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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 2017
Commission file number 001-36501
THE MICHAELS COMPANIES, INC.
A Delaware Corporation
IRS Employer Identification No. 37-1737959
8000 Bent Branch Drive
Irving, Texas 75063
(972) 409-1300
The Michaels Companies, Inc.’s common stock, par value $0.06775 per share, is registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934 (the “Act) and is listed on the NASDAQ Global Select Market. The Michaels Companies, Inc. does
not have any securities registered under Section 12(g) of the Act.
The Michaels Companies, Inc. is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
The Michaels Companies, Inc. (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.
The Michaels Companies, Inc. has submitted electronically and posted on its corporate website, 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).
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will be contained, to the best
of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The Michaels Companies, Inc. is a large accelerated filer.
The Michaels Companies, Inc. is not a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of The Michaels Companies, Inc.’s common stock held by non-affiliates as of July 30, 2016 was
approximately $2,415,252,000 based upon the closing sales price of $26.36 quoted on The NASDAQ Global Select Market as of
July 29, 2016. For this purpose, directors and officers have been assumed to be affiliates.
As of March 1, 2017, 188,894,383 shares of The Michaels Companies, Inc.’s common stock were outstanding.
The registrant will incorporate by reference information required in response to Part III, items 10-14, from its definitive proxy
statement for its annual meeting of shareholders, to be held on June 7, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
THE MICHAELS COMPANIES, INC.
TABLE OF CONTENTS
Part I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Item 6. Selected Financial Data
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV.
Item 15. Exhibits and Financial Statement Schedules
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ITEM 1. BUSINESS.
PART I
The following discussion, as well as other portions of this Annual Report on Form 10-K, contains
forward-looking statements that reflect our plans, estimates and beliefs. Any statements contained herein
(including, but not limited to, statements to the effect that Michaels or its management “anticipates”, “plans”,
“estimates”, “expects”, “believes”, “intends”, and other similar expressions) that are not statements of
historical fact should be considered forward-looking statements and should be read in conjunction with our
consolidated financial statements and related notes contained elsewhere in this report. Specific examples of
forward-looking statements include, but are not limited to, statements regarding our forecasts of financial
performance, share repurchases, store openings, capital expenditures and working capital requirements. Our
actual results could materially differ from those discussed in these forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to, those discussed below and
elsewhere in this Annual Report on Form 10-K and particularly in “Item 1A. Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Unless the context
otherwise indicates, references in this Annual Report on Form 10-K to “we”, “our”, “us”, “our Company”,
“the Company”, and “Michaels” mean The Michaels Companies, Inc., together with its subsidiaries.
General
Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of
Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels
Companies, Inc. was incorporated in Delaware in connection with the reorganization.
With $5,197.3 million in sales in fiscal 2016, the Company is the largest arts and crafts specialty
retailer in North America (based on store count) providing materials, project ideas and education for creative
activities. Our mission is to inspire and enable customer creativity, create a fun and rewarding place to work,
foster meaningful connections with our communities and lead the industry in growth and innovation. With
crafting classes, store events, project sheets, store displays, mobile applications and online videos, we offer a
shopping experience that can inspire creativity and build confidence in our customers’ artistic abilities.
On February 2, 2016, we completed the acquisition of Lamrite West, Inc. and certain of its affiliates
and subsidiaries (“Lamrite”) for $150.0 million, prior to certain purchase price adjustments, utilizing our
existing cash on hand. Lamrite operates an international wholesale business under the Darice brand name
(“Darice”) and 35 arts and crafts retail stores, located primarily in Ohio and the surrounding states, under the
Pat Catan’s brand name (“Pat Catan’s”). We acquired Lamrite to enhance our private brand development
capabilities, accelerate our direct sourcing initiatives and strengthen our business-to-business capabilities.
As of January 28, 2017, we operated 1,223 Michaels retail stores in 49 states and Canada, with
approximately 18,000 average square feet of selling space per store. We operated 109 Aaron Brothers stores in
nine states, with approximately 5,500 average square feet of selling space and 35 Pat Catan’s stores in five
states, with approximately 32,000 average square feet of selling space. We also operate an international
wholesale business under the Darice brand name.
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Merchandising
Michaels. Each Michaels store offers approximately 33,000 basic stock-keeping units (“SKUs”) in a
number of product categories. The following table shows a breakdown of sales for Michaels stores by
department as a percentage of total net sales:
General crafts
Home décor and seasonal
Framing
Papercrafting
Fiscal Year
2015
2016
2014
50 %
22
17
11
100 % 100 %
52 %
21
17
10
52 %
21
17
10
100 %
We have a product development and design team focused on quality, innovation and cost mitigation.
Our internal product development and global sourcing teams position us to continue delivering a differentiated
level of innovation, quality and value to our customers. Our global sourcing network allows us to control new
product introductions, maintain quality standards, monitor delivery times, and manage product costs and
inventory levels to enhance profitability. In an industry with few well-known national brands, our private
brands are recognized as a leader in many categories. We continue to expand our private brands and improve
the selection of products we design, develop and deliver to our customers. In fiscal 2016, we acquired Lamrite
as part of our strategy to enhance our private brand and direct sourcing capabilities. Our private brands totaled
approximately 57% of net sales in fiscal 2016 and include, among others, Recollections®, Studio Decor®,
Bead Landing®, Creatology®, Ashland®, Celebrate It®, ArtMinds®, Artist’s Loft®, Craft Smart®, Loops &
Threads®, Make Market™, Foamies®, LockerLookz®, Imagin8® and Sticky Sticks®.
We continue to search for ways to leverage our position as a market leader by establishing strategic
partnerships and exclusive product relationships to provide our customers with exciting merchandise. We have
partnerships with popular brands such as Wilton, Crayola and Elmer’s. We will continue to explore
opportunities to form future partnerships and exclusive product associations.
Aaron Brothers. Each Aaron Brothers store offers approximately 5,900 SKUs, including photo
frames, a full line of ready-made frames, art prints, framed art, art supplies and custom framing services. The
merchandising strategy for our Aaron Brothers stores is to provide a unique, upscale framing assortment in an
appealing environment with attentive customer service.
Pat Catan’s. Each Pat Catan’s store offers approximately 53,000 SKUs, including an assortment of
kids craft items, fine art supplies, yarn, floral supplies, scrapbooking materials, home décor, bakeware and
wedding related merchandise. The merchandising strategy for our Pat Catan’s stores is to provide a wide
variety of affordably priced craft supplies.
Darice. We operate an international wholesale business under the Darice brand name. Darice sources
products from domestic and foreign suppliers for resale to a variety of retail outlets worldwide, including our
Michaels and Pat Catan’s stores. Darice offers over 50,000 SKUs consisting of a wide range of craft and
hobby items. We also develop Darice branded products carried by both Company owned and third-party stores
reflecting the breadth of our product line and our ability to distribute and source quality products at competitive
prices.
E-commerce. While we expect e-commerce to remain a relatively small portion of our business, we
believe it provides an important avenue to communicate with our customers in an interactive way that
reinforces the Michaels brand and drives traffic to our stores and website. Since the launch of our e-commerce
platform in fiscal 2014, we continue to develop new features, functionality, marketing programs and product
assortments.
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Seasonality
Our business is highly seasonal, with higher sales in the third and fourth fiscal quarters. Our fourth
quarter, which includes the Holiday selling season, has on average accounted for approximately 34% of our net
sales and approximately 45% of our operating income.
Purchasing and Inventory Management
We purchase merchandise from a variety of different vendors through our wholly-owned subsidiary,
Michaels Stores Procurement Company, Inc. We believe our buying power and ability to make centralized
purchases enable us to acquire products on favorable terms. Centralized merchandising management teams
negotiate with vendors in an attempt to obtain the lowest net merchandise costs and to improve product mix
and inventory levels. In fiscal 2016, there were no vendors or sourcing agents accounting for more than 10% of
total purchases.
In fiscal 2016, we formed Darice International Sourcing Group as part of our strategy to develop our
direct sourcing capabilities. We believe our direct sourcing operation allows us to maintain greater control over
the manufacturing process resulting in improved product quality and lower costs. In addition, our stores
purchase custom frames, framing supplies and mats from our framing operation and wholly-owned subsidiary,
Artistree, Inc. (“Artistree”), which consists of a manufacturing facility and four regional processing centers.
The majority of the products sold in our stores are manufactured in Asia. Goods manufactured in Asia
generally require long lead times and are ordered four to six months in advance of delivery. Those products are
either imported directly by us or acquired from distributors based in the U.S.
Our automated replenishment system uses perpetual inventory records to analyze on-hand SKU
quantities by store, as well as other pertinent information such as sales forecasts, seasonal selling patterns,
promotional events and vendor lead times, to generate recommended merchandise reorder information. These
recommended orders are reviewed daily and purchase orders are delivered electronically to our vendors and
our distribution centers. In addition to improving our store in-stock position, these systems enable us to better
forecast merchandise ordering quantities for our vendors and give us the ability to identify, order and replenish
the stores’ merchandise using less store labor. These systems also allow us to react more quickly to sales trends
and allow our store team members to devote more time to customer service, thereby improving inventory
productivity and sales opportunities.
Artistree
We own and operate Artistree, a vertically-integrated framing operation which supplies precut mats
and high quality custom framing merchandise across our store networks. We believe Artistree provides a
competitive advantage to our stores and gives us quality control over the entire framing process. Custom
framing orders are processed and shipped to our stores where the custom frame order is completed for
customer pick-up.
Our moulding manufacturing plant, located in Kernersville, North Carolina, converts lumber into
finished frame moulding that is used at our regional processing centers to fulfill custom framing orders for our
stores. We manufacture approximately 33% of the moulding that we process and import approximately 45%
from quality manufacturers in Brazil, Indonesia, Malaysia, China and Italy.
During fiscal 2016, we operated four regional processing centers located in City of Industry,
California; DFW Airport, Texas; Kernersville, North Carolina; and Mississauga, Ontario. Combined, these
facilities occupy approximately 579,000 square feet and, in fiscal 2016, processed 29.4 million linear feet of
frame moulding and 4.3 million individual custom cut mats and foam boards for our stores. Our precut mats
and custom frame supplies are packaged and distributed out of our DFW Airport regional processing center.
