Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company's financial condition and results of operations should be read together with the Company’s consolidated financial statements and notes thereto, included elsewhere in this document. When used herein, the terms “the Company,” "Tapestry," “we,” “us” and “our” refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Stuart Weitzman," "Kate Spade" or "kate spade new york" refer only to the referenced brand.

EXECUTIVE OVERVIEW

The fiscal years ended June 30, 2018 and July 1, 2017 were each 52-week periods, and the fiscal year ended July 2, 2016 was a 53-week period.

Tapestry is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry is powered by optimism, innovation and inclusivity. Our brands are approachable and inviting and create joy every day for people around the world. Defined by quality, craftsmanship and creativity, the brands that make up our house give global audiences the opportunity for exploration and self-expression. Tapestry is comprised of the Coach, Kate Spade and Stuart Weitzman brands, all of which have been part of the American landscape for over 25 years.

Prior to fiscal 2018, the Company had three reportable segments: North America (Coach brand), International (Coach brand) and Stuart Weitzman. Beginning in fiscal 2018 and as a result of the Kate Spade acquisition, the Company aligned its reportable segments with the new structure of its business. As a result, the Company has three reportable segments:

•	Coach - Includes global sales of Coach brand products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors.

•	Kate Spade - Includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, to wholesale customers, through concession shop-in-shops and through independent third party distributors.

•	Stuart Weitzman - Includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, to wholesale customers and through numerous independent third party distributors.

Each of our brands is unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. Our success does not depend solely on the performance of a single channel, geographic area or brand.

Fiscal 2019 Strategic Initiatives

The company is focused first and foremost on execution in fiscal 2019. The goal is to deliver strong revenue and operating income growth in fiscal 2019, while making the right strategic investments to support our long-term vision. Specifically, in fiscal 2019, the Company intends to:

•	Capture the full benefit of multi-brand structure and synergies

•	Fuel brand innovation by accelerating product newness across all brands

•	Drive global growth with an emphasis on the Chinese consumer

•	Advance our digital and data analytic capabilities

Recent Developments

Stuart Weitzman Production Challenges

During the third quarter of fiscal 2018, Stuart Weitzman results were negatively impacted by supply chain operational challenges including production delays, which caused lower than expected sales, as the brand was not prepared for the level of complexity and new development as it transitions to a new creative vision. The Company added infrastructure and capacity to support this vision with quality and on-time deliveries. The Company expects to experience some negative impacts through the Fall/Winter Season in fiscal 2019.

Impact of Tax Legislation

On December 22, 2017, H.R.1, formerly known as the Tax Cuts and Jobs Act (the "Tax Legislation") was enacted. The Tax Legislation significantly revises the U.S. tax code by (i) lowering the U.S. federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries ("Transition Tax"), (iv) requiring current inclusion of global intangible low taxed income ("GILTI") of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax ("BEAT"),

(vi) implementing bonus depreciation that will allow for full expensing of qualified property, (vii) enacting a beneficial rate to be applied against Foreign Derived Intangible Income (“FDII”) and (viii) limiting deductibility of interest and executive compensation expense, among other changes. Notable changes include the following:

•	The Company expects to receive the full benefit of the rate reduction in fiscal 2019, as compared with the partial rate reduction during fiscal 2018 based on the pro-rated number of days the new rate applied in fiscal 2018. In the current year, the U.S federal statutory income tax rate was approximately 28%, which is expected to decline to 21% in fiscal 2019.

•

Foreign earnings that may exist after December 31, 2017 will generally be eligible for a 100% dividends received exemption, however companies may be subject to the alternative BEAT and GILTI tax provisions which could increase the global effective tax rate. Conversely, Companies may be eligible for a reduced rate to the extent their earnings qualify as FDII, which would reduce their global effective tax rate. These tax provisions are expected to impact the Company in fiscal year 2019. Based on current facts and circumstances the Company believes that GILTI is the tax provision most likely to apply. Under GILTI, a portion of the Company’s foreign earnings will be subject to U.S. taxation. To the extent a company’s foreign operations are subject to GILTI and there is an existing outside basis difference in the Company’s foreign investments that exists within the reporting period, the Company may need to record a deferred tax liability for some portion of the anticipated additional tax resulting from future GILTI inclusions. Outside-basis difference is generally defined as the difference between an entity’s financial statement carrying amount and the tax basis of the parent’s investment in that entity’s stock. Outside basis differences typically arise from things such as the entity earning income, that has yet to be distributed to the parent company, or from purchase accounting adjustments not recognized for tax purposes. For companies subject to GILTI, the Financial Accounting Standards Board ("FASB") has indicated that companies are allowed to record tax associated with GILTI as a period cost in the period the earnings are included on the U.S. tax return. The Company has chosen to adopt this policy.

•

The Tax Legislation includes, what many believe, is an unintended consequence that results in certain leasehold improvements, being ineligible for bonus depreciation. The Company has estimated fiscal year 2018 depreciation expense based on how the law was drafted, with no consideration of the perceived legislative intent. The Company has estimated its capital expenditures by class to estimate depreciation expense for purposes of calculating the rate change adjustment of our deferred tax balance. If Tax Legislation for QIP is adjusted in fiscal 2019 or beyond, it will impact the rate change adjustment, which in turn will impact the Company’s estimated annual effective tax rate in the year the legislation is revised.

•	At this time, it is unknown whether certain states in which the Company operates will conform to the Tax Legislation or adopt an alternative regime. The Company continues to monitor developments; at this time all material aspects of its provision for income tax for the fiscal year ended June 30, 2018 are recorded based on recent guidance or its historical approach to state tax expense.

•	Other provisions of the new legislation that are not applicable to the Company until fiscal 2019 include, but are not limited to, the provisions limiting deductibility of interest and executive compensation expense. Based on current facts and circumstances, we do not anticipate the impact of these provisions to be material to the overall financial statements.

Integration and Acquisition Costs

During the first quarter of fiscal 2018, the Company completed its acquisition of Kate Spade & Company. During the third quarter of fiscal 2018, the Company completed its acquisition of certain distributors for the Coach and Stuart Weitzman brands and obtained operational control of the Kate Spade Joint Ventures. The operating results of the respective entities have been consolidated in the Company's operating results commencing on the date of each acquisition. As a result, the Company incurred charges related to the integration and acquisition of the businesses. These charges are primarily associated with purchase price accounting adjustments, acquisition costs, inventory-related charges, contractual payments and organization-related expenses. The Company currently estimates that it will incur approximately $50-60 million in pre-tax charges, of which approximately $5-10 million are expected to be non-cash charges, in fiscal 2019. Refer to Note 4, "Integration and Acquisition Costs," and "GAAP to Non-GAAP Reconciliation," herein, for further information.

Strategic Repositioning of Coach Brand in North America Department Stores

In the beginning of fiscal 2017, the Company implemented a deliberate and strategic decision to elevate Coach's positioning in the channel by limiting participation in promotional events and closing approximately 25% of its wholesale doors during fiscal 2017.

Operational Efficiency Plan

During the fourth quarter of fiscal 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model (the "Operational Efficiency Plan"). The significant majority of the charges under

this plan were recorded within SG&A expense. These charges were associated with organizational efficiencies, primarily related to the reduction of corporate staffing levels globally, as well as accelerated depreciation, mainly associated with information systems retirement, technology infrastructure charges related to the initial costs of replacing and updating our core technology platforms, and international supply chain and office location optimization. The Company incurred charges life to date of $87.4 million. The plan was completed in fiscal 2018.

Refer to Note 5, "Restructuring Activities," and "GAAP to Non-GAAP Reconciliation," herein, for further information.

Transformation Plan

During the fourth quarter of fiscal 2014, the Company announced a multi-year strategic plan with the objective of transforming the Coach brand and reinvigorating growth (the "Transformation Plan"). Key operational and cost measures of the Transformation Plan included: (i) the investment in capital improvements in our stores and wholesale locations to drive comparable sales improvement; (ii) the optimization and streamlining of our organizational model as well as the closure of underperforming stores in North America, and select International stores; (iii) the realignment of inventory levels and mix to reflect our elevated product strategy and consumer preferences; (iv) the investment in incremental advertising costs to elevate consumer perception of the Coach brand, drive sales growth and promote our new strategy, which started in fiscal 2015; and (v) the significant scale-back of our promotional cadence in an increased global promotional environment, particularly within our outlet Internet sales site, which began in fiscal 2014. The Company's execution of these key operational and cost measures was concluded during fiscal 2016, and we believe that long-term growth will be realized through these transformational efforts over time.

Refer to Note 5, "Restructuring Activities," and "GAAP to Non-GAAP Reconciliation," herein, for further information.

