 million. EPS, Basic and Diluted from discontinued operations was flat in 2016 and $(0.02) in 2015.

Net Income

Net income in the third quarter of 2016 was $29.6 million, compared to $2.3 million in the third quarter of 2015. EPS, Basic and Diluted was $0.23 in 2016 and $0.02 in 2015.

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Segment Adjusted EBITDA

Segment Adjusted EBITDA for our reportable segments is provided below.


	Three Months Ended				Variance
	October 1, 2016		October 3, 2015
Dollars in thousands	(13 Weeks)		(13 Weeks)		$		%
Reportable Segments Adjusted EBITDA:
KATE SPADE North America	$	46,958	$	30,713	$	16,245	52.9	%
KATE SPADE International (a)		5,287		4,793		494	10.3	%
Adelington Design Group		1,089		1,127		(38)	(3.4)	%
Total Reportable Segments Adjusted EBITDA		53,334		36,633
Depreciation and amortization, net (b)		(11,687)		(11,676)
Charges due to streamlining initiatives (c), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net		(1,199)		(6,871)
Share-based compensation (d)		(6,072)		(6,684)
Adjusted equity loss included in Reportable Segments Adjusted EBITDA (e)		2,726		915
Operating Income		37,102		12,317
Other expense, net (a)		(2,735)		(1,560)
Interest expense, net		(4,920)		(5,274)
(Benefit) provision for income taxes		(56)		973
Discontinued operations, net of income taxes		123		(2,207)
Net Income	$	29,626	$	2,303

(a) Amounts include equity in the adjusted losses of our equity method investees of $2.7 million and $0.9 million for the three months ended October 1, 2016 and October 3, 2015.

(b) Excludes amortization included in Interest expense, net.

(d) Includes share-based compensation expense of $0.1 million in 2015 that was classified as restructuring.

(e) Excludes $0.4 million of joint venture restructuring expense included in equity losses for the three months ended October 3, 2015.

A discussion of Segment Adjusted EBITDA of our reportable segments for the three months ended October 1, 2016 and October 3, 2015 follows:

 KATE SPADE North America Adjusted EBITDA for the third quarter of 2016 was $47.0 million (18.1% of net sales), compared to $30.7 million (13.4% of net sales) in 2015. The period-over-period increase reflected an increase in gross profit and a reduction in payroll related expenses, as discussed above, partially offset by an increase in SG&A related to direct-to-consumer expansion, including rent and other store operating expenses and increased e-commerce fees.

 KATE SPADE International Adjusted EBITDA for the third quarter of 2016 was $5.3 million (10.4% of net sales), compared to $4.8 million (11.2% of net sales) in 2015. The period-over-period increase primarily reflected reduced SG&A related to the wind-down of our Company-owned stores in Brazil and an increase in gross profit, partially offset by increased equity losses in our equity method investees.

 Adelington Design Group Adjusted EBITDA for the third quarter of 2016 and 2015 was $1.1 million (18.7% and 18.9% of net sales, respectively).

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 and normal maintenance activities; (iii) invest in our information systems; (iv) fund operational and contractual obligations, including remaining efforts associated with our streamlining initiatives; and (v) potentially repurchase or retire debt obligations.

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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 January 2, 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 cash flows from operations and the projected borrowing availability under our ABL Facility will be sufficient to fund our liquidity requirements for at least the next 12 months.

There can be no certainty that availability under the ABL Facility will be sufficient to fund our liquidity needs. Should we be unable to comply with the requirements in the ABL Facility, we would be unable to borrow under such agreement and any amounts outstanding would become immediately due and payable, unless we were able to secure a waiver or an amendment under the ABL Facility. Should we be unable to borrow under the ABL Facility, or if outstanding borrowings thereunder become immediately due and payable, our liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations. In addition, an acceleration of amounts outstanding under the ABL Facility would likely cause cross-defaults under our other outstanding indebtedness, including the Term Loan.

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.

Because of the continuing uncertainty and risks relating to future economic conditions, 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 nine months of 2016 with $308.1 million in cash and marketable securities, compared to $219.6 million at the end of the first nine months of 2015 and with $394.2 million of debt outstanding at the end of the first nine months of 2016, compared to $396.6 million at the end of the first nine months of 2015. The $90.9 million decrease in our net debt primarily reflected: (i) the generation of $163.0 million of cash from continuing operating activities over the past 12 months; (ii) the funding of $53.1 million of capital and in-store shop expenditures over the last 12 months; and (iii) the funding of aggregate loans of $6.5 million to the KSC and KS HMT joint ventures.

Accounts Receivable increased $10.8 million, or 18.4%, at October 1, 2016 compared to October 3, 2015, primarily reflecting a period-over-period increase in wholesale net sales. Accounts receivable decreased $27.1 million, or 28.0%, at October 1, 2016 compared to January 2, 2016, primarily reflecting the timing of wholesale shipments.

Inventories increased $14.2 million, or 5.7% at October 1, 2016 compared to October 3, 2015, primarily due to an increase in kate spade new york inventory to support growth initiatives. Inventories increased $70.7 million, or 36.9%, compared to January 2, 2016, primarily due to an increase in kate spade new york inventory to support growth initiatives and timing of wholesale shipments.

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Borrowings under our ABL Facility peaked at $8.0 million during the first nine months of 2015. We had no outstanding borrowings under our ABL Facility at October 1, 2016 and October 3, 2015.