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Distribution
We currently operate eight distribution centers to supply our stores with merchandise. Approximately
90% of our stores’ merchandise receipts are shipped through the distribution network with the remainder
shipped directly from vendors to stores. Our distribution centers are located in California, Florida, Illinois,
Ohio, Pennsylvania, Texas and Washington. We also utilize a third-party warehouse to support the distribution
of our seasonal merchandise, as well as a third-party fulfillment center for our e-commerce merchandise.
Our distribution facilities use warehouse management and control software systems to maintain and
support product purchase decisions. Store replenishment order selection is performed using pick-to-light and
radio frequency processing technologies. Product is delivered to stores using a dedicated fleet of trucks and
contract carriers.
Our Industry
According to recent internal market research, approximately 55% of U.S. households participated in at
least one crafting project during 2016, which represented approximately 68 million households. This research
indicated that crafting activities continue to grow in popularity and market size has expanded to approximately
$35.8 billion relative to prior studies. We believe the broad, multi-generational appeal, high personal
attachment and the low-cost, project-based nature of crafting creates a loyal, resilient following consistent with
the research insights.
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Store Expansion and Relocation
The following table shows our total store growth for the last five years:
Michaels stores:
Open at beginning of period
New stores
Relocated stores opened
Closed stores
Relocated stores closed
Open at end of period
Aaron Brothers stores:
Open at beginning of period
New stores
Relocated stores opened
Closed stores
Relocated stores closed
Open at end of period
Pat Catan's stores:
Open at beginning of period
Acquired stores
New stores
Relocated stores opened
Closed stores
Relocated stores closed
Open at end of period
Total store count at end of period
2016
2015
Fiscal Year
2014
2013
2012
1,196
32
14
(5)
(14)
1,223
117
1
—
(9)
—
109
—
32
3
1
—
(1)
35
1,367
1,168
30
17
(2)
(17)
1,196
120
—
—
(3)
—
117
—
—
—
—
—
—
—
1,313
1,136
32
13
—
(13)
1,168
121
5
—
(6)
—
120
—
—
—
—
—
—
—
1,288
1,099
40
14
(3)
(14)
1,136
125
—
2
(5)
(1)
121
—
—
—
—
—
—
—
1,257
1,064
38
13
(3)
(13)
1,099
134
—
—
(8)
(1)
125
—
—
—
—
—
—
—
1,224
We believe, based on an internal real estate and market penetration study of Michaels stores, that the
combined U.S. and Canadian markets can support between 1,400 and 1,500 Michaels stores. We plan to open
approximately 30 Michaels stores, including approximately 13 relocations in fiscal 2017. We continue to
pursue a store relocation program to improve the real estate location quality and performance of our store base.
During fiscal 2017, we plan to close up to five Michaels stores and 15 Aaron Brothers stores. Many of our
store closings are stores that have reached the end of their lease term. We believe our ongoing store evaluation
process results in strong performance across our store base.
We have developed a standardized procedure to allow for the efficient opening of new stores and their
integration into our information and distribution systems. We develop the merchandise layout floor plan and
organize the advertising and promotions in connection with the opening of each new store. In addition, we
maintain qualified store opening teams to provide new store team members with training.
Our Michaels store operating model, which is based on historical store performance, assumes an
average store size of approximately 18,000 selling square feet. Our fiscal 2016 average initial net investment,
which varies by site and specific store characteristics, was $1.2 million per Michaels store, including store
build-out costs, pre-opening expenses and average first year inventory.
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Employees
As of January 28, 2017, we employed approximately 50,000 team members, approximately 38,000 of
whom were employed on a part-time basis. The number of part-time team members substantially increases
during the Holiday selling season. Of our full-time team members, approximately 4,400 are engaged in various
executive, operating, training, distribution and administrative functions in our support center, division offices,
administrative offices and distribution centers and the remainder are engaged in store operations. None of our
team members are subject to a collective bargaining agreement.
Competition
We are the largest arts and crafts specialty retailer in North America based on store count. The market
in which we compete is highly fragmented and includes stores across the U.S. and Canada operated primarily
by small, independent retailers along with a few regional and national chains. We believe customers choose
where to shop based upon store location, breadth of selection, price, quality of merchandise, availability of
product and customer service. We compete with many different types of retailers and classify our competition
within the following categories:
· Multi-store chains. This category consists of several multi-store chains, each operating more than 100
stores, including: Hobby Lobby Stores, Inc., which operates more than 700 stores in 47 states; Jo-
Ann Stores, Inc., which operates approximately 850 stores in 49 states; and A.C. Moore Arts &
Crafts, Inc., which operates approximately 140 stores primarily in the Eastern U.S. We believe all of
these chains are significantly smaller than Michaels with respect to net sales.
· Mass merchandisers. This category of retailers typically dedicate only a small portion of their selling
space to a limited selection of home décor, arts and crafts supplies and seasonal merchandise, but
they do seek to capitalize on the latest trends by stocking products that are complementary to those
trends and their current merchandise offerings. These mass merchandisers generally have limited
customer service staffs with minimal experience in crafting projects.
·
·
Small, local specialty retailers. This category includes local independent arts and crafts retailers and
custom framing shops. Typically, these stores are single-store operations managed by the owner.
These stores generally have limited resources for advertising, purchasing and distribution. Many of
these stores have established a loyal customer base within a given community and compete based on
relationships and customer service.
Internet. This category includes all internet-based retailers that sell arts and crafts merchandise,
completed projects and online custom framing. Our internet competition is inclusive of those
companies discussed in the categories above, as well as others that may only sell products online.
These retailers provide consumers with the ability to search and compare products and prices without
having to visit a physical store. These sellers generally offer a wide variety of products but do not
offer product expertise or project advice.
Foreign Sales
Substantially all of our international business is in Canada, which accounted for approximately 9% of
total sales in fiscal 2016 and fiscal 2015 and 10% of total sales in fiscal 2014. Approximately 8% of our assets
were located outside of the U.S. in fiscal 2016 and approximately 7% of our assets were located outside of the
U.S. in fiscal 2015 and fiscal 2014. See Note 12 to the consolidated financial statements for net sales and total
assets by country.
Trademarks and Service Marks
As of January 28, 2017, we own or have rights to trademarks, service marks or trade names we use in
connection with the operation of our business, including “Aaron Brothers”, “Artistree”, “Darice”, “Lamrite”,
“Michaels”, “Michaels the Arts and Crafts Store”, “Pat Catan’s”, “Recollections”, “Make Creativity Happen”,
“Where Creativity Happens”, and the stylized Michaels logo. We have registered our primary private brands
including Recollections®, Studio Decor®, Bead Landing®, Creatology®, Ashland®, Celebrate It®,
ArtMinds®, Artist’s Loft®, Craft Smart®, Loops & Threads®, Make
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Market™, Foamies®, LockerLookz®, Imagin8® and Sticky Sticks® and various sub-brands associated with
these primary marks. Solely for convenience, some of the trademarks, service marks and trade names referred
to in this Annual Report on Form 10-K are listed without the copyright, trademark and registered trademark
symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks,
service marks, trade names and domain names.
Available Information
We provide links to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, and other documents filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on our
Internet website, free of charge, at www.michaels.com under the heading “Investor Relations”. These reports
are available as soon as reasonably practicable after we electronically file them with the Securities and
Exchange Commission (“SEC”). The reports may also be accessed at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. These filings are also available through the SEC’s
EDGAR system at www.sec.gov.
We use our website (www.michaels.com) as a means of disclosing material non-public information
and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC.
These disclosures are included on our website in the “Investor Relations” section. Accordingly, investors
should monitor this portion of our website, in addition to following our press releases, SEC filings, public
conference calls and webcasts.
We webcast our earnings calls and certain events we participate in or host with members of the
investment community on the investor relations section of our website. Additionally, we provide notifications
of news or announcements regarding press and earnings releases as part of the investor relations section of our
website. The contents of our website are not part of this Annual Report on Form 10-K, or any other report we
file with, or furnish to, the SEC.
ITEM 1A. RISK FACTORS.
Our financial performance is subject to various risks and uncertainties. The risks described below are
those we believe are the material risks we face. Any of the risk factors described below, as well as risks not
currently known to us, could significantly and adversely affect our business, prospects, sales, revenues, gross
profit, cash flows, financial condition and results of operations.
We face risks related to the effect of economic uncertainty.
In the event of an economic downturn or slow recovery, our growth, prospects, results of operations,
cash flows and financial condition could be adversely impacted. Our stores offer arts and crafts supplies and
products for the crafter and custom framing for the do-it-yourself home decorator, which some customers may
perceive as discretionary. Pressure on discretionary income brought on by economic downturns and slow
recoveries, including housing market declines, rising energy prices and weak labor markets, may cause
consumers to reduce the amount they spend on discretionary items. The inherent uncertainty related to
predicting economic conditions makes it difficult for us to accurately forecast future demand trends, which
could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or limit our
ability to satisfy customer demand and potentially lose market share.
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We face risks related to our substantial indebtedness.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk
associated with our variable rate debt and prevent us from meeting our obligations under our notes and credit
facilities. As of January 28, 2017, we had total outstanding debt of $2,773.5 million, of which $2,263.5 million
was subject to variable interest rates and $510.0 million was subject to fixed interest rates. As of January 28,
2017, we had $735.5 million of additional borrowing capacity (after giving effect to $57.6 million of letters of
credit then outstanding) under our Amended Revolving Credit Facility. Our substantial indebtedness could
have important consequences to us, including:
· making it more difficult for us to satisfy our obligations with respect to our debt, and any failure
to comply with the obligations under our debt instruments, including restrictive covenants, could
result in an event of default under the agreements governing our indebtedness;
·
·
·
·
·
·
increasing our vulnerability to general economic and industry conditions;
requiring a substantial portion of our cash flow from operations to be dedicated to the payment of
principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our
operations, capital expenditures, selling and marketing efforts, product development, future
business opportunities and other purposes;
exposing us to the risk of increased interest rates as certain of our borrowings, including under
our Senior Secured Credit Facilities, which consist of the Amended Revolving Credit Facility
and the Amended Term Loan Credit Facility (each, as defined below), are at variable rates;
restricting us from making strategic acquisitions or causing us to make non‑strategic
divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures,
product development, debt service requirements, acquisitions, and general corporate or other
purposes; or
limiting our ability to plan for, or adjust to, changing market conditions and placing us at a
competitive disadvantage compared to our competitors who may be less highly leveraged.