Current Trends and Outlook

The environment in which we operate is subject to a number of different factors driving global consumer spending. Consumer preferences, macroeconomic conditions, foreign currency fluctuations and geopolitical events continue to impact overall levels of consumer travel and spending on discretionary items, with inconsistent patterns across channels and geographies.

Global consumer retail traffic trends remain under pressure. This, along with other factors, has led to a more promotional environment in the fragmented retail industry due to increased competition and a desire to offset traffic declines with increased levels of conversion. Further declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.

After strong economic performance in calendar 2017 and the first half of 2018, including improvements in the labor market as well as modest growth in overall consumer spending, the U.S. economic outlook has improved and moderate economic growth is expected to continue in the next year. Several organizations that monitor the world’s economy, including the International Monetary Fund, observed economic strengthening across the majority of the globe recently and are projecting continued economic strengthening over the next year, but anticipate that the growth will be inconsistent among different markets. It is still, however, too early to understand what kind of sustained impact these trends or changes in trade agreements and tax legislation will have on consumer discretionary spending.

Risk of volatility or a worsening of the macroeconomic environment remains due to political uncertainty and potential changes to international trade agreements. The Trump Administration recently announced that the U.S. is beginning the process to impose duties related to Chinese made imported products. Certain of the Company's offerings are included in this proposal, however the Company believes that there will be minimal impact given the diversity of its sourcing activities.

Additional macroeconomic impacts include but are not limited to the United Kingdom ("U.K.") voting to leave the European Union ("E.U."), commonly known as "Brexit." On March 29, 2017, the U.K. triggered Article 50 of the Lisbon Treaty formally starting negotiations with the E.U. The U.K. and E.U. announced in March 2018 an agreement in principle to transitional provisions under which E.U. law would remain in force in the U.K. until the end of December 2020, but this remains subject to the successful conclusion of a final withdrawal agreement between the parties. In the absence of such an agreement, there would be no transitional provisions and a "hard" Brexit would occur on March 29, 2019.

We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands.

Furthermore, refer to Part I, Item 1 - "Business" for additional discussion on our expected store openings and closures within each of our segments. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, Item 1A - "Risk Factors".

FISCAL 2018 COMPARED TO FISCAL 2017

The following table summarizes results of operations for fiscal 2018 compared to fiscal 2017. All percentages shown in the tables below and the related discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	June 30, 2018							July 1, 2017							Variance
	(millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	5,880.0			100.0	%		$	4,488.3			100.0	%		$	1,391.7			31.0	%
Gross profit	3,853.9				65.5			3,081.1				68.6			772.8				25.1
SG&A expenses	3,183.1				54.1			2,293.7				51.1			889.4				38.8
Operating income	670.8				11.4			787.4				17.5			(116.6		)		(14.8	)
Interest expense, net	74.0				1.3			28.4				0.6			45.6				160.8
Income before provision for income taxes	596.8				10.2			759.0				16.9			(162.2		)		(21.4	)
Provision for income taxes	199.3				3.4			168.0				3.7			31.3				18.6
Net income	397.5				6.8			591.0				13.2			(193.5		)		(32.7	)
Net income per share:
Basic	$	1.39						$	2.11						$	(0.72	)		(33.9	)%
Diluted	$	1.38						$	2.09						$	(0.71	)		(34.1	)%

GAAP to Non-GAAP Reconciliation

The Company’s reported results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The reported results during fiscal 2018 and fiscal 2017 reflect the impact of the Operational Efficiency Plan, Integration and Acquisition costs and the impact of the new Tax Legislation in fiscal 2018, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.

Fiscal 2018 Items

	June 30, 2018
	GAAP Basis (As Reported)				Operational Efficiency Plan				Integration & Acquisition				Impact of Tax Legislation				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,853.9			$	—			$	(116.4	)		$	—			$	3,970.3
SG&A expenses	3,183.1				19.5				185.2				—				2,978.4
Operating income	670.8				(19.5		)		(301.6		)		—				991.9
Income before provision for income taxes	596.8				(19.5		)		(301.6		)		—				917.9
Provision for income taxes	199.3				(6.2		)		(130.7		)		178.2				158.0
Net income	397.5				(13.3		)		(170.9		)		(178.2		)		759.9
Diluted net income per share	1.38				(0.05		)		(0.58		)		(0.62		)		2.63

In fiscal 2018 the Company incurred charges as follows:

•	Operational Efficiency Plan - Total charges of $19.5 million primarily related to technology infrastructure costs. Refer to the "Executive Overview" herein and Note 5, "Restructuring Activities," for further information regarding this plan.

•

Integration & Acquisition - Total charges of $301.6 million, primarily attributable to the integration and acquisition of Kate Spade, and to a lesser extent the acquisition of certain distributors for the Coach and Stuart Weitzman brands and assumed operational control of the Kate Spade Joint Ventures. Provision for income taxes includes a one-time benefit of $40.7 million as a result of the reversal of certain valuation allowances that relate, in part, to the enactment of Tax Legislation. These charges include:

◦	Limited life purchase accounting adjustments

◦	Professional fees

◦	Severance and other costs related to contractual agreements with certain Kate Spade executives

◦	Organizational costs as a result of integration

◦	Inventory reserves established primarily for the destruction of inventory

Refer to the "Executive Overview" herein and Note 4, "Integration & Acquisitions Costs," for more information.

•	Impact of Tax Legislation - Total charges of $178.2 million primarily related to the net impact of the transition tax and re-measurement of deferred tax balances. Refer to the "Executive Overview" herein and Note 14, "Income Taxes," for further information.

These actions taken together increased the Company's SG&A expenses by $204.7 million, cost of sales by $116.4 million and provision for income taxes by $41.3 million, negatively impacting net income by $362.4 million, or $1.25 per diluted share.

The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable segment through operating income for fiscal 2018:

	June 30, 2018
	GAAP Basis (As Reported)				Coach				Kate Spade				Stuart Weitzman				Corporate				Non-GAAP Basis (Excluding Items)
	(millions)
COGS
Integration & Acquisition(1)					(4.1		)		(106.5		)		(5.8		)		—
Gross profit	$	3,853.9			$	(4.1	)		$	(106.5	)		$	(5.8	)		$	—			$	3,970.3
SG&A
Integration & Acquisition(1)					0.5				113.7				7.8				63.2
Operational Efficiency Plan					—				—				—				19.5
SG&A	$	3,183.1			$	0.5			$	113.7			$	7.8			$	82.7			$	2,978.4
Operating income	$	670.8			$	(4.6	)		$	(220.2	)		$	(13.6	)		$	(82.7	)		$	991.9

(1)

During the first quarter of fiscal 2018, the Company completed its acquisition of Kate Spade & Company. During the third quarter of fiscal 2018, the Company completed its acquisition of certain distributors for the Coach and Stuart Weitzman brands and obtained operational control of the Kate Spade Joint Ventures. The operating results of the respective entity have been consolidated in the Company's operating results commencing on the date of each acquisition.

Fiscal 2017 Items

	July 1, 2017
	GAAP Basis (As Reported)				Operational Efficiency Plan				Integration & Acquisition				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,081.1			$	—			$	(2.9	)		$	3,084.0
SG&A expenses	2,293.7				24.0				(1.7		)		2,271.4
Operating income	787.4				(24.0		)		(1.2		)		812.6
Income before provision for income taxes	759.0				(24.0		)		(10.7		)		793.7
Provision for income taxes	168.0				(8.3		)		(8.1		)		184.4
Net income	591.0				(15.7		)		(2.6		)		609.3
Diluted net income per share	2.09				(0.05		)		(0.01		)		2.15

In fiscal 2017 the Company incurred adjustments as follows:

•	Operational Efficiency Plan - Total charges of $24.0 million primarily related to organizational efficiency costs, technology infrastructure costs and, to a lesser extent, network optimization costs.

•	Integration & Acquisition - Total charges of $10.7 million, related to $29.0 million of Stuart Weitzman integration-related costs, which were more than offset by the reversal of a $35.2 million accrual related to estimated contingent purchase price payments which were not paid, and $16.9 million of Kate Spade integration-related costs.

These actions taken together increased the Company's SG&A expenses by $22.3 million, interest expense by $9.5 million and cost of sales by $2.9 million, negatively impacting net income by $18.3 million, or $0.06 per diluted share.

The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable segment through operating income for fiscal 2017:

	July 1, 2017
	GAAP Basis (As Reported)				Coach				Stuart Weitzman				Corporate(1)				Non-GAAP Basis (Excluding Items)
	(millions)
COGS
Integration & Acquisition					—				(2.9		)		—
Gross profit	$	3,081.1			$	—			$	(2.9	)		$	—			$	3,084.0
SG&A
Integration & Acquisition					—				17.7				(19.4		)
Operational Efficiency Plan					—				—				24.0
SG&A	$	2,293.7			$	—			$	17.7			$	4.6			$	2,271.4
Operating income	$	787.4			$	—			$	(20.6	)		$	(4.6	)		$	812.6

(1)	The Company incurred $9.5 million related to bridge financing fees recorded in interest expense within Corporate, which is not included in the above table.