Net cash provided by operating activities of our continuing operations was $61.8 million the first nine months of 2016, compared to $19.3 million in the first nine months of 2015. This $42.5 million period-over-period change was primarily due to increased earnings in 2016 compared to 2015 (excluding depreciation and amortization, foreign currency gains and losses, impairment charges and other non-cash items), partially offset by an increase in cash outflows related to working capital items. The operating activities of our discontinued operations used $1.3 million and $10.8 million of cash in the nine months ended October 1, 2016 and October 3, 2015, respectively.

Net cash (used in) provided by investing activities of our continuing operations was $(48.6) million in the first nine months of 2016, compared to $35.5 million in the first nine months of 2015. Net cash used in investing activities in the nine months ended October 1, 2016 primarily reflected: (i) the use of $38.5 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 LCJG. Net cash provided by investing activities in the nine months ended October 3, 2015 primarily reflected: (i) the receipt of net proceeds of $75.1 million from the settlement of the Lucky Brand Note in March 2015; (ii) the receipt of net proceeds of $19.9 million from LCJG for their interest in the joint ventures; (iii) the use of $45.6 million for capital and in-store shop expenditures; (iv) the payment of $10.0 million to acquire E-Land’s 60.0% interest in KSC; and (v) the use of $5.0 million for investments in and advances to KSC. The investing activities of our discontinued operations provided $0.7 million in the nine months ended October 3, 2015.

Net cash used in financing activities was $1.9 million in the first nine months of 2016, compared to $8.1 million in the first nine months of 2015. The $6.2 million period-over-period change primarily reflected the absence of a net $6.0 million repayment of borrowings under our ABL Facility in the first nine months of 2015.

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 98 such leases. As of October 1, 2016, the future aggregate payments under these leases amounted to $74.2 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 44 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.

Our 2016 capital expenditures are expected to be approximately $65.0 - $70.0 million, compared to $60.2 million in 2015. These expenditures primarily relate to our plan to open approximately 15 Company operated retail stores globally in 2016, net of approximately 7 store closures, the continued technological upgrading of our management information systems and costs associated with the refurbishment of selected specialty retail and outlet stores. We expect capital expenditures and working capital cash needs to be financed with available cash, cash provided by operating activities and our ABL Facility.

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Debt consisted of the following:


In thousands	October 1, 2016		January 2, 2016		October 3, 2015
Term Loan credit facility (a)	$	386,486	$	388,667	$	388,381
ABL Facility		—		—		—
Capital lease obligations		7,746		8,126		8,245
Total debt	$	394,232	$	396,793	$	396,626

^(a)

For information regarding our debt and credit instruments, refer to Note 5 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 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 October 1, 2016, 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	$	328,616	$	—	$	10,447	$	189,553	$	169,553

^(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 October 1, 2016, 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 business in Japan. As of October 1, 2016, we had forward contracts maturing through December 2017 to sell 2.6 billion yen for $23.9 million. We also had option contracts maturing through December 2016 to sell 0.6 billion yen for $5.8 million.

We use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of October 1, 2016, we had forward contracts to sell 5.1 billion yen for $50.3 million maturing through December 2016. Transaction losses of $7.6 million and $0.1 million related to these derivative instruments were reflected within Other expense, net for the nine months ended October 1, 2016 and October 3, 2015, respectively, and $1.4 million and $0.8 million for the three months ended October 1, 2016 and October 3, 2015, 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.

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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 January 2, 2016. There were no significant changes in our critical accounting policies during the nine months ended October 1, 2016. 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.

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 October 1, 2016, January 2, 2016 and October 3, 2015, our exposure to changing market rates related to our ABL Facility and the Term Loan credit facility was as follows:


Dollars in millions	October 1, 2016			January 2, 2016			October 3, 2015
ABL Facility	$	—		$	—		$	—
Average interest rate		—			—			—

Term Loan credit facility	$	392.0		$	395.0		$	395.0
Average interest rate		4.00	%		4.00	%		4.00	%

A ten percent change in the average rate would have minimal impact to interest expense during the three months ended October 1, 2016. The Term Loan interest is based on LIBOR (with a floor of 1.0%) plus 3.0% per annum; therefore a ten percent change in the average LIBOR rate would not impact interest expense, since the LIBOR rate was below the floor of 1.0% at October 1, 2016.

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 October 1, 2016, we had forward contracts with net notional amounts of $74.2 million and option contracts of $5.8 million. Unrealized (losses) gains for outstanding foreign currency forward contracts and option contracts were $(2.7) million. A sensitivity analysis to changes in foreign currency exchange rates indicated that if the yen weakened by 10.0% against the US dollar, the fair value of these instruments would increase by $6.9 million at October 1, 2016. Conversely, if the yen strengthened by 10.0% against the US dollar, the fair value of these instruments would decrease by $8.4 million at October 1, 2016. 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.

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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 third fiscal quarter. Our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that, as of October 1, 2016, 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.

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 October 1, 2016 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 January 2, 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 third quarter ended October 1, 2016 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended January 2, 2016.

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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 October 1, 2016 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)(a)	Paid Per Share		(In thousands)	(In thousands)(b)
July 3, 2016 — July 30, 2016	—	$	—	—	$	28,749
July 31, 2016 — September 3, 2016	—		—	—		28,749
September 4, 2016 — October 1, 2016	—		—	—		28,749
Total — 13 Weeks Ended October 1, 2016	—	$	—	—	$	28,749

^(a)

Includes shares withheld to cover tax-withholding requirements relating to the vesting of restricted stock issued to employees pursuant to the Company’s shareholder-approved stock incentive plans.

^(b)

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.

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ITEM 6. EXHIBITS




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: November 2, 2016



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 - November 2, 2016

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Kate Spade & Co Reports