The occurrence of any one of these events could have an adverse effect on our business, financial
condition, results of operations, and ability to satisfy our obligations under our indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject,
in the case of MSI and Michaels Funding, Inc. (“Holdings”) and their subsidiaries, to the restrictions contained
in our Senior Secured Credit Facilities and the indenture governing our notes. In addition, our Senior Secured
Credit Facilities and indenture governing our notes do not restrict us from creating new holding companies that
may be able to incur indebtedness without regard to the restrictions set forth in our Senior Secured Credit
Facilities and indenture governing our notes. If new indebtedness is added to our current debt levels, the
related risks that we now face could intensify.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our Senior Secured Credit Facilities and the indenture governing our notes contain various covenants
that limit our ability to engage in specified types of transactions. These covenants limit the ability of the
relevant borrowers, issuers, guarantors and their restricted subsidiaries to, among other things:
·
·
incur or guarantee additional debt;
pay dividends or distributions on their capital stock or redeem, repurchase or retire their capital
stock or indebtedness;
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·
issue stock of subsidiaries;
· make certain investments, loans, advances and acquisitions;
·
·
create liens on our assets to secure debt;
enter into transactions with affiliates;
· merge or consolidate with another company; or
·
sell or otherwise transfer assets.
In addition, under the Amended Term Loan Credit Facility, MSI is required to meet specified
financial ratios in order to undertake certain actions, and under our Amended Revolving Credit Facility, MSI is
required to meet specified financial ratios in order to undertake certain actions, and under certain
circumstances, MSI may be required to maintain a specified fixed charge coverage ratio. Our ability to meet
those tests can be affected by events beyond our control, and we cannot assure you we will meet them. A
breach of any of these covenants could result in a default under our Senior Secured Credit Facilities, which
could also lead to an event of default under our notes if any of the Senior Secured Credit Facilities were
accelerated. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the lenders
could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be immediately due
and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts,
the lenders under our Senior Secured Credit Facilities could proceed against the collateral granted to them to
secure such indebtedness. Holdings, MSI and certain of MSI’s subsidiaries have pledged substantially all of
their assets, including the capital stock of MSI and certain of its subsidiaries, as collateral under our Senior
Secured Credit Facilities. If the indebtedness under our Senior Secured Credit Facilities or our notes were to be
accelerated, our assets may not be sufficient to repay such indebtedness in full.
Changes in customer demands could materially adversely affect our sales, results of operations and cash
flow.
Our success depends on our ability to anticipate and respond in a timely manner to changing customer
demands and preferences for products and supplies used in creative activities. If we misjudge the market, we
may significantly overstock unpopular products and be forced to take significant inventory markdowns, or
experience shortages of key items, either of which could have a material adverse impact on our operating
results and cash flow. In addition, adverse weather conditions, economic instability and consumer confidence
volatility could have material adverse impacts on our sales and operating results.
We have experienced a data breach in the past and any future failure to adequately maintain security and
prevent unauthorized access to electronic and other confidential information could result in an additional
data breach which could materially adversely affect our reputation, financial condition and operating
results.
The protection of our customer, team members and Company data is critically important to us. Our
customers and team members have a high expectation that we will adequately safeguard and protect their
sensitive personal information. We have become increasingly centralized and dependent upon automated
information technology processes. In addition, a portion of our business operations is conducted electronically,
increasing the risk of attack or interception that could cause loss or misuse of data, system failures or
disruption of operations. This risk has increased with the launch of our e‑commerce platform in fiscal 2014.
Improper activities by third parties, exploitation of encryption technology, new data‑hacking tools and
discoveries and other events or developments may result in a future compromise or breach of our networks,
payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain
unauthorized access to sensitive data change frequently and often are not recognized until launched against a
target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative
measures. Any failure to maintain the security of our customers’ sensitive information, or data belonging to
ourselves or our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’
confidence in us, and subject us to potential litigation, liability, fines and penalties, resulting in a possible
material adverse impact on our financial condition and results of operations. While we maintain insurance
coverage that may, subject to policy terms and conditions, cover certain aspects
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of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage
to our reputation. There can be no assurance that we will not suffer a criminal attack in the future, that
unauthorized parties will not gain access to personal information, or that any such incident will be discovered
in a timely manner.
Competition, including Internet-based competition, could negatively impact our business.
The retail arts and crafts industry, including custom framing, is competitive, which could result in
pressure to reduce prices and losses in our market share. We must remain competitive in the areas of quality,
price, breadth of selection, customer service and convenience to retain and grow our market share. We compete
with mass merchants, which dedicate a portion of their selling space to a limited selection of craft supplies and
seasonal and holiday merchandise, along with national and regional chains and local merchants. We also
compete with specialty retailers, which include Hobby Lobby Stores, Inc., A.C. Moore Arts & Crafts, Inc. and
Jo‑Ann Stores, Inc. Some of our competitors, particularly the mass merchants, are larger and have greater
financial resources than we do. We also face competition from Internet‑based retailers, such as
Amazon.com, Inc., in addition to traditional store‑based retailers, who may be larger, more experienced and
able to offer products we cannot. This could result in increased price competition since our customers could
more readily search and compare non‑private brand products. Furthermore, we ultimately compete with
alternative sources of entertainment and leisure for our customers.
Our reliance on foreign suppliers increases our risk of obtaining adequate, timely and cost-effective product
supplies.
To a significant extent, we rely on foreign manufacturers for our merchandise, particularly
manufacturers located in China. In addition, many of our domestic suppliers purchase a portion of their
products from foreign sources. This reliance increases the risk that we will not have adequate and timely
supplies of various products due to local political, economic, social or environmental conditions (including acts
of terrorism, the outbreak of war or the occurrence of a natural disaster), transportation delays (including dock
strikes and other work stoppages), restrictive actions by foreign governments, or changes in U.S. laws and
regulations affecting imports or domestic distribution. Reliance on foreign manufacturers also increases our
exposure to trade infringement claims and reduces our ability to return product for various reasons.
We are at a risk for higher costs associated with goods manufactured in China. Significant increases
in wages or wage taxes paid by contract facilities may increase the cost of goods manufactured, which could
have a material adverse effect on our profit margins and profitability.
All of our products manufactured overseas and imported into the U.S. are subject to duties collected
by the U.S. Customs Service. We may be subjected to additional duties or tariffs, significant monetary
penalties, the seizure and forfeiture of the products we are attempting to import, or the loss of import privileges
if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of
our products.
Our growth depends on our ability to open new stores and increase comparable store sales.
One of our key business strategies is to expand our base of retail stores. If we are unable to continue
this strategy, our ability to increase our sales, profitability and cash flow could be impaired. To the extent we
are unable to open new stores as we anticipate, our sales growth would primarily come from increases in
comparable store sales. Growth in profitability would then depend significantly on our ability to improve gross
margin. We may be unable to continue our store growth strategy if we cannot identify suitable sites for
additional stores, negotiate acceptable leases, access sufficient capital to support store growth, or hire and train
a sufficient number of qualified team members.
Damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect
our sales.
We believe the Michaels brand name and many of our private and exclusive brand names are
powerful sales and marketing tools and we devote significant resources to promoting and protecting them. To
be successful in the future, we must continue to preserve, grow and utilize the value of Michaels’ reputation.
Reputational value is based in large part on perceptions of subjective qualities, and even isolated incidents may
erode trust and confidence. In addition, we develop and promote private and exclusive brands, which we
believe have generated national recognition. Our Michaels private
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brands totaled approximately 57% of net sales in fiscal 2016 and 54% of net sales in fiscal 2015. Damage to
the reputations (whether or not justified) of our brand names could arise from product failures, data privacy or
security incidents, litigation or various forms of adverse publicity (including adverse publicity generated as a
result of a vendor’s or a supplier’s failure to comply with general social accountability practices), especially in
social media outlets, and may generate negative customer sentiment, potentially resulting in a reduction in our
sales and earnings.
A weak fourth quarter would materially adversely affect our result of operations.
Our business is highly seasonal. Our inventories and short-term borrowings may grow in the third
fiscal quarter as we prepare for our peak selling season in the third and fourth fiscal quarters. Our most
important quarter in terms of sales, profitability and cash flow historically has been the fourth fiscal quarter. If
for any reason our fourth fiscal quarter results were substantially below expectations, our operating results for
the full year would be materially adversely affected, and we could have substantial excess inventory,
especially in seasonal merchandise that is difficult to liquidate.
Suppliers from whom our products are sourced may fail us and transitioning to other qualified vendors
could materially adversely affect our revenue and profit growth.
The products we sell are sourced from a wide variety of domestic and international vendors. Global
sourcing has become an increasingly important part of our business, as we have undertaken efforts to increase
the amount of product we source directly from overseas manufacturers. Our ability to find qualified vendors
who meet our standards and supply products in a timely and efficient manner is a significant challenge,
especially with respect to goods sourced from outside the U.S. Any issues related to transitioning vendors
could adversely affect our revenue and gross profit.
Many of our suppliers are small firms that produce a limited number of items. Given their limited
resources, these firms are susceptible to cash flow issues, access to capital, production difficulties, quality
control issues and problems in delivering agreed‑upon quantities on schedule. We may not be able, if
necessary, to return products to these suppliers and obtain refunds of our purchase price or obtain
reimbursement or indemnification from them if their products prove defective. These suppliers may also be
unable to withstand a downturn in economic conditions. Significant failures on the part of our key suppliers
could have a material adverse effect on our results of operations.
In addition, many of these suppliers require extensive advance notice of our requirements to supply
products in the quantities we desire. This long lead time may limit our ability to respond timely to shifts in
demand.
Unexpected or unfavorable consumer responses to our promotional or merchandising programs could
materially adversely affect our sales, results of operations, cash flow and financial condition.