Tapestry, Inc. Summary - Fiscal 2018

Currency Fluctuation Effects

The change in net sales in fiscal 2018 compared to fiscal 2017 has been presented both including and excluding currency fluctuation effects.

Net Sales

Net sales in fiscal 2018 increased 31.0% or $1.39 billion to $5.88 billion, primarily due to the Kate Spade acquisition as well as increased revenues from Coach. Excluding the effects of foreign currency, net sales increased by 29.6% or $1.33 billion.

Gross Profit

Gross profit increased 25.1% or $772.8 million to $3.85 billion in fiscal 2018 from $3.08 billion in fiscal 2017. Gross margin for fiscal 2018 was 65.5% as compared to 68.6% in fiscal 2017. Excluding Non-GAAP charges of $116.4 million in fiscal 2018 and $2.9 million in fiscal 2017, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 28.7% or $886.3 million to $3.97 billion in fiscal 2018, and gross margin decreased to 67.5% in fiscal 2018 from 68.7% in fiscal 2017. This increase in gross profit is primarily driven by the acquisition of Kate Spade of $817.6 million and increases in Coach of $80.6 million, partially offset by decreases in Stuart Weitzman of $11.9 million.

Selling, General and Administrative Expenses

The Company includes inbound product-related transportation costs from our service providers within cost of sales. The Company, similar to some companies, includes certain transportation-related costs related to our distribution network in SG&A expenses rather than in cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in cost of sales.

SG&A expenses increased 38.8% or $889.4 million to $3.18 billion in fiscal 2018 as compared to $2.29 billion in fiscal 2017. As a percentage of net sales, SG&A expenses increased to 54.1% during fiscal 2018 as compared to 51.1% during fiscal 2017. Excluding non-GAAP charges of $204.7 million in fiscal 2018 and $22.3 million in fiscal 2017, SG&A expenses increased 31.1% or $707.0 million from fiscal 2017; and SG&A expenses as a percentage of net sales remained relatively consistent at 50.7% in fiscal 2018 compared to 50.6% in fiscal 2017. This increase is primarily due to the acquisition of Kate Spade of $659.3 million.

Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, increased 30.2% or $80.8 million to $348.9 million in fiscal 2018 as compared to $268.1 million in fiscal 2017. Excluding non-GAAP charges of $82.7 million and $4.6 million in fiscal 2018 and fiscal 2017, respectively, SG&A expenses increased 1.1% or $2.7 million to $266.2 million in fiscal 2018 as compared to $263.5 million in fiscal 2017.

Operating Income

Operating income decreased 14.8% or $116.6 million to $670.8 million during fiscal 2018 as compared to $787.4 million in fiscal 2017. Operating margin was 11.4% in fiscal 2018 as compared to 17.5% in fiscal 2017. Excluding non-GAAP charges of $321.1 million in fiscal 2018 and $25.2 million in fiscal 2017, operating income increased 22.1% or $179.3 million to $991.9 million from $812.6 million in fiscal 2017; and operating margin was 16.9% in fiscal 2018 as compared to 18.1% in fiscal 2017. This increase in operating income is primarily driven by the acquisition of Kate Spade of $158.3 million and increases in Coach of $48.8 million.

Interest Expense, net

Interest expense, net totaled $74.0 million in fiscal 2018 as compared to $28.4 million in fiscal 2017, which included $9.5 million related to bridge financing fees. The increase in interest expense, net is due to the Company's debt borrowings that occurred to finance the Kate Spade acquisition. Refer to Note 11, "Debt," for further information.

Provision for Income Taxes

The effective tax rate was 33.4% in fiscal 2018 as compared to 22.1% in fiscal 2017. Excluding non-GAAP charges, the effective tax rate was 17.2% in fiscal 2018 as compared to 23.2% in fiscal 2017. The decrease in our effective tax rate was primarily attributable to the Tax Legislation, which lowered the U.S. federal statutory income tax, the adoption of ASU No. 2016-09 and the geographic mix of earnings.

Net Income

Net income decreased 32.7% or $193.5 million to $397.5 million in fiscal 2018 as compared to $591.0 million in fiscal 2017. Excluding non-GAAP charges, net income increased 24.7% or $150.6 million to $759.9 million in fiscal 2018 from $609.3 million in fiscal 2017. This increase was primarily due to higher operating income, as well as a decrease in the provision for income taxes.

Net Income per Share

Net income per diluted share decreased 34.1% to $1.38 in fiscal 2018 as compared to $2.09 in fiscal 2017. Excluding non-GAAP charges, net income per diluted share increased 22.3% or $0.48 to $2.63 in fiscal 2018 from $2.15 in fiscal 2017, due to higher net income partially offset by an increase in shares outstanding.

Segment Performance - Fiscal 2018

Coach

	Fiscal Year Ended
	June 30, 2018							July 1, 2017							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,221.5			100.0	%		$	4,114.7			100.0	%		$	106.8			2.6	%
Gross profit	2,931.5				69.4			2,855.0				69.4			76.5				2.7
SG&A expenses	1,847.3				43.8			1,815.0				44.1			32.3				1.8
Operating income	1,084.2				25.7			1,040.0				25.3			44.2				4.3

Coach Net Sales increased 2.6% or $106.8 million to $4.22 billion in fiscal 2018. Excluding the favorable impact of foreign currency, net sales increased 1.6% or $63.8 million. This increase was due to an increase in comparable store sales of $51.0 million or 1.5% compared to fiscal 2017. Excluding the impact of the Internet, comparable store sales increased 0.8%. This increase in comparable store sales is primarily led by increases in North America, Japan and Greater China, primarily due to conversion. These increases were partially offset by decreases in other parts of Asia, excluding Japan and Greater China. Net sales attributable to non-comparable stores increased by $43.5 million primarily driven by new stores in Greater China and Europe, partially offset by declines in non-comparable stores in North America due to store closures. These increases were partially offset by lower licensing revenues due to the expiration of the footwear license at the end of fiscal 2017 and bringing this business in-house.

Coach Gross Profit increased 2.7% or $76.5 million to $2.93 billion in fiscal 2018 from $2.86 billion in fiscal 2017. Gross margin remained flat at 69.4% in fiscal 2018 as compared to fiscal 2017. Excluding non-GAAP charges of $4.1 million in fiscal 2018, Coach gross profit increased 2.8% or $80.6 million and gross margin increased 10 basis points to 69.5% in fiscal 2018 from 69.4% in fiscal 2017 on a non-GAAP basis. Gross margin in fiscal 2018 was not materially impacted by foreign currency. Excluding the impact of foreign currency in both periods, gross margin increased 20 basis points. The increase in gross margin was primarily due to favorable channel mix, partially offset by promotional activity.

Coach SG&A expenses increased 1.8% or $32.3 million to $1.85 billion in fiscal 2018 as compared to $1.82 billion in fiscal 2017. As a percentage of net sales, SG&A expenses decreased to 43.8% in fiscal 2018 as compared to 44.1% in fiscal 2017. Excluding non-GAAP charges of $0.5 million in fiscal 2018, SG&A expenses increased 1.7% or $31.8 million. The $31.8 million increase is primarily due to higher store-related costs in Europe and Greater China associated with new store openings, partially offset by lower store-related costs in North America.

Coach Operating Income increased 4.3% or $44.2 million to $1.08 billion in fiscal 2018, resulting in an operating margin of 25.7%, as compared to $1.04 billion and 25.3%, respectively in fiscal 2017. Excluding non-GAAP charges, Coach operating income increased 4.7% or $48.8 million to $1.09 billion from $1.04 billion in fiscal 2017; and operating margin was 25.8% in fiscal 2018 as compared to 25.3% in fiscal 2017. The increase in operating income was due to an increase in gross profit, partially offset by higher SG&A expenses.

Kate Spade

	Fiscal Year Ended
	June 30, 2018(1)							July 1, 2017							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount		%
Net sales	$	1,284.7			100.0	%		$	—			—	%		NM		NM
Gross profit	711.1				55.4			—				—			NM		NM
SG&A expenses	773.0				60.2			—				—			NM		NM
Operating loss	(61.9		)		(4.8	)		—				—			NM		NM

NM - Not meaningful

(1)	On July 11, 2017, the Company completed its acquisition of Kate Spade. The operating results of the Kate Spade brand have been consolidated in the Company's operating results commencing on July 11, 2017.

Kate Spade Net Sales totaled $1.28 billion in fiscal 2018. Comparable store sales for the period declined 7.2% primarily due to the strategic pullback in Internet flash sales. Excluding the impact of the Internet business, comparable store sales declined 2.5%.

Kate Spade Gross Profit totaled $711.1 million in fiscal 2018, resulting in a gross margin of 55.4%. Excluding non-GAAP charges of $106.5 million, gross profit totaled $817.6 million, resulting in a gross margin of 63.6%.

Kate Spade SG&A Expenses totaled $773.0 million in fiscal 2018. As a percentage of net sales, SG&A expenses were 60.2% during fiscal 2018. Excluding non-GAAP charges of $113.7 million, SG&A expenses were $659.3 million, or 51.3% of sales.

Kate Spade Operating Loss totaled $61.9 million in fiscal 2018, resulting in an operating margin of (4.8)%. Excluding non-GAAP charges, Kate Spade operating income totaled $158.3 million, resulting in an operating margin of 12.3%.

Stuart Weitzman

	Fiscal Year Ended
	June 30, 2018							July 1, 2017							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	373.8			100.0	%		$	373.6			100.0	%		$	0.2			—	%
Gross profit	211.3				56.5			226.1				60.5			(14.8		)		(6.5	)
SG&A expenses	213.9				57.2			210.6				56.4			3.3				1.6
Operating (loss) income	(2.6		)		(0.7	)		15.5				4.2			(18.1		)		NM

NM - Not meaningful

Stuart Weitzman Net Sales increased slightly by $0.2 million to $373.8 million in fiscal 2018. Excluding the favorable impact of foreign currency, net sales decreased 1.6% or $5.9 million. This decrease was primarily due to a $20.3 million decrease in wholesale sales primarily due to lower shipments. This was partially offset by higher sales in the retail business of $15.5 million, primarily due to the direct ownership of the Northern China distributor and the impact of net store openings, partially offset by lower comparable store sales.

Stuart Weitzman Gross Profit decreased 6.5% or $14.8 million to $211.3 million in fiscal 2018 from $226.1 million in fiscal 2017. Gross margin decreased 400 basis points to 56.5% in fiscal 2018 from 60.5% in fiscal 2017. Excluding non-GAAP charges of $5.8 million in fiscal 2018 and $2.9 million in fiscal 2017, Stuart Weitzman gross profit decreased 5.2% or $11.9 million to $217.1 million from $229.0 million in fiscal 2017, and gross margin decreased 320 basis points to 58.1% in fiscal 2018 from 61.3% in fiscal 2017. The year over year change in gross margin was negatively impacted by foreign currency rates by 150 basis points, primarily due to the Euro. Excluding the impact of foreign currency, there was a decrease in gross margin of 170 basis points primarily due to lower wholesale margins and the impact of promotional activity.

Stuart Weitzman SG&A Expenses increased 1.6% or $3.3 million to $213.9 million in fiscal 2018 as compared to $210.6 million in fiscal 2017. As a percentage of net sales, SG&A expenses increased to 57.2% in fiscal 2018 as compared to 56.4% in fiscal 2017. Excluding non-GAAP charges of $7.8 million in fiscal 2018 and $17.7 million in fiscal 2017, SG&A expenses increased 6.8% or $13.2 million to $206.1 million in fiscal 2018; and SG&A expenses as a percentage of net sales increased to 55.1% in fiscal 2018 from 51.6% in fiscal 2017. This increase is primarily due to the direct ownership of the Northern China distributor, timing of marketing expenses and increased store-related costs partially offset by reduced employee-related costs.

Stuart Weitzman Operating Income decreased $18.1 million to an operating loss of $2.6 million in fiscal 2018, resulting in an operating margin of (0.7)%, as compared to an operating income of $15.5 million and operating margin of 4.2% in fiscal 2017. Excluding non-GAAP charges, Stuart Weitzman operating income decreased 69.2% or $25.1 million to $11.0 million from $36.1 million in fiscal 2017; and operating margin was 3.0% in fiscal 2018 as compared to 9.7% in fiscal 2017. The decrease in operating income was due to a decrease in gross profit and higher SG&A expenses.

FISCAL 2017 COMPARED TO FISCAL 2016

The following table summarizes results of operations for fiscal 2017 compared to fiscal 2016. All percentages shown in the tables below and the related discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	July 1, 2017							July 2, 2016							Variance
	(millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,488.3			100.0	%		$	4,491.8			100.0	%		$	(3.5	)		(0.1	)%
Gross profit	3,081.1				68.6			3,051.3				67.9			29.8				1.0
SG&A expenses	2,293.7				51.1			2,397.8				53.4			(104.1		)		(4.3	)
Operating income	787.4				17.5			653.5				14.5			133.9				20.5
Interest expense, net	28.4				0.6			26.9				0.6			1.5				5.5
Income before provision for income taxes	759.0				16.9			626.6				14.0			132.4				21.1
Provision for income taxes	168.0				3.7			166.1				3.7			1.9				1.2
Net income	591.0				13.2			460.5				10.3			130.5				28.3
Net Income per share:
Basic	$	2.11						$	1.66						$	0.45			27.0	%
Diluted	$	2.09						$	1.65						$	0.44			26.7	%

GAAP to Non-GAAP Reconciliation

The Company’s reported results are presented in accordance with GAAP. The reported results during fiscal 2017 and 2016 reflect the impact of the Operational Efficiency Plan, Stuart Weitzman and Kate Spade Acquisition-Related Costs and the Transformation Plan, as noted in the following tables.

Fiscal 2017 Items

	July 1, 2017
	GAAP Basis (As Reported)				Operational Efficiency Plan				Stuart Weitzman Acquisition-Related Costs				Kate Spade Acquisition-Related Costs				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,081.1			$	—			$	(2.9	)		$	—			$	3,084.0
SG&A expenses	2,293.7				24.0				(9.1		)		7.4				2,271.4
Operating income	787.4				(24.0		)		6.2				(7.4		)		812.6
Income before provision for income taxes	759.0				(24.0		)		6.2				(16.9		)		793.7
Provision for income taxes	168.0				(8.3		)		(1.5		)		(6.6		)		184.4
Net income	591.0				(15.7		)		7.7				(10.3		)		609.3
Diluted net income per share	2.09				(0.05		)		0.03				(0.04		)		2.15

In fiscal 2017, the Company incurred pre-tax adjustments as follows:

•	Operational Efficiency Plan - Total charges of $24.0 million primarily related to organizational efficiency costs, technology infrastructure costs and, to a lesser extent, network optimization costs.

•	Stuart Weitzman Acquisition-Related Costs - Total income of $6.2 million, primarily attributable to the reversal of an accrual of $35.2 million related to estimated contingent purchase price payments which were not paid, offset by integration-related costs.

•	Kate Spade Acquisition-Related Costs - Total charges of $16.9 million, of which $9.5 million is related to bridge financing fees and recorded in interest expense and $7.4 million is related to professional fees.

These actions taken together increased the Company's SG&A expenses by $22.3 million, interest expense by $9.5 million and cost of sales by $2.9 million, negatively impacting net income by $18.3 million, or $0.06 per diluted share. The following table summarizes GAAP to Non-GAAP charges by reportable segment through operating income for fiscal 2017:

	July 1, 2017
	GAAP Basis (As Reported)				Coach				Stuart Weitzman				Corporate(1)				Non-GAAP Basis (Excluding Items)
	(millions)
COGS
Stuart Weitzman Acquisition-Related Costs					—				(2.9		)		—
Gross profit	$	3,081.1			$	—			$	(2.9	)		$	—			$	3,084.0
SG&A
Stuart Weitzman Acquisition-Related Costs					—				17.7				(26.8		)
Kate Spade Acquisition-Related Costs					—				—				7.4
Operational Efficiency Plan					—				—				24.0
SG&A	$	2,293.7			$	—			$	17.7			$	4.6			$	2,271.4
Operating income	$	787.4			$	—			$	(20.6	)		$	(4.6	)		$	812.6

(1)	The Company incurred $9.5 million related to bridge financing fees recorded in interest expense within Corporate, which is not included in the above table.

Fiscal 2016 Items

	July 2, 2016
	GAAP Basis (As Reported)			Transformation and Other Actions			Operational Efficiency Plan			Stuart Weitzman Acquisition-Related Costs			Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,051.3		$	—		$	—		$	(1.1	)	$	3,052.4
SG&A expenses	2,397.8			44.1			43.9			34.0			2,275.8
Operating income	653.5			(44.1		)	(43.9		)	(35.1		)	776.6
Income before provision for income taxes	626.6			(44.1		)	(43.9		)	(35.1		)	749.7
Provision for income taxes	166.1			(10.7		)	(10.3		)	(10.9		)	198.0
Net income	460.5			(33.4		)	(33.6		)	(24.2		)	551.7
Diluted net income per share	1.65			(0.12		)	(0.12		)	(0.09		)	1.98

In fiscal 2016, the Company incurred pre-tax charges as follows:

•	Transformation and Other Actions - Total charges of $44.1 million primarily due to organizational efficiency costs, lease termination charges and accelerated depreciation as a result of store renovations within North America and select international stores.