Brand recognition, quality and price have a significant influence on consumers’ choices among
competing products and brands. Advertising, promotion, merchandising and the cadence of new product
introductions also have a significant impact on consumers’ buying decisions. If we misjudge consumer
responses to our existing or future promotional activities, this could have a material adverse impact on our
sales, results of operations, cash flow and financial condition.
We believe improvements in our merchandise offering help drive sales at our stores. We could be
materially adversely affected by poor execution of changes to our merchandise offering or by unexpected
consumer responses to changes in our merchandise offering.
Our marketing programs, e-commerce initiatives and use of consumer information are governed by an
evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure
to comply with existing or future laws, could substantially harm our business and results of operations.
We collect, maintain and use data provided to us through our online activities and other customer
interactions in our business. Our current and future marketing programs depend on our ability to collect,
maintain and use this information, and our ability to do so is subject to certain contractual restrictions in
third‑party contracts as well as evolving international, federal and state laws and enforcement trends. We strive
to comply with all applicable laws and other legal obligations
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relating to privacy, data protection and consumer protection, including those relating to the use of data for
marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a
manner that is inconsistent from one jurisdiction to another, or may conflict with other rules or may conflict
with our practices. If so, we may suffer damage to our reputation and be subject to proceedings or actions
against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force
us to spend significant amounts to defend our practices, distract our management, increase our costs of doing
business and result in monetary liability.
In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we
remain in compliance with such laws. If applicable data privacy and marketing laws become more restrictive at
the federal or state level, our compliance costs may increase, our ability to effectively engage customers via
personalized marketing may decrease, our investment in our e‑commerce platform may not be fully realized,
our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our
potential liability for security breaches may increase.
Product recalls and/or product liability, as well as changes in product safety and other consumer protection
laws, may adversely impact our operations, merchandise offerings, reputation, results of operations, cash
flow and financial condition.
We are subject to regulations by a variety of federal, state and international regulatory authorities,
including the Consumer Product Safety Commission. In fiscal 2016, we purchased merchandise from
approximately 620 vendors. Since a majority of our merchandise is manufactured in foreign countries, one or
more of our vendors may not adhere to product safety requirements or our quality control standards, and we
may not identify the deficiency before merchandise ships to our stores. Any issues of product safety, including
but not limited to those manufactured in foreign countries, could cause us to recall some of those products. If
our vendors fail to manufacture or import merchandise that adheres to our quality control standards, our
reputation and brands could be damaged, potentially leading to increases in customer litigation against us.
Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce our
merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near or during a seasonal
period. If our vendors are unable or unwilling to recall products failing to meet our quality standards, we may
be required to recall those products at a substantial cost to us. Moreover, changes in product safety or other
consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs
associated with readying merchandise for sale. Long lead times on merchandise ordering cycles increase the
difficulty for us to plan and prepare for potential changes to applicable laws. The Consumer Product Safety
Improvement Act of 2008 imposes significant requirements on manufacturing, importing, testing and labeling
requirements for our products. In the event that we are unable to timely comply with regulatory changes or
regulators do not believe we are complying with current regulations applicable to us, significant fines or
penalties could result, and could adversely affect our reputation, results of operations, cash flow and financial
condition.
Changes in regulations or enforcement, or our failure to comply with existing or future regulations, may
adversely impact our business.
We are subject to federal, state and local regulations with respect to our operations in the U.S. We are
further subject to federal, provincial and local regulations internationally, including in Canada and China, each
of which are distinct from those in the U.S., and may be subject to greater international regulation as our
business expands. There are a number of legislative and regulatory initiatives that could adversely impact our
business if they are enacted or enforced. Those initiatives include wage or workforce issues (such as
minimum‑wage requirements, overtime and other working conditions and citizenship requirements), collective
bargaining matters, environmental regulation, price and promotion regulation, trade regulations and others.
Proposed changes in tax regulations may also change our effective tax rate as our business is subject
to a combination of applicable tax rates in the various countries, states and other jurisdictions in which we
operate. New accounting pronouncements and interpretations of existing accounting rules and practices have
occurred and may occur in the future. A change in accounting standards or practices can have a significant
effect on our reported results of operations. Failure to comply with legal requirements could result in, among
other things, increased litigation risk that could affect us adversely by subjecting us to significant monetary
damages and other remedies or by increasing our litigation expenses, administrative enforcement actions, fines
and civil and criminal liability. We are currently subject to various class action
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lawsuits alleging violations of wage and workforce laws and similar matters (see Note 13 to the consolidated
financial statements). If such issues become more expensive to address, or if new issues arise, they could
increase our expenses, generate negative publicity, or otherwise adversely affect us.
Significant increases in inflation or commodity prices, such as petroleum, natural gas, electricity, steel,
wood and paper, may adversely affect our costs, including cost of merchandise.
Significant future increases in commodity prices or inflation could adversely affect our costs,
including cost of merchandise and distribution costs. Furthermore, the transportation industry may experience a
shortage or reduction of capacity, which could be exacerbated by higher fuel prices. Our results of operations
may be adversely affected if we are unable to secure, or are able to secure only at significantly higher costs,
adequate transportation resources to fulfill our receipt of goods or delivery schedules to the stores.
We may be subject to information technology system failures or network disruptions, or our information
systems may prove inadequate, resulting in damage to our reputation, business operations and financial
condition.
We depend on our management information systems for many aspects of our business, including our
perpetual inventory, automated replenishment and weighted-average cost stock ledger systems which are
necessary to properly forecast, manage, analyze and record our inventory. The Company may be subject to
information technology system failures and network disruptions. These may be caused by natural disasters,
accidents, power disruptions, telecommunications failures, acts of terrorism or war, denial‑of‑service attacks,
computer viruses, physical or electronic break‑ins, or similar events or disruptions. System redundancy may be
ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient for all
eventualities. Such failures or disruptions could prevent access to the Company’s online services and preclude
store transactions. System failures and disruptions could also impede the manufacturing and shipping of
products, transactions processing and financial reporting. Additionally, we may be materially adversely
affected if we are unable to improve, upgrade, maintain, and expand our systems.
Improvements to our supply chain may not be fully successful.
An important part of our efforts to achieve efficiencies, cost reductions, and sales and cash flow
growth is the identification and implementation of improvements to our supply chain, including merchandise
ordering, transportation, direct sourcing initiatives and receipt processing. We continue to implement
enhancements to our distribution systems and processes, which are designed to improve efficiency throughout
the supply chain and at our stores. If we are unable to successfully implement significant changes, this could
disrupt our supply chain, which could have a material adverse impact on our results of operations.
Our total assets include intangible assets, goodwill and substantial amounts of property and equipment.
Changes in estimates or projections used to assess the fair value of these assets, or operating results that are
lower than our current estimates at certain store locations, may cause us to incur impairment charges that
could adversely affect our results of operation.
Our total assets include intangible assets, goodwill and substantial amounts of property and
equipment. We make certain estimates and projections in connection with impairment analyses for these long
lived assets, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification ("ASC") 360, "Property, Plant and Equipment " ("ASC 360"), and ASC 350, "Intangibles—
Goodwill and Other" ("ASC 350"). We also review the carrying value of these assets for impairment on an
annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may
not be recoverable in accordance with ASC 360 or ASC 350. We will record an impairment loss when the
carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. These calculations
require us to make a number of estimates and projections of future results. If these estimates or projections
change, we may be required to record additional impairment charges on certain of these assets. If these
impairment charges are significant, our results of operations would be adversely affected.
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Changes in newspaper subscription rates may result in reduced exposure to our circular advertisements.
A substantial portion of our promotional activities utilize circular advertisements in local newspapers.
A continued decline in consumer subscriptions of these newspapers could reduce the frequency with which
consumers receive our circular advertisements, thereby negatively affecting sales, results of operations and
cash flow.
Disruptions in the capital markets could increase our costs of doing business.
Any disruption in the capital markets could make it difficult for us to raise additional capital when
needed, or to eventually refinance our existing indebtedness on acceptable terms or at all. Similarly, if our
suppliers face challenges in obtaining credit when needed, or otherwise face difficult business conditions, they
may become unable to offer us the merchandise we use in our business thereby causing reductions in our
revenues, or they may demand more favorable payment terms, all of which could adversely affect our results
of operations, cash flows and financial condition.
Our real estate leases generally obligate us for long periods, which subject us to various financial risks.
We lease virtually all of our store, distribution center and administrative locations, generally for long
terms. While we have the right to terminate some of our leases under specified conditions by making specified
payments, we may not be able to terminate a particular lease if or when we would like to do so. If we decide to
close stores, we are generally required to continue paying rent and operating expenses for the balance of the
lease term, or pay to exercise rights to terminate, and the performance of any of these obligations may be
expensive. When we assign or sublease vacated locations, we may remain liable on the lease obligations if the
assignee or sublessee does not perform. In addition, when leases for the stores in our ongoing operations
expire, we may be unable to negotiate renewals, either on commercially acceptable terms, or at all, which
could cause us to close stores. Accordingly, we are subject to the risks associated with leasing real estate,
which can have a material adverse effect on our results.
We have co-sourced certain of our information technology, accounts payable, payroll, accounting and
human resources functions and may co-source other administrative functions, which makes us more
dependent upon third parties.
We place significant reliance on third‑party providers for the co‑sourcing of certain of our
information technology (“IT”), accounts payable, payroll, accounting and human resources functions. This
co‑sourcing initiative is a component of our ongoing strategy to increase efficiencies, increase our IT
capabilities, manage our costs and seek additional cost savings. These functions are generally performed in
offshore locations. As a result, we rely on third parties to ensure that certain functional needs are sufficiently
met. This reliance subjects us to risks arising from the loss of control over these processes, changes in pricing
that may affect our operating results, and potentially, termination of provision of these services by our
suppliers. If our service providers fail to perform, we may have difficulty arranging for an alternate supplier or
rebuilding our own internal resources, and we could incur significant costs, all of which may have a significant
adverse effect on our business. We may co‑source other administrative functions in the future, which would
further increase our reliance on third parties. Further, the use of offshore service providers may expose us to
risks related to local political, economic, social or environmental conditions (including acts of terrorism, the
outbreak of war, or the occurrence of natural disaster), restrictive actions by foreign governments or changes in
U.S. laws and regulations.