•	Operational Efficiency Plan - Total charges of $43.9 million primarily related to organizational efficiency costs and, to a lesser extent, network optimization costs.

•

Stuart Weitzman Acquisition-Related Costs - Total charges of $35.1 million related to the acquisition of Stuart Weitzman Holdings LLC, of which $27.6 million is primarily related to charges attributable to contingent payments and integration-related activities and $7.5 million is related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the order backlog asset, distributor relationships and inventory step-up.

These actions taken together increased the Company's SG&A expenses by $122.0 million and cost of sales by $1.1 million, negatively impacting net income by $91.2 million, or $0.33 per diluted share. The following table summarizes GAAP to Non-GAAP charges by reportable segment through operating income for fiscal 2016:

	July 2, 2016
	GAAP Basis (As Reported)				Coach				Stuart Weitzman				Corporate				Non-GAAP Basis (Excluding Items)
	(millions)
COGS
Integration & Acquisition					—				(1.1		)		—
Gross profit	$	3,051.3			$	—			$	(1.1	)		$	—			$	3,052.4
SG&A
Transformation and Other Actions					—				—				44.1
Stuart Weitzman Acquisition-Related Costs					—				14.6				19.4
Operational Efficiency Plan					—				—				43.9
SG&A	$	2,397.8			$	—			$	14.6			$	107.4			$	2,275.8
Operating income	$	653.5			$	—			$	(15.7	)		$	(107.4	)		$	776.6

Tapestry, Inc. Summary - Fiscal 2017

Currency Fluctuation Effects

The change in net sales in fiscal 2017 has been presented both including and excluding currency fluctuation effects.

Net Sales

Net sales in fiscal 2017 decreased slightly by 0.1% to $4.49 billion, with no material impact from foreign currency. Net sales in fiscal 2016 includes the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net sales of $84.4 million. Excluding the impact of the 53rd week in fiscal 2016, net sales increased by $80.9 million or 1.8%. This was due to an increase in both Coach and Stuart Weitzman.

Gross Profit

Gross profit increased 1.0% or $29.8 million to $3.08 billion in fiscal 2017 from $3.05 billion in fiscal 2016. Gross margin for fiscal 2017 was 68.6% as compared to 67.9% in fiscal 2016. Excluding Non-GAAP charges of $2.9 million in fiscal 2017 and $1.1 million in fiscal 2016, gross profit increased 1.0% or $31.6 million to $3.08 billion from $3.05 billion in fiscal 2016, and gross margin was 68.7% in fiscal 2017 as compared to 68.0% in fiscal 2016, an increase of 70 basis points.

Selling, General and Administrative Expenses

SG&A expenses decreased 4.3% or $104.1 million to $2.29 billion in fiscal 2017 as compared to $2.40 billion in fiscal 2016. As a percentage of net sales, SG&A expenses decreased to 51.1% during fiscal 2017 as compared to 53.4% during fiscal 2016. Excluding non-GAAP charges of $22.3 million in fiscal 2017 and $122.0 million in fiscal 2016, SG&A expenses decreased 0.2% or $4.4 million from fiscal 2016; and SG&A expenses as a percentage of net sales remained relatively consistent at 50.6% in fiscal 2017 compared to 50.7% in fiscal 2016.

Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, decreased 33.6% or $135.3 million to $268.1 million in fiscal 2017 as compared to $403.4 million in fiscal 2016. This decrease was primarily attributable due to lower non-GAAP charges incurred by the Company in fiscal 2017 as compared to fiscal 2016. Excluding non-GAAP charges, Corporate expenses decreased by $32.5 million to $263.5 million. This decrease is primarily due to lower employee costs related to headcount and litigation costs, partially offset by higher occupancy costs.

Operating Income

Operating income increased 20.5% or $133.9 million to $787.4 million during fiscal 2017 as compared to $653.5 million in fiscal 2016. Operating margin increased to 17.5% as compared to 14.5% in fiscal 2016. Excluding non-GAAP charges of $25.2 million in fiscal 2017 and $123.1 million in fiscal 2016, operating income increased 4.6% or $36.0 million to $812.6 million from $776.6 million in fiscal 2016; and operating margin was 18.1% in fiscal 2017 as compared to 17.3% in fiscal 2016.

Provision for Income Taxes

The effective tax rate was 22.1% in fiscal 2017, as compared to 26.5% in fiscal 2016. Excluding non-GAAP charges, the effective tax rate was 23.2% in fiscal 2017, as compared to 26.4% in fiscal 2016. The decrease in our effective tax rate was primarily attributable to the geographical mix of earnings and the U.S. income earned on foreign investments.

Net Income

Net income increased 28.3% or $130.5 to $591.0 million in fiscal 2017 as compared to $460.5 million in fiscal 2016. Excluding non-GAAP charges, net income increased 10.4% or $57.5 million to $609.3 million in fiscal 2017 from $551.7 million in fiscal 2016. This increase was primarily due to higher operating income.

Earnings per Share

Net income per diluted share increased 26.7% to $2.09 in fiscal 2017 as compared to $1.65 in fiscal 2016. Excluding non-GAAP charges, net income per diluted share increased 9.1% or $0.17 to $2.15 in fiscal 2017 from $1.98 in fiscal 2016, due to higher net income. The impact of the 53rd week in fiscal 2016 contributed approximately $0.07 to net income per diluted share.

Segment Performance - Fiscal 2017

Coach

	Fiscal Year Ended
	July 1, 2017							July 2, 2016							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,114.7			100.0	%		$	4,147.1			100.0	%		$	(32.4	)		(0.8	)%
Gross profit	2,855.0				69.4			2,848.9				68.7			6.1				0.2
SG&A expenses	1,815.0				44.1			1,824.5				44.0			(9.5		)		(0.5	)
Operating income	1,040.0				25.3			1,024.4				24.7			15.6				1.5

Coach Net Sales decreased 0.8% or $32.4 million to $4.11 billion in fiscal 2017. Net sales for the Coach brand was not materially impacted by foreign currency. Excluding the impact of the 53rd week in fiscal 2016 of $77.0 million, net sales increased $44.6 million or 1.1% in fiscal 2017. This increase was due to an increase in comparable store sales of $44.1 million or 1.2% when comparing to fiscal 2016, which was driven by higher conversion. Excluding the impact of the Internet, comparable store sales increased 1.5%. Net sales attributable to non-comparable stores increased by $29.5 million primarily driven by new stores in Greater China and Europe. These increases were offset by lower sales to wholesale customers of $41.6 million due to the Company's strategic decision to elevate the Coach's brand positioning in the channel, specifically in North America, by limiting participation in promotional events and closing approximately 25% of its wholesale doors by the end of fiscal 2017.

Coach Gross Profit increased 0.2% or $6.1 million to $2.86 billion in fiscal 2017. Excluding the 53rd week in fiscal 2016, gross profit increased by $55.1 million. Gross margin increased 70 basis points to 69.4% in fiscal 2017 from 68.7% in fiscal 2016, which was not materially impacted by the year over year change in foreign currency rates. This increase was due to improved costing and product mix which was offset by promotional activity.

Coach SG&A Expenses remained relatively consistent with a slight decrease of 0.5% or $9.5 million to $1.82 billion in fiscal 2017. As a percentage of net sales, SG&A expenses increased to 44.1% in fiscal 2017 as compared to 44.0% in fiscal 2016.

Coach Operating Income increased 1.5% or $15.6 million to $1.04 billion in fiscal 2017 reflecting lower SG&A expenses of $9.5 million coupled with an increase in gross profit of $6.1 million. Operating margin increased 60 basis points to 25.3% in fiscal 2017 from 24.7% during the same period in the prior year.

Stuart Weitzman

	Fiscal Year Ended
	July 1, 2017							July 2, 2016							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	373.6			100.0	%		$	344.7			100.0	%		$	28.9			8.4	%
Gross profit	226.1				60.5			202.4				58.7			23.7				11.7
SG&A expenses	210.6				56.4			169.9				49.3			40.7				24.0
Operating income (loss)	15.5				4.2			32.5				9.4			(17.0		)		(52.2	)

Stuart Weitzman Net Sales increased 8.4% or $28.9 million to $373.6 million in fiscal 2017, which was not materially impacted by changes in foreign currency. Fiscal 2016 included net sales of $7.4 million as a result of the 53rd week. This increase was primarily due to $35.2 million in the retail channel due to the acquisition of the Stuart Weitzman Canadian distributor in the fourth quarter of fiscal 2016, positive comparable store sales and net store openings. This was partially offset by lower wholesale net sales of $7.0 million. Prior year wholesale net sales included shipments into the Canadian distributor. Since the end of the fiscal 2016, Stuart Weitzman opened a net 6 new stores.

Stuart Weitzman Gross Profit increased 11.7% or $23.7 million to $226.1 million in fiscal 2017. Gross profit in the 53rd week of fiscal 2016 was $4.0 million. Gross margin increased 180 basis points to 60.5% in fiscal 2017 from 58.7% in fiscal 2016. Excluding non-GAAP charges of $2.9 million in fiscal 2017 and $1.1 million in fiscal 2016, gross profit increased 12.5% or $25.5 million to $229.0 million, resulting in a gross margin of 61.3% in fiscal 2017 as compared to 59.1% in fiscal 2016. The increase in gross margin is primarily attributable to a shift in channel mix.

Stuart Weitzman SG&A Expenses increased 24.0% or $40.7 million to $210.6 million in fiscal 2017. As a percentage of net sales, SG&A expenses increased to 56.4% in fiscal 2017 as compared to 49.3% in fiscal 2016. Excluding non-GAAP charges of $17.7 million in fiscal 2017 and $14.6 million in fiscal 2016, SG&A expenses increased 24.3% or $37.6 million to $192.9 million; and SG&A expenses as a percentage of net sales increased to 51.6% in fiscal 2017 compared to 45.0% in fiscal 2016. This increase is due to increased investments in stores and increased marketing expenses.

Stuart Weitzman Operating Income decreased $17.0 million to $15.5 million in fiscal 2017, resulting in an operating margin of 4.2%, compared to an operating income of $32.5 million and operating margin of 9.4% in fiscal 2016. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, which reflect acquisition and integration-related costs, Stuart Weitzman operating income totaled $36.1 million in fiscal 2017, resulting in an operating margin of 9.7%. This compared to Stuart Weitzman operating income of $48.2 million in fiscal 2016, resulting in an operating margin of 14.0%.

NON-GAAP MEASURES

The Company’s reported results are presented in accordance with GAAP. The reported gross profit, SG&A expenses, operating income, provision for income taxes, net income and earnings per diluted share in fiscal 2018, fiscal 2017 and fiscal 2016 reflect certain items, including the impact of Integration and Acquisition costs for acquired companies by Tapestry, the Operational Efficiency Plan, the impact of the Tax Legislation enacted in the second quarter of fiscal 2018 and the Transformation Plan. As a supplement to the Company's reported results, these metrics are also reported on a non-GAAP basis to exclude the impact of these items, along with a reconciliation to the most directly comparable GAAP measures.

Comparable store sales, which is a non-GAAP measure, reflects sales performance at stores that have been open for at least 12 months, and includes sales from the Internet. In certain instances, orders placed via the Internet are fulfilled by a physical store; such sales are recorded by the physical store. The Company excludes new locations, including newly acquired stores, from the comparable store base for the first twelve months of operation. Comparable store sales have not been adjusted for store expansions. Kate Spade comparable store sales have been calculated using this methodology by comparing current period sales to sales during the equivalent pre-acquisition period.

Furthermore, the Company’s sales and earnings per diluted share results are presented both including and excluding the impact of the 53rd week in fiscal year 2016.

These non-GAAP performance measures were used by management to conduct and evaluate its business during its regular review of operating results for the periods affected. Management and the Company’s Board utilized these non-GAAP measures to make decisions about the uses of Company resources, analyze performance between periods, develop internal projections and measure management performance. The Company’s primary internal financial reporting excluded these items. In addition, the compensation committee of the Company’s Board will use these non-GAAP measures when setting and assessing achievement of incentive compensation goals.

The Company operates on a global basis and reports financial results in U.S. dollars in accordance with GAAP. Fluctuations in foreign currency exchange rates can affect the amounts reported by the Company in U.S. dollars with respect to its foreign revenues and profit. Accordingly, certain increases and decreases in operating results for the Company, the Coach segment and the Stuart Weitzman segment have been presented both including and excluding currency fluctuation effects. These effects occur from translating foreign-denominated amounts into U.S. dollars and comparing to the same period in the prior fiscal year. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency revenue results by translating current period revenue in local currency using the prior year period's monthly average currency conversion rate.

We believe these non-GAAP measures are useful to investors and others in evaluating the Company’s ongoing operating and financial results in a manner that is consistent with management’s evaluation of business performance and understanding how such results compare with the Company’s historical performance. Additionally, we believe presenting certain increases and decreases in constant currency provides a framework for assessing the performance of the Company’s business outside the United States and helps investors and analysts understand the effect of significant year-over-year currency fluctuations. We believe excluding these items assists investors and others in developing expectations of future performance.

By providing the non-GAAP measures, as a supplement to GAAP information, we believe we are enhancing investors’ understanding of our business and our results of operations. The non-GAAP financial measures are limited in their usefulness and should be considered in addition to, and not in lieu of, U.S. GAAP financial measures. Further, these non-GAAP measures may be unique to the Company, as they may be different from non-GAAP measures used by other companies.

For a detailed discussion on these non-GAAP measures, refer to Item 6. "Selected Financial Data," and the Results of Operations section within Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" herein.

FINANCIAL CONDITION

Cash Flows - Fiscal 2018 Compared to Fiscal 2017

		Fiscal Year Ended
		July 1, 2018				July 1, 2017				Change
		(millions)
Net cash provided by operating activities		$	996.7			$	853.8			$	142.9
Net cash (used in) provided by investing activities		(2,164.8		)		593.0				(2,757.8		)
Net cash (used in) provided by financing activities		(249.9		)		369.5				(619.4		)
Effect of exchange rate changes on cash and cash equivalents		(11.5		)		(2.4		)		(9.1		)
Net (decrease) increase in cash and cash equivalents		$	(1,429.5	)		$	1,813.9			$	(3,243.4	)

The Company’s cash and cash equivalents decreased by $1.43 billion in fiscal 2018 compared to an increase of $1.81 billion in fiscal 2017, as discussed below.

Net cash provided by operating activities

Net cash provided by operating activities increased $142.9 million primarily due to changes in operating assets and liabilities of $265.7 million and lower non-cash charges of $70.7 million, partially offset by lower net income of $193.5 million.

The $265.7 million increase in changes in our operating asset and liability balances was primarily driven by changes in other liabilities, inventories, accrued liabilities and other assets, partially offset by changes in accounts payable, as follows:

•	Other liabilities changed by $211.1 million. They were a source of cash of $157.7 million in fiscal 2018 compared to a use of cash of $53.4 million in fiscal 2017, primarily driven by an increase in the Company's long-term income tax payable as a result of the Transition Tax.

•	Inventories changed by $50.4 million. They were a source of cash of $30.4 million in fiscal 2018 as compared to a use of cash of $20.0 million in fiscal 2017, primarily driven by Kate Spade inventory balances as a result of heightened focus on inventory management.

•	Accrued liabilities changed by $33.2 million. They were a use of cash of $16.9 million in fiscal 2018 as compared to a use of cash of $50.1 million in fiscal 2017, primarily driven by the timing of employee-related costs.

•	Other assets changed by $32.9 million. They were a source of cash of $80.9 million in fiscal 2018 as compared to a source of cash of $48.0 million in fiscal 2017, primarily driven by timing of income tax payments.

•	Accounts payable changed by $85.7 million. They were a use of cash of $77.3 million in fiscal 2018 as compared to a source of cash in fiscal 2017 of $8.4 million, primarily driven by the timing of Kate Spade and Coach inventory payments.

Net cash (used in) provided by investing activities

Net cash used in investing activities was $2.16 billion in fiscal 2018 compared to a source of cash of $593.0 million in fiscal 2017, resulting in a $2.76 billion increase in net cash used in investing activities.

The $2.16 billion use of cash in fiscal 2018 is primarily due to the $2.38 billion purchase of Kate Spade and other acquisitions, net of cash acquired, and capital expenditures of $267.4 million. This use of cash was partially offset by net cash proceeds from maturities and sales of investments of $478.4 million.

The $593.0 million source of cash in fiscal 2017 primarily consisted of proceeds from the sale of the Company's equity method investment in Hudson Yards of $680.6 million, the sale of our prior headquarters of $126.0 million and net proceeds from maturities and sales of investments of $67.7 million in fiscal 2017, which was partially offset by capital expenditures of $283.1 million.

Net cash (used in) provided by financing activities

Net cash used in financing activities was $249.9 million in fiscal 2018 as compared to a source of cash of $369.5 million in fiscal 2017, resulting in a net decrease in cash of $619.4 million.

The $249.9 million of cash used in fiscal 2018 was primarily due to dividend payments of $384.1 million which were partially offset by proceeds from share-based awards of $165.7 million. The Company also borrowed and repaid debt of $1.10 billion within the fiscal year.