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the
functional currency of our Canadian subsidiaries.
Our Canadian operating subsidiaries purchase inventory in U.S. dollars, which is sold in Canadian
dollars and exposes us to foreign exchange rate fluctuations. In addition, our customers at border locations can
be sensitive to cross‑border price differences. Substantial foreign currency fluctuations could adversely affect
our business. In fiscal 2016, exchange rates had a positive impact on our consolidated operating results due to a
7% increase in the Canadian exchange rate.
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We are dependent upon the services of our senior management team.
We are dependent on the services, abilities and experience of our executive officers, including Carl S.
Rubin, our Chief Executive Officer, and Denise A. Paulonis, our Chief Financial Officer. The permanent loss
of the services of either of these senior executives and any change in the composition of our senior
management team could have a negative impact on our ability to execute on our business and operating
strategies.
Failure to attract and retain quality sales, distribution center and other team members in appropriate
numbers as well as experienced buying and management personnel could adversely affect our performance.
Our performance depends on recruiting, developing, training and retaining quality sales, distribution
center and other team members in large numbers as well as experienced buying and management personnel.
Many of our store level team members are in entry level or part‑time positions with historically high rates of
turnover. Our ability to meet our labor needs while controlling labor costs is subject to external factors such as
unemployment levels, prevailing wage rates, minimum wage legislation, changing demographics, health and
other insurance costs and governmental labor and employment requirements. In the event of increasing wage
rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our
customer service to suffer, while increasing our wages could cause our earnings to decrease. The market for
retail management is highly competitive and, similar to other retailers, we face challenges in securing
sufficient management talent. If we do not continue to attract, train and retain quality team members, our
performance could be adversely affected.
Our results may be adversely affected by serious disruptions or catastrophic events, including geo-political
events and weather.
Unforeseen public health issues, such as pandemics and epidemics, and geo‑political events, such as
civil unrest in a country in which our suppliers are located or terrorist or military activities disrupting
transportation, communication or utility systems, as well as natural disasters such as hurricanes, tornadoes,
floods, earthquakes and other adverse weather and climate conditions, whether occurring in the U.S. or abroad,
particularly during peak seasonal periods, could disrupt our operations or the operations of one or more of our
vendors or could severely damage or destroy one or more of our stores or distribution facilities located in the
affected areas. For example, day‑to‑day operations, particularly our ability to receive products from our
vendors or transport products to our stores, could be adversely affected, or we could be required to close stores
or distribution centers in the affected areas or in areas served by the affected distribution center. These factors
could also cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and
global financial markets and economy. Such occurrences could significantly impact our operating results and
financial performance. For example, during fiscal 2015, one of our stores was damaged by weather related to
Hurricane Joaquin, resulting in closure and lost sales. Had the hurricane impacted a larger geographic area, it is
possible that we would have suffered a substantial negative impact to our sales for a prolonged period.
Any difficulty executing or integrating an acquisition, a business combination or a major business initiative
could adversely affect our business or results of operations.
Any difficulty in executing or integrating an acquisition, a business combination or a major business
initiative, including the recent acquisition of Lamrite, may result in our inability to achieve anticipated benefits
from these transactions in the time frame that we anticipate, or at all, which could adversely affect our business
or results of operations. Such transactions may also disrupt the operation of our current activities and divert
management's attention from other business matters. In addition, the Company’s current credit agreements
place certain limited constraints on our ability to make an acquisition or enter into a business combination, and
future borrowing agreements could place tighter constraints on such actions.
Substantial changes to fiscal and tax policies may adversely affect our business.
Legislative actions, including changes in fiscal and tax policies, may adversely affect our business.
For example, any restrictions or limitations on trade with China and other countries or the imposition of a
tariff or border tax on all foreign imports could negatively impact our business. A majority of the products
currently sold in Michaels stores are
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manufactured in Asia. Therefore, any such restrictions or tariffs imposed on products that we or our suppliers
import for sale in the U.S. would adversely and directly impact our tax liability and cost of goods sold. Further,
such a policy change may require us to raise our prices, which could result in the loss of customers and harm
our business.
Our holding company structure makes us, and certain of our direct and indirect subsidiaries, dependent on
the operations of our, and their, subsidiaries to meet our financial obligations.
We, and certain of our direct and indirect subsidiaries, have no significant assets other than the
interest in direct and indirect subsidiaries, including MSI. As a result, we, and certain of our direct and indirect
subsidiaries, rely exclusively upon payments, dividends and distributions from direct and indirect subsidiaries’
cash flows. Our ability to pay dividends, if any are declared, to our shareholders is dependent on the ability of
our subsidiaries to generate sufficient net income and cash flows to pay upstream dividends and make loans or
loan repayments.
We are subject to certain phase-in provisions of The NASDAQ Stock Market and, as a result, we are not
currently subject to certain corporate governance requirements. Until the expiration of the phase-in period
on December 16, 2017, you will not have the same protections as those afforded to stockholders of
companies that are subject to such governance requirements.
Following the December 2016 secondary offering, our significant stockholders, affiliates of or funds
advised by Bain Capital Partners, LLC and The Blackstone Group L.P. (the “Sponsors”) ceased to indirectly
beneficially own a majority controlling interest in us. As a result, we are no longer a “controlled company”
within the meaning of the corporate governance standards of The NASDAQ Stock Market. However, we
continue to rely on a phase-in provision for the requirement that we have a Compensation Committee that is
composed entirely of independent directors. Accordingly, for up to one year from the expiration of the phase-
in period, which will occur on December 16, 2017, you will not have the same protections afforded to
stockholders of companies that are subject to all of the corporate governance requirements of The NASDAQ
Stock Market.
The Sponsors continue to have significant influence over us and their interest may conflict with yours and
those of our Company.
Although we are no longer a “controlled company”, the Sponsors continue to beneficially own
approximately 38% of our outstanding common stock as of January 28, 2017. For so long as the Sponsors
continue to hold a significant portion of our outstanding common stock, the Sponsors may continue to be able
to strongly influence or effectively control our decisions.
Our stock price could be extremely volatile and may decline and, as a result, you may not be able to resell
your shares at or above the price you paid for them.
Since listing our common stock on The NASDAQ Global Select Market in June 2014 in connection
with our IPO, the price of our common stock has ranged from a low of $14.51 on August 1, 2014 to a high of
$31.37 on June 6, 2016. In addition, the stock market in general has been highly volatile. As a result, the
market price of our common stock is likely to be similarly volatile, and investors in our common stock may
experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to
our operating performance or prospects, and could lose part or all of their investment. The price of our
common stock could be subject to wide fluctuations in response to a number of factors, including those
described elsewhere in this filing and others such as:
·
·
·
·
variations in our operating performance and the performance of our competitors;
actual or anticipated fluctuations in our quarterly or annual operating results;
publication of research reports by securities analysts about us or our competitors or our industry;
our failure or the failure of our competitors to meet analysts’ projections or guidance that we or
our competitors may give to the market;
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·
·
·
·
·
·
·
·
·
additions and departures of key personnel;
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin‑offs, joint
ventures, strategic investments or changes in business strategy;
the passage of legislation or other regulatory developments affecting us or our industry;
speculation in the press or investment community;
adverse publicity;
changes in accounting principles;
terrorist acts, acts of war or periods of widespread civil unrest;
natural disasters and other calamities; and
changes in general market and economic conditions.
In the past, securities class action litigation has often been initiated against companies following
periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our
management’s attention and resources, and could also require us to make substantial payments to satisfy
judgments or to settle litigation.
Provisions in our charter documents and Delaware law may deter takeover efforts that may be beneficial to
stockholder value.
Delaware law and provisions in our certificate of incorporation and bylaws could make it harder for a
third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include
limitations on our stockholders’ ability to act by written consent. In addition, our Board has the right to issue
preferred stock without stockholder approval that could be used to dilute a potential hostile acquirer. Our
certificate of incorporation imposes some restrictions on mergers and other business combinations between us
and any holder of 15% or more of our outstanding common stock other than the Sponsors, who own
approximately 38% of our outstanding common stock as of January 28, 2017. As a result, you may lose your
ability to sell your stock for a price in excess of the prevailing market price due to these protective measures
and efforts by stockholders to change the direction or management of the Company may be unsuccessful.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and
exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers or employees.
Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of
the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought
on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or
other employee to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any
provision of the Delaware General Corporation Law or our certificate of incorporation or the bylaws or
(iv) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity
purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of
and to have consented to the provisions of our certificate of incorporation described above. This choice of
forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for
disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us
and our directors, officers and employees. Alternatively, if a court were to find these provisions of our
certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of
actions or proceedings, we may incur additional costs associated with resolving such matters in other
jurisdictions, which could adversely affect our business and financial condition.
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Because our executive officers hold or may hold restricted shares or option awards that will vest upon a
change of control, these officers may have interests in us that conflict with yours.
Our executive officers hold or may hold restricted shares and options to purchase shares that would
automatically vest upon a change of control. As a result, these officers may view certain change of control
transactions more favorably than an investor due to the vesting opportunities available to them and, as a result,
may have an economic incentive to support a transaction that you may not believe to be favorable to
stockholders.
Because we have no current plans to pay cash dividends on our common stock for the foreseeable future,
you may not receive any return on investment unless you sell your common stock for a price greater than
you paid.
We plan to retain future earnings, if any, for future operation, expansion and debt repayment and have
no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay
dividends in the future will be made at the discretion of our Board and will depend on, among other things, our
results of operations, financial condition, cash requirements, contractual restrictions and other factors that our
Board may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing
and future outstanding indebtedness we or our subsidiaries incur, including our Senior Secured Credit
Facilities. As a result, you may not receive any return on an investment in our common stock unless you sell
our common stock for a price greater than you paid.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
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ITEM 2. PROPERTIES
We lease substantially all of the sites for our Michaels, Aaron Brothers and Pat Catan’s stores, with
the majority of our stores having initial lease terms of approximately 10 years. The leases are generally
renewable, with increases in lease rental rates. Lessors have made leasehold improvements to prepare our
stores for opening under a majority of our existing leases. As of January 28, 2017, in connection with stores
that we plan to open or relocate in future fiscal years, we had signed approximately 37 leases for Michaels
stores. Management believes our facilities are suitable and adequate for our business as presently conducted.