The $369.5 million of cash proceeds in fiscal 2017 was primarily due the net proceeds from the issuance of debt of $712.2 million, partially offset by dividend payments of $378.0 million.

Cash Flows - Fiscal 2017 Compared to Fiscal 2016

		Fiscal Year Ended
		July 1, 2017				July 2, 2016				Change
		(millions)
Net cash provided by operating activities		$	853.8			$	758.6			$	95.2
Net cash provided by (used in) investing activities		593.0				(810.0		)		1,403.0
Net cash provided by (used in) financing activities		369.5				(384.9		)		754.4
Effect of exchange rate changes on cash and cash equivalents		(2.4		)		3.5				(5.9		)
Net increase (decrease) in cash and cash equivalents		$	1,813.9			$	(432.8	)		$	2,246.7

The Company’s cash and cash equivalents increased by $1.81 billion in fiscal 2017 compared to a decrease of $432.8 million in fiscal 2016, as discussed below.

Net cash provided by operating activities

Net cash provided by operating activities increased $95.2 million primarily due to higher net income of $130.5 million and higher non-cash charges of $98.5 million, partially offset by changes in operating assets and liabilities of $133.8 million.

The $133.8 million decline in changes in our operating asset and liability balances was primarily driven by changes in other liabilities, accrued liabilities and inventories, partially offset by changes in accounts payable and other assets. Other liabilities were a use of cash of $53.4 million in fiscal 2017 compared to a source of cash of $49.5 million in fiscal 2016, primarily driven by changes in tax liabilities (including the expiration of statutes during the quarter), partially offset by higher store-related liabilities in fiscal 2016. Accrued liabilities were a use of cash of $50.1 million in fiscal 2017 as compared to a source of cash of $30.1 million in fiscal 2016, primarily driven by changes in derivative positions due to foreign currency fluctuations and timing of other operating payments. Inventories were a use of cash of $20.0 million in fiscal 2017 as compared to a source of cash of $40.7 million in fiscal 2016, primarily driven by increased inventory purchases. Accounts payable were a source of cash of $8.4 million in fiscal 2017 as compared to a use of cash in fiscal 2016 of $48.4 million, primarily driven by timing of inventory payments and other expenses. Other assets were a source of cash of $48.0 million in fiscal 2017 as compared to a use of cash of $6.3 million in fiscal 2016, primarily driven by lower prepaid assets when compared to prior year.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $593.0 million in fiscal 2017 compared to a use of cash of $810.0 million in fiscal 2016. The $1.40 billion increase in net cash was primarily due to proceeds from the sale of the Company's equity method investment in Hudson Yards of $680.6 million in fiscal 2017, the impact of net cash proceeds from maturities and sales of investments of $67.7 million in fiscal 2017, compared to net purchases of investments of $238.8 million in fiscal 2016. This increase is also due to the absence of an equity method investment in fiscal 2017 as compared to a $140.3 million investment in fiscal 2016. Furthermore, in fiscal 2017, the Company received proceeds from the sale of its prior headquarters of $126.0 million. The Company spent $283.1 million on capital expenditures in fiscal 2017 as compared to $396.4 million in fiscal 2016.

Net cash provided by (used in) financing activities

Net cash provided by financing activities was $369.5 million in fiscal 2017 as compared to a use of cash of $384.9 million in fiscal 2016. This net increase of $754.4 million was primarily due to the net proceeds of the issuance of Senior Notes in fiscal 2017 of $997.2 million, partially offset by the repayment of long-term debt of $285.0 million.

Working Capital and Capital Expenditures

As of June 30, 2018, in addition to our cash flows from operations, our sources of liquidity and capital resources were comprised of the following:

	Sources of Liquidity				Outstanding Indebtedness				Total Available Liquidity(1)
	(millions)
Cash and cash equivalents(1)	$	1,243.4			$	—			$	1,243.4
Short-term investments(1)	6.6				—				6.6
Revolving Credit Facility(2)	900.0				—				900.0
3.000% Senior Notes due 2022(3)	400.0				400.0				—
4.250% Senior Notes due 2025(3)	600.0				600.0				—
4.125% Senior Notes due 2027(3)	600.0				600.0				—
Total	$	3,750.0			$	1,600.0			$	2,150.0

(1)

As of June 30, 2018, approximately 73% of our cash and short-term investments were held outside the United States. Before the Tax Legislation, the Company considered the earnings of its non-U.S. subsidiaries to be indefinitely reinvested, and accordingly, recorded no deferred income taxes on these earnings. In fiscal 2018, we have analyzed our global working capital and cash requirements, and the potential tax liabilities associated with repatriation, and have determined that we will likely repatriate some portion of available foreign cash in the foreseeable future. See Note 14, "Income Taxes" for more information.

(2)

In May 2017, the Company entered into a definitive credit agreement whereby Bank of America, N.A., as administrative agent, the other agents party thereto, and a syndicate of banks and financial institutions have made available to the Company a $900.0 million revolving credit facility, including sub-facilities for letters of credit, with a maturity date of May 30, 2022 (the "Revolving Credit Facility" and collectively with the Term Loan Facilities, the "Facility"). Borrowings under the Facility bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or (b) a rate based on the rates applicable for deposits in the interbank 47 market for U.S. Dollars or the applicable currency in which the loans are made plus, in each case, an applicable margin. The applicable margin will be determined by reference to a grid, defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus 600% of consolidated lease expense to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid. The Company had no outstanding borrowings under the Revolving Credit Facility at fiscal year-end. Refer to Note 11, "Debt," for further information on our existing debt instruments.

(3)

In March 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the "2025 Senior Notes"). Furthermore, on June 20, 2017, the Company issued $400.0 million aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at 99.505% of par (the "2022 Senior Notes"), and $600.0 million aggregate principal amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Furthermore, the indentures for the 2025 Senior Notes, 2022 Senior Notes and 2027 Senior Notes contain certain covenants limiting the Company's ability to: (i) create certain liens, (ii) enter into certain sale and leaseback transactions and (iii) merge, or consolidate or transfer, sell or lease all or substantially all of the Company's assets. As of June 30, 2018, no known events of default have occurred. Refer to Note 11, "Debt," for further information on our existing debt instruments.

We believe that our Revolving Credit Facility is adequately diversified with no undue concentrations in any one financial institution. As of June 30, 2018, there were 13 financial institutions participating in the Revolving Credit Facility, with no one participant maintaining a combined maximum commitment percentage in excess of 13%. We have no reason to believe at this time that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the facility in the event we elect to draw funds in the foreseeable future.

We have the ability to draw on our credit facilities or access other sources of financing options available to us in the credit and capital markets for, among other things, our restructuring initiatives, acquisition or integration-related costs, settlement of a material contingency, or a material adverse business or macroeconomic development, as well as for other general corporate business purposes.

Management believes that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments will provide adequate funds to support our operating, capital, and debt service requirements for the foreseeable future, our plans for acquisitions, further business expansion and restructuring-related initiatives.

We expect total capital expenditures to be in the range of $300 to $325 million in fiscal 2019. Future events, such as acquisitions or joint ventures, and other similar transactions may require additional capital. There can be no assurance that any such capital will be available to the Company on acceptable terms or at all. Our ability to fund working capital needs, planned capital expenditures, dividend payments and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control.

Seasonality

The Company's results are typically affected by seasonal trends. During the first fiscal quarter, we build inventory for the holiday selling season. In the second fiscal quarter, working capital requirements are reduced substantially as we generate higher net sales and operating income, especially during the holiday months of November and December.

Fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events.

Contractual and Other Obligations

Firm Commitments

As of June 30, 2018, the Company's contractual obligations are as follows:

		Total				Fiscal 2019				Fiscal 2020 – 2021				Fiscal 2022 – 2023				Fiscal 2024 and Beyond
		(millions)
Capital expenditure commitments		$	21.5			$	21.5			$	—			$	—			$	—
Inventory purchase obligations		342.8				342.8				—				—				—
Operating lease obligations		2,768.3				384.8				643.8				528.6				1,211.1
Capital lease obligations		9.7				1.4				2.8				2.8				2.7
Debt repayment		1,611.4				—				11.4				400.0				1,200.0
Interest on outstanding debt		468.6				62.7				125.1				118.5				162.3
Mandatory transition tax payments(1)		266.0				43.6				42.4				60.9				119.1
Other		31.0				14.2				16.0				0.8				—
Total		$	5,519.3			$	871.0			$	841.5			$	1,111.6			$	2,695.2

(1)	Mandatory transition tax payments represent our tax obligation incurred in connection with the deemed repatriation of previously deferred foreign earnings pursuant to the Tax Legislation. These amounts represent the Company's best estimate as of June 30, 2018, but may change based on refinements to the calculation. Refer to Note 14, "Income Taxes," for further information.

Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $75.6 million as of June 30, 2018, as we cannot make a reliable estimate of the period in which the liability will be settled, if ever. The above table also excludes amounts included in current liabilities in the Consolidated Balance Sheet at June 30, 2018 as these items will be paid within one year, certain long-term liabilities not requiring cash payments and cash contributions for the Company’s pension plan.

Off-Balance Sheet Arrangements

In addition to the commitments included in the table above, we have outstanding letters of credit, surety bonds and bank guarantees of $35.1 million as of June 30, 2018, primarily serving to collateralize our obligation to third parties for duty, leases, insurance claims and materials used in product manufacturing. These letters of credit expire at various dates through 2039.

We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships with unconsolidated entities that would be expected to have a material current or future effect on our consolidated financial statements. Refer to Note 12, "Commitments and Contingencies," for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 our results of operations, financial condition and cash flows as well as the disclosure of contingent assets and liabilities as of the date of the Company's financial statements. Actual results could differ from estimates in amounts that may be material to the financial statements. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ from estimates in amounts that may be material to the financial statements. The development and selection of the Company’s critical accounting policies and estimates are periodically reviewed with the Audit Committee of the Board.

The accounting policies discussed below are considered critical because changes to certain judgments and assumptions inherent in these policies could affect the financial statements. For more information on the Company's accounting policies, please refer to the Notes to Consolidated Financial Statements.

Revenue Recognition

Revenue is recognized by the Company when there is persuasive evidence of an arrangement, delivery has occurred (and risks and rewards of ownership have been transferred to the buyer), price has been fixed or is determinable, and collectability is reasonably assured.

Retail store and concession-based shop-in-shop revenues are recognized at the point-of-sale, which occurs when merchandise is sold in an over-the-counter consumer transaction. Internet revenue from sales of products ordered through the Company’s e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and internet revenues are also reduced by an estimate for returns at the time of sale.

Wholesale revenue is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of markdown allowances, returns and discounts. Estimates for markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Returns and allowances require pre-approval from management and discounts are based on trade terms. The Company reviews and refines these estimates on a quarterly basis. The Company’s historical estimates of these costs have not differed materially from actual results.

At June 30, 2018, a 10% change in the allowances for estimated uncollectible accounts, markdowns and returns would not have resulted in a material change in the Company's reserves and net sales.

Inventories

Substantially all of the Company's inventories are comprised of finished goods, and are reported at the lower of cost or market. Inventory costs include material, conversion costs, freight and duties and are primarily determined by the first-in, first-out method. The Company reserves for inventory, including slow-moving and aged inventory, based on current product demand, expected future demand and historical experience. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could impact the Company's evaluation of its inventory and additional reserves might be required. Estimates may differ from actual results due to the quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. At June 30, 2018, a 10% change in the inventory reserve, would not have resulted in material change in inventory and cost of sales.

Business Combinations

In connection with an acquisition, the Company records all assets acquired and liabilities assumed of the acquired business at their acquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair value determinations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in making these fair value determinations. If goodwill is identified based upon the valuation of an acquired business, the goodwill is assigned to the reporting units which will benefit from the synergies that result from the business combination and reported within the segment that such reporting units comprise. Refer to Note 3, "Acquisitions," for detailed disclosures related to our acquisitions.

Goodwill and Other Intangible Assets

Goodwill and certain other intangible assets deemed to have indefinite useful lives, including brand intangible assets, are not amortized, but are assessed for impairment at least annually. Finite-lived intangible assets are amortized over their respective estimated useful lives and, and along with other long-lived assets as noted above, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Estimates of fair value for finite-lived and indefinite-lived intangible assets are primarily determined using discounted cash flows and the multi-period excess earnings method, respectively, with consideration of market comparisons. This approach uses significant estimates and assumptions, including projected future cash flows, discount rates and growth rates.

The Company generally performs its annual goodwill and indefinite-lived intangible assets impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of each reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill allocated to that reporting unit.

Determination of the fair value of a reporting unit and intangible asset is based on management's assessment, considering independent third-party appraisals when necessary. Furthermore, this determination is judgmental in nature and often involves the use of significant estimates and assumptions, which may include projected future cash flows, discount rates, growth rates, and determination of appropriate market comparables and recent transactions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge.

The Company performs its annual impairment assessment of goodwill as well as brand intangibles during the fourth quarter of each fiscal year. The Company determined that there was no impairment in fiscal 2018, fiscal 2017 or fiscal 2016 as the fair values of our Coach brand reporting units significantly exceeded their respective carrying values. The Company determined that there was no impairment in fiscal 2018 as the fair values of the Kate Spade brand reporting unit and indefinite-lived brand significantly exceeded their respective carrying values. Furthermore, the fair values of the Stuart Weitzman brand reporting unit and indefinite-lived brand exceeded their respective carrying values by approximately 15% and 90%, respectively. Several factors could impact the Stuart Weitzman brand's ability to achieve future cash flows, including the management of the supply chain operational challenges at Stuart Weitzman, the success of international expansion strategies including the consolidation or take-back and integration of certain distributor relationships, the optimization of the store fleet productivity, the impact of promotional activity in department stores, the simplification of certain corporate overhead structures and other initiatives aimed at expanding higher performing categories of the business. Given the relatively small excess of fair value over carrying value as noted above, if profitability trends decline during fiscal 2019 from those that are expected, it is possible that an interim test, or our annual impairment test, could result in an impairment of these assets.

Valuation of Long-Lived Assets

Long-lived assets, such as property and equipment, are evaluated for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions.

In determining future cash flows, the Company takes various factors into account, including the effects of macroeconomic trends such as consumer spending, in-store capital investments, promotional cadence, the level of advertising and changes in merchandising strategy. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations.

Share-Based Compensation

The Company recognizes the cost of equity awards to employees and the non-employee Directors based on the grant-date fair value of those awards. The grant-date fair values of share unit awards are based on the fair value of the Company's common stock on the date of grant. The grant-date fair value of stock option awards is determined using the Black-Scholes option pricing model and involves several assumptions, including the expected term of the option, expected volatility and dividend yield. The expected term of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience. Expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publicly traded options on the Company's stock. Dividend yield is based on the current expected annual dividend per share and the Company’s stock price. Changes in the assumptions used to determine the Black-Scholes value could result in significant changes in the Black-Scholes value.

For stock options and share unit awards, the Company recognizes share-based compensation net of estimated forfeitures and revises the estimates in subsequent periods if actual forfeitures differ from the estimates. We estimate the forfeiture rate based on historical experience as well as expected future behavior.

The Company grants performance-based share awards to certain key executives, the vesting of which is subject to the executive’s continuing employment and the Company's achievement of certain performance goals. On a quarterly basis, the Company assesses actual performance versus the predetermined performance goals, and adjusts the share-based compensation expense to reflect the relative performance achievement. Actual distributed shares are calculated upon conclusion of the service and performance periods, and include dividend equivalent shares. If the performance-based award incorporates a market condition, the grant-date fair value of such award is determined using a pricing model, such as a Monte Carlo Simulation.

A hypothetical 10% change in our stock-based compensation expense would not have a material impact to our fiscal 2018 net income.

Income Taxes

The Company’s effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations, and tax planning strategies available in the various jurisdictions in which the Company operates. The Company classifies interest and penalties on uncertain tax positions in the provision for income taxes. We record net deferred tax assets to the extent we believe that it is more likely than not that these assets will be realized. In making such determination, we consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operation. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some amount of deferred tax assets is not expected to be realized. Before the Tax Legislation, the Company considered the earnings of its non-U.S. subsidiaries to be indefinitely reinvested, and accordingly, recorded no deferred income taxes on these earnings. We are partially changing our assertion in fiscal 2018, and have recorded an estimate of the deferred tax impact associated with this change.

The Company recognizes the impact of tax positions in the financial statements if those positions will more likely than not be sustained on audit, based on the technical merits of the position. Although we believe that the estimates and assumptions we use are reasonable and legally supportable, the final determination of tax audits could be different than that which is reflected in historical tax provisions and recorded assets and liabilities. Tax authorities periodically audit the Company’s income tax returns, and in specific cases, the tax authorities may take a contrary position that could result in a significant impact on our results of operations. Significant management judgment is required in determining the effective tax rate, in evaluating our tax positions and in determining the net realizable value of deferred tax assets.

Refer to Note 14, “Income Taxes,” for further information.

Recent Accounting Pronouncements

Refer to Note 2, "Significant Accounting Policies," to the accompanying audited consolidated financial statements for a description of certain recently adopted, issued or proposed accounting standards which may impact our consolidated financial statements in future reporting periods.