As of January 28, 2017, we leased the following non-store facilities:
Locations
Distribution centers:
Hazleton, Pennsylvania
Jacksonville, Florida
Lancaster, California
Centralia, Washington
New Lenox, Illinois
Haslet, Texas
City of Commerce, California (Aaron Brothers)
Strongsville, Ohio (Darice warehouse)
Artistree:
DFW Airport, Texas (regional processing and fulfillment operations center)
Kernersville, North Carolina (manufacturing plant and regional processing center)
City of Industry, California (regional processing center)
Mississauga, Ontario (regional processing center)
Office space:
Irving, Texas (corporate office support center)
Strongsville, Ohio (Lamrite office support center)
Atlanta, Georgia (Darice showroom)
Mississauga, Ontario (Canadian regional office)
Kowloon Bay, Hong Kong
Ningbo, China
Coppell, Texas (new store staging warehouse)
21
Square
Footage
692,000
506,000
763,000
718,000
693,000
433,000
174,000
217,000
4,196,000
271,000
156,000
90,000
62,000
579,000
296,000
505,000
6,000
3,000
4,000
17,000
831,000
82,000
5,688,000
Table of Contents
The following table indicates the number of our retail stores located in each state or province as of
January 28, 2017:
State/Province
Alabama
Alaska
Alberta
Arizona
Arkansas
British Columbia
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Manitoba
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Brunswick
New Hampshire
New Jersey
New Mexico
New York
Newfoundland and Labrador
North Carolina
North Dakota
Nova Scotia
Ohio
Oklahoma
Ontario
Oregon
Pennsylvania
Prince Edward Island
Quebec
Rhode Island
Saskatchewan
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
22
Michaels
12
3
23
27
5
17
136
22
20
5
1
82
35
7
41
18
8
8
12
15
3
4
25
32
35
23
7
21
5
6
10
3
9
31
4
62
1
36
3
7
32
7
58
15
48
1
16
4
3
15
2
17
83
13
2
37
23
5
17
1
1,223
Number of Stores
Aaron
Brothers
Pat
Catan's Total
12
3
23
31
5
17
206
24
20
5
1
82
36
8
41
19
8
8
12
15
3
4
25
32
36
23
7
21
5
6
13
3
9
31
4
62
1
36
3
7
58
7
58
17
54
1
16
4
3
15
2
17
102
13
2
37
30
6
17
1
1,367
4
70
2
1
1
3
2
19
7
1
1
26
6
1
109
35
Table of Contents
ITEM 3. LEGAL PROCEEDINGS.
Information regarding legal proceedings is incorporated by reference from Note 13 to the consolidated
financial statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is listed on The NASDAQ Global Select Market under the symbol “MIK”. As of
January 28, 2017, there were approximately 375 holders of record of our common stock. The following table
sets forth the high and low sales price per share for the periods indicated of our common stock on The
NASDAQ Global Select Market:
Fiscal Year
2016
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
Low
High
High
Low
$ 29.56 $ 20.25 $ 30.00 $ 25.77
$ 31.37 $ 25.52 $ 28.49 $ 24.60
$ 26.57 $ 22.11 $ 26.84 $ 21.78
$ 25.57 $ 19.25 $ 24.05 $ 19.46
The Company does not anticipate paying any cash dividends in the near future. We anticipate that all
of our earnings for the foreseeable future will be used to repay debt, to repurchase outstanding shares, for
working capital, to support our operations and to finance the growth and development of our business. Any
future determination to pay dividends will be at the discretion of our Board, subject to compliance with
applicable law and any contractual provisions, including under agreements for indebtedness, that restrict or
limit our ability to pay dividends, and will depend upon, among other factors, our results of operations,
financial condition, earnings, capital requirements and other factors that our Board may deem relevant. For
additional information concerning restrictions relating to agreements for indebtedness, see Note 7 to the
consolidated financial statements.
23
Table of Contents
Performance Graph
The following graph shows a comparison of cumulative total return to holders of The Michaels
Companies, Inc.’s common shares against the cumulative total return of the S&P 500 Index and S&P 500
Retail Index from June 27, 2014 (the date the Company’s stock commenced trading on the NASDAQ Global
Select Market) through January 28, 2017. The comparison of the cumulative total returns for each investment
assumes that $100 was invested in The Michaels Companies, Inc. common shares and the respective indices on
June 27, 2014 through January 28, 2017 including reinvestment of any dividends. Historical share price
performance should not be relied upon as an indication of future share price performance.
The Michaels Companies, Inc.
S&P 500 Index
S&P 500 Retail Index
6/27/2014 1/31/2015 1/30/2016 1/28/2017
$ 100.00 $ 151.76 $128.24 $115.06
100.00 103.10 102.41 123.78
100.00 108.50 97.18 102.61
24
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information for the five most recent fiscal years has been derived from our
consolidated financial statements. This information should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere herein.
Fiscal Year
2014
(in thousands, except earnings per share, other operating and store count data)
2015
2016
2013
2012
(2)
(1)
(3)
Results of Operations Data:
Net sales
Operating income
Interest expense
Losses on early extinguishments
of debt and refinancing costs
Net income
Earnings per common share:
$ 5,197,292
715,280
126,270
$ 4,912,782
720,604
139,405
$ 4,738,144
626,529
198,409
$ 4,569,792
610,402
214,497
$ 4,407,545
592,050
245,466
7,292
378,159
8,485
362,912
74,312
217,395
14,420
243,430
32,551
199,734
Basic
Diluted
$
$
1.84
1.82
$
$
1.75
1.72
$
$
1.07
1.05
$
$
1.39
1.36
$
$
1.14
1.12
Weighted-average common shares
outstanding:
Basic
Diluted
Balance Sheet Data:
Cash and equivalents
Merchandise inventories
Total current assets
Total assets
Total current liabilities
Current portion of long-term debt
Long-term debt
Total liabilities
Stockholders’ deficit
Other Operating Data:
Average net sales per selling
square foot
Comparable store sales
Comparable store sales, at constant
currency
Total selling square footage (in
thousands)
Stores Open at End of Year:
Michaels
Aaron Brothers
Pat Catan's
Total stores open at end of year
(4)
204,735
206,354
206,845
209,346
203,229
207,101
174,797
178,628
174,715
178,068
$
298,813
1,127,777
1,542,805
2,147,640
1,024,224
31,125
2,723,187
3,846,066
(1,698,426)
$
409,391
1,002,607
1,507,723
2,031,287
912,860
24,900
2,744,942
3,755,382
(1,724,095)
$
378,295
958,171
1,423,778
1,961,108
889,632
24,900
3,089,781
4,072,633
(2,111,525)
$
238,864
901,308
1,237,336
1,767,132
825,556
16,400
3,633,279
4,549,414
(2,782,282)
$
55,961
862,478
1,007,479
1,519,510
851,618
150,514
2,855,834
3,823,471
(2,303,961)
$
$
223
(0.5)%
$
223
1.8 %
$
220
1.7 %
$
218
2.9 %
(0.4)%
3.2 %
2.4 %
3.4 %
215
1.5 %
1.5 %
23,539
22,068
21,605
21,108
20,588
1,223
109
35
1,367
1,196
117
—
1,313
1,168
120
—
1,288
1,136
121
—
1,257
1,099
125
—
1,224
(1) Fiscal 2012 consisted of 53 weeks while all other periods presented consisted of 52 weeks.
(2) Fiscal 2016 results of operations and balance sheet data includes the impact of the acquisition of Lamrite on
February 2, 2016, including non-recurring purchase accounting adjustment and integrations costs of $11.4
million. Lamrite’s net sales totaled $232.3 million in fiscal 2016.
(3) Fiscal 2014 operating income includes a $32.3 million charge associated with the IPO primarily related to a $30.2
million fee paid to certain related parties to terminate our management agreement.
(4) The calculation of average net sales per selling square foot includes only Michaels comparable stores. Aaron
Brothers, which is a smaller store model, and Pat Catan’s, which is a larger store model, are excluded from the
calculation.
25
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to
January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal
2016” relate to the 52 weeks ended January 28, 2017, references to “fiscal 2015” relate to the 52 weeks ended
January 30, 2016 and references to “fiscal 2014” relate to the 52 weeks ended January 31, 2015.
Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of
Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels
Companies, Inc. (the “Company”) was incorporated in Delaware in connection with the reorganization. In July
2014, we completed an initial public offering (“IPO”) of 27.8 million shares of common stock at a public
offering price of $17.00 per share, resulting in net proceeds of $445.7 million.
Fiscal 2016 Overview
With $5,197.3 million in net sales in fiscal 2016, we are the largest arts and crafts specialty retailer in
North America (based on store count) providing materials, project ideas and education for creative activities,
under the retail brands of Michaels, Aaron Brothers and Pat Catan’s. We also operate an international
wholesale business under the Darice brand name (“Darice”) and a market-leading vertically-integrated custom
framing business under the Artistree brand name. At January 28, 2017, we operated 1,223 Michaels stores, 109
Aaron Brothers stores and 35 Pat Catan’s stores.
Financial highlights for fiscal 2016 include the following:
· Net sales increased to $5,197.3 million, a 5.8% improvement over last year, primarily driven by
the acquisition of Lamrite West, Inc. (“Lamrite”) and the opening of 19 additional stores (net of
closures).
·
Comparable store sales decreased 0.5%, or 0.4%, at constant exchange rates.
· Our Michaels retail stores’ private brand merchandise drove approximately 57% of net sales in
fiscal 2016 compared to 54% of net sales in fiscal 2015.
· We reported operating income of $715.3 million, a decrease of 0.7% from the prior year,
including $11.4 million of purchase accounting adjustments and integration costs.
· We reported net income of $378.2 million, an increase of 4.2% from the prior year.
· Adjusted EBITDA, a non-GAAP measure that is a required calculation in our debt agreements,
improved by 0.8%, from $866.2 million in fiscal 2015 to $872.7 million in fiscal 2016 (see
“Management Discussion and Analysis of Financial Condition and Results of Operations - Non-
GAAP Measures”).
· We refinanced our term loan credit facility and our revolving credit facility during fiscal 2016.
26
Table of Contents
In fiscal 2016, we made significant progress implementing our strategic initiatives, including:
·
·
·
·
·
·
·
·
the acquisition of Lamrite, which enhanced our private brand development capabilities,
accelerated our direct sourcing initiatives and strengthened our business-to-business capabilities
through an international wholesale business under the Darice brand name;
the introduction of our fully-integrated “Make” brand campaign through television, radio, social
media and in-store events intended to leverage the growing customer trends of “do-it-yourself”
and “personalization” while also positioning Michaels in a more contemporary light;
creating flexible merchandising space in our stores to highlight newness and present stronger,
more cohesive seasonal product statements to customers;
the launch of our Michaels Rewards program, which allows us to differentiate our business from
others in our channel while providing us with valuable data to help tailor customer
communications more effectively;
the improvement of our in-store and online education programs, including the addition of more
free classes for children and adults;
improving our in-store presentation and raising operational standards to deliver a better shopping
experience;
delivering trend-right merchandise to our customers; and
the authorization from our Board of Directors to purchase up to $500.0 million of the
Company’s common stock on the open market.
Fiscal 2017 Outlook
In fiscal 2017, we intend to continue to expand our industry leadership through innovation and strategic
initiatives such as:
· making our stores more inviting to a broader set of customers, including those new to do-it-
yourself projects and more experienced crafters;
·
·
·
·
·
continuing to enhance our in-store shopping experience by creating a more visually appealing
environment and making it easier for our customers to shop;
broadening our merchandising and sourcing capabilities to better identify and source new trends,
merchandise and categories that enhance our portfolio of exclusive brands and products;
strengthening our connections with customers and reaching new customers through an expanded
marketing program, including print, digital, direct mail, broadcast and community events;
expanding our omni-channel offering of merchandise, promotional and marketing events; and
strengthening our business-to-business operations.
Comparable Store Sales
Comparable store sales represents the change in net sales for stores open the same number of months
in the comparable period of the previous year, including stores that were relocated or expanded during either
period, as well as e-commerce sales. A store is deemed to become comparable in its 14 month of operation in
order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not
considered comparable during the month
th
27
Table of Contents
it is closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the
month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes
comparable in its 14 month of operation after its reopening. Pat Catan’s stores will not be included in
comparable store sales until the beginning of fiscal 2017, the 13 month after the acquisition.
th
th
Results of Operations
The following table sets forth the percentage relationship to net sales of line items of our consolidated
statements of comprehensive income. This table should be read in conjunction with the following discussion
and with our consolidated financial statements, including the related notes.
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Related party expenses
Store pre-opening costs
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Other (income) expense, net
Income before income taxes
Income taxes
Net income
Fiscal 2016 Compared to Fiscal 2015
2016
100.0 %
61.0
39.0
25.2
—
0.1
13.8
2.4
0.1
—
11.2
3.9
7.3 %
Fiscal Year
2015
100.0 %
59.9
40.1
25.3
—
0.1
14.7
2.8
0.2
—
11.6
4.3
7.4 %
2014
100.0 %
59.9
40.1
26.0
0.8
0.1
13.2
4.2
1.6
0.1
7.4
2.8
4.6 %
Net Sales. Net sales increased $284.5 million in fiscal 2016, or 5.8%, compared to fiscal 2015. The
increase in net sales was due to a $232.3 million increase related to the acquisition of Lamrite in fiscal 2016
and a $75.1 million increase related to 19 additional stores opened (net of closures) since January 30, 2016.
The increase was partially offset by a $22.9 million decrease in comparable store sales. Comparable store sales
decreased 0.5% compared to fiscal 2015 due to a decrease in customer transactions, partially offset by an
increase in average ticket.
Gross Profit. Gross profit was 39.0% of net sales in fiscal 2016 compared to 40.1% in fiscal 2015.
The 110 basis point decline was primarily due to an increase in promotional activity and lower margins
associated with Lamrite’s wholesale business, including $4.0 million of non-recurring purchase accounting
adjustments related to inventory. The decline was partially offset by an increase in retail prices and sourcing
efficiencies.
Selling, General and Administrative . Selling, general and administrative (“SG&A”) was 25.2% of
net sales in fiscal 2016 compared to 25.3% in fiscal 2015. SG&A increased $65.1 million to $1,308.1 million in
fiscal 2016 due primarily to $72.4 million of expenses related to Lamrite, including $7.4 million of integration
costs, a $14.9 million increase in payroll-related costs, $10.7 million of costs associated with operating 19
additional stores (net of closures) and $9.0 million of costs to create flexible space in our stores to present new
and seasonally relevant merchandise. The increase was partially offset by a $45.6 million decrease in
performance-based compensation.
Interest Expense. Interest expense decreased $13.1 million to $126.3 million in fiscal 2016 compared
to fiscal 2015. The decrease was primarily attributable to $8.0 million of interest savings from the partial
redemption of our term loan credit facility in the fourth quarter of fiscal 2015, $3.8 million of interest savings
from the redemption of our remaining
28
Table of Contents
outstanding 7.5%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”) during the second quarter of fiscal 2015
and $1.1 million of interest savings from the refinancing of our revolving credit facility in the second quarter of
fiscal 2016.
Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a loss on the early
extinguishment of debt of $7.3 million during fiscal 2016, consisting of $6.9 million related to the amendment
of our term loan credit facility and $0.4 million related to the refinancing of our revolving credit facility.
During fiscal 2015, we recorded a loss on the early extinguishment of debt of $8.5 million related to the
redemption of our remaining outstanding PIK Notes and the partial prepayment of our Amended Term Loan
Credit Facility maturing in 2020 (“Additional Term Loan”), consisting of $4.4 million to write off related debt
issuance costs, $3.6 million of redemption premiums and a $0.5 million write-off of the unamortized net
discount of the Additional Term Loan.
Income Taxes. The effective tax rate for fiscal 2016 was 35.0% compared to 36.6% in the prior year.
The effective tax rate for fiscal 2016 was lower than the prior year primarily due to benefits realized associated
with our direct sourcing initiatives implemented in the current year and a decrease in state taxes.
Fiscal 2015 Compared to Fiscal 2014
Net Sales. Net sales increased $174.6 million in fiscal 2015, or 3.7%, compared to fiscal 2014. The
increase in net sales was due to a $91.5 million increase primarily related to 25 additional stores opened (net of
closures) since January 31, 2015 and an $83.1 million increase in comparable store sales. Comparable store
sales increased 1.8%, or 3.2% at constant exchange rates, due primarily to an increase in our average ticket.
Gross Profit. Gross profit was 40.1% as a percent of net sales for both fiscal 2015 and fiscal 2014. An
improvement related to an increase in retail prices and sourcing efficiencies was offset by an increase in
promotional activity as a result of the continued competitive retail environment and the negative impact of
foreign exchange rates.
Selling, General, and Administrative . SG&A was 25.3% of net sales in fiscal 2015 compared to
26.0% in fiscal 2014. SG&A increased $9.1 million to $1,243.0 million in fiscal 2015 due primarily to $10.9
million of costs associated with operating 25 additional stores (net of closures) and an increase in marketing
costs of $4.0 million, partially offset by a decrease in Canadian operating costs due primarily to the impact of
foreign exchange rates.
Related Party Expenses. Related party expenses decreased $35.7 million in fiscal 2015 compared to
the prior year due to the termination of the management services agreement in connection with our IPO
completed in July 2014.
Interest Expense. Interest expense decreased $59.0 million to $139.4 million in fiscal 2015. The
decrease is primarily attributable to $39.7 million of interest savings from the redemption of the remaining
outstanding PIK Notes in fiscal 2014 and fiscal 2015 and $19.5 million of interest savings from the refinancing
of the 7.75% Senior Notes due 2018 (“2018 Senior Notes”) during fiscal 2014.
Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a loss on the early
extinguishment of debt of $8.5 million during fiscal 2015 related to the redemption of our remaining
outstanding PIK Notes and the partial prepayment of our Additional Term Loan, consisting of $4.4 million to
write off related debt issuance costs, $3.6 million of redemption premiums and a $0.5 million write-off of the
unamortized net discount of the Additional Term Loan. During fiscal 2014, we recorded a loss on the early
extinguishment of debt of $74.3 million related to the redemption of our 2018 Senior Notes and the partial
redemption of our PIK Notes, consisting of $58.8 million of redemption premiums and $20.6 million to write
off related debt issuance costs. The loss in fiscal 2014 was partially offset by a $5.1 million write-off of the
unamortized premium on the 2018 Senior Notes.
Income Taxes. The effective tax rate for fiscal 2015 was 36.6% compared to 38.1% in the prior year.
The effective tax rate in fiscal 2015 was lower than the prior year primarily due to our assertion in fiscal 2015
to indefinitely reinvest the fiscal 2014 and fiscal 2015 earnings of our Canadian subsidiary into our operations
outside of the U.S., which is taxed at a lower rate than the U.S.
29
Table of Contents
Liquidity and Capital Resources
We require cash principally for day-to-day operations, to finance capital investments, purchase
inventory, service our outstanding debt and for seasonal working capital needs. We expect that our available
cash, cash flow generated from operating activities and funds available under our Amended Revolving Credit
Facility (as defined below) will be sufficient to fund planned capital expenditures, working capital
requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future.
Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected
by the occurrence of any of the events described under “Item 1A. Risk Factors” or our failure to meet our debt
covenants as described below. Our Amended Revolving Credit Facility provides senior secured financing of up
to $850.0 million, subject to a borrowing base. As of January 28, 2017, the borrowing base was $793.1 million,
of which we had no outstanding borrowings, $57.6 million of outstanding standby letters of credit and
$735.5 million of unused borrowing capacity. Our cash and cash equivalents totaled $298.8 million at January
28, 2017, of which $86.9 million was held by our foreign subsidiaries. If it were necessary to repatriate these
funds for use in the U.S., we would be required to pay U.S. taxes on the amount of undistributed earnings in
our foreign subsidiaries. However, it is our intent to indefinitely reinvest these funds outside the U.S.
On February 2, 2016, we completed the acquisition of Lamrite for $150.0 million, prior to certain
purchase price adjustments, utilizing our existing cash on hand. Lamrite operates an international wholesale
business under the Darice brand name and 35 arts and crafts retail stores, located primarily in Ohio and the
surrounding states, under the Pat Catan’s brand name. The retail stores have approximately 32,000 average
square feet of selling space per store. The acquisition is helping to enhance our private brand development
capabilities, accelerate our direct sourcing initiatives and strengthen our business-to-business capabilities.
In fiscal 2016, the Board of Directors authorized the Company to purchase $500.0 million of the
Company’s common stock on the open market. The share repurchase program does not have an expiration
date, and the timing and number of repurchase transactions under the program will depend on market
conditions, corporate considerations, debt agreements and regulatory requirements. Shares repurchased under
the program are held as treasury shares until retired. During fiscal 2016, we repurchased 17.2 million shares
for an aggregate amount of $400.7 million. During the first quarter of fiscal 2017, we repurchased an
additional 4.8 million shares of our common stock for an aggregate amount of $99.3 million, utilizing the
remaining availability under our share repurchase program.
We had total outstanding debt of $2,773.5 million at January 28, 2017, of which $2,263.5 million was
subject to variable interest rates and $510.0 million was subject to fixed interest rates.
Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our
ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from
meeting our obligations. Management reacts strategically to changes in economic conditions and monitors
compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and
flexibility.
We intend to use excess operating cash flows to invest in growth opportunities, repurchase
outstanding shares and repay portions of our indebtedness, depending on prevailing market conditions,
liquidity requirements, contractual restrictions and other factors. As such, we and our subsidiaries, affiliates
and significant shareholders may, from time to time, seek to retire or purchase our outstanding debt (including
publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated
transactions, by tender offer or otherwise. If we use our excess cash flows to repay our debt, it will reduce the
amount of excess cash available for additional capital expenditures.
Cash Flow from Operating Activities
Cash flows provided by operating activities was $564.4 million in fiscal 2016, an increase of $60.4
million from fiscal 2015. The improvement was primarily due to the timing of vendor payments and lower
interest payments as a result of debt redemptions, partially offset by an increase in estimated federal tax
payments and integration costs incurred as a result of the acquisition of Lamrite.
30
Table of Contents
Inventory increased 12.5% to $1,127.8 million at January 28, 2017, from $1,002.6 million at January
30, 2016. The increase in inventory was primarily due to $91.5 million in additional inventory from the
acquisition of Lamrite. Average inventory per Michaels store (inclusive of distribution centers, in-transit and
inventory for the Company’s e-commerce site) increased 1.6% to $826,000 at January 28, 2017, from $813,000
at January 30, 2016. The increase was primarily due to additional inventory to support our core business,
including improving our in-stock presentation and supporting key paper crafting initiatives.
Cash Flow from Investing Activities
The following table includes capital expenditures paid during the periods presented (in thousands):
New and relocated stores and stores not yet opened
Existing stores
Information systems
Corporate and other
(1)
2016
2014
Fiscal Year
2015
$ 22,489 $ 30,315 $ 29,846
48,289 49,898
47,290
32,228 40,191
27,584
17,099
13,088 17,845
$114,462 $123,920 $137,780
(1)
In fiscal 2016, we incurred capital expenditures related to the opening of 46 Michaels stores, including the
relocation of 14 stores, and the opening of one Aaron Brothers store and four Pat Catan’s stores, including the
relocation of one Pat Catan’s store. In fiscal 2015, we incurred capital expenditures related to the opening of 47
Michaels stores, including the relocation of 17 stores. In fiscal 2014, we incurred capital expenditures related to
the opening of 45 Michaels stores, including the relocation of 13 stores, and five Aaron Brothers stores.
We currently estimate that our capital expenditures will be $125.0 million to $135.0 million in fiscal
2017. We plan to invest in the infrastructure necessary to support the further development of our business. In
fiscal 2017, we plan to open approximately 30 new Michaels stores, including approximately 13 relocations.
Term Loan Credit Facility
On January 28, 2013, MSI entered into an amended and restated credit agreement maturing on January
28, 2020 (the “Credit Agreement”) to amend various terms of MSI’s then existing term loan credit agreement
with Deutsche Bank AG New York Branch (“Deutsche Bank”) and other lenders. The Credit Agreement,
together with the related security, guarantee and other agreements, is referred to as the “Term Loan Credit
Facility”.
On July 2, 2014, MSI issued an additional $850.0 million of debt under the Term Loan Credit Facility
maturing in 2020 (“Additional Term Loan”). The Additional Term Loan was issued at 99.5% of face value,
resulting in an effective interest rate of 4.02%. The net proceeds from this borrowing and the issuance of an
additional $250.0 million of the 5.875% senior subordinated notes were used to fully redeem the then
outstanding 2018 Senior Notes and to pay the applicable make-whole premium and accrued interest.
On December 28, 2015, MSI voluntarily prepaid $150.0 million in principal of the Additional Term
Loan for an aggregate redemption price (including any unpaid interest) of $151.0 million.
On September 28, 2016, MSI entered into an amendment with Deutsche Bank and other lenders to
amend and restate our Term Loan Credit Facility. The amended and restated credit agreement, together with
the related security, guarantee and other agreements, is referred to as the “Amended Term Loan Credit
Facility”. The Amended Term Loan Credit Facility matures on January 28, 2023.
As of January 28, 2017, the Amended Term Loan Credit Facility provides for senior secured
financing of $2,263.5 million. MSI has the right under the Amended Term Loan Credit Facility to request
additional term loans (a) in the aggregate amount of up to $750.0 million or (b) at MSI’s election, an amount of
additional term loans if the consolidated secured debt ratio (as defined in the Amended Term Loan Credit
Facility) is no more than 3.25 to 1.00 on a pro forma basis as of the last day of the most recently ended four
quarter period, subject to certain adjustments. The lenders under
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the Amended Term Loan Credit Facility will not be under any obligation to provide any such additional term
loans, and the incurrence of any such additional term loans is subject to customary conditions.
Borrowings under the Amended Term Loan Credit Facility bear interest at a rate per annum, at MSI’s
option, of either (a) a margin of 1.75% plus a base rate defined as the highest of (1) the prime rate of Deutsche
Bank, (2) the federal funds effective rate plus 0.5%, and (3) the one-month London Interbank Offered Rate
(“LIBOR”) plus 1% or (b) a margin of 2.75% plus the applicable LIBOR. Subsequent to the first fiscal quarter
following the amendment, the applicable margin will be 1.50% for base rate loans and 2.50% for LIBOR loans
if our consolidated secured debt ratio is below 1.50:1.00 for the applicable quarter.
There are no limitations on dividends and certain other restricted payments so long as (a) no event of
default shall have occurred and be continuing and (b) immediately after giving pro forma effect to such
restricted payment(s) and the application of proceeds therefrom, the consolidated total leverage ratio is less
than or equal to 3.75 to 1.00.
MSI must offer to prepay outstanding term loans at 100% of the principal amount, plus any unpaid
interest, with the proceeds of certain asset sales or casualty events under certain circumstances. MSI may
voluntarily prepay outstanding loans under the Amended Term Loan Credit Facility at any time without
premium or penalty other than customary breakage costs with respect to LIBOR loans; provided, that if MSI
enters into certain repricing transactions on or before March 28, 2017, the amount of the repricing payment
will be subject to a premium equal to 1.0%.
MSI is required to make scheduled quarterly payments equal to 0.25% of the original principal
amount of the term loans (subject to adjustments relating to the incurrence of additional term loans) for the first
six years and three quarters of the Amended Term Loan Credit Facility, with the balance paid on January 28,
2023.
All obligations under the Amended Term Loan Credit Facility are unconditionally guaranteed, jointly
and severally, by Michaels Funding, Inc. (“Holdings”) and all of MSI’s existing domestic material subsidiaries
and are required to be guaranteed by certain of MSI’s future domestic wholly-owned material subsidiaries
(“the Subsidiary Guarantors”). All obligations under the Amended Term Loan Credit Facility, and the
guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of
Holdings, MSI and the Subsidiary Guarantors, including:
·
·
·
a first-priority pledge of MSI’s capital stock and all of the capital stock held directly by MSI and
the Subsidiary Guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65%
of the voting stock of such foreign subsidiary and 100% of the non-voting stock of such
subsidiary);
a first-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor, including substantially all of
MSI’s and its subsidiaries’ owned real property and equipment, but excluding, among other
things, the collateral described below; and
a second-priority security interest in personal property consisting of inventory and related
accounts, cash, deposit accounts, all payments received by Holdings, MSI or the Subsidiary
Guarantors from credit card clearinghouses and processors or otherwise in respect of all credit
card charges and debit card charges for sales of inventory by Holdings, MSI and the Subsidiary
Guarantors, and certain related assets and proceeds of the foregoing.
The Amended Term Loan Credit Facility contains a number of negative covenants that are
substantially similar to, but more restrictive in certain respects than, those governing the 2020 Senior
Subordinated Notes (as defined below), as well as certain other customary representations and warranties,
affirmative and negative covenants and events of default. As of January 28, 2017, MSI was in compliance with
all covenants.
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5.875% Senior Subordinated Notes due 2020
On December 19, 2013, MSI issued $260.0 million in principal amount of 5.875% senior
subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes”). On June 16, 2014, MSI issued an
additional $250.0 million of the 2020 Senior Subordinated Notes at 102% of face value, resulting in an
effective interest rate of 5.76%. Interest is payable semi-annually on June 15 and December 15 of each year.
The net proceeds from this borrowing, and the $850.0 million Additional Term Loan, were used to fully
redeem the outstanding 2018 Senior Notes and to pay the applicable make-whole premium and accrued interest.
The 2020 Senior Subordinated Notes are guaranteed, jointly and severally, fully and unconditionally,
on an unsecured senior subordinated basis, by each of MSI’s subsidiaries that guarantee indebtedness under the
Amended Revolving Credit Facility and the Amended Term Loan Credit Facility (collectively defined as the
“Senior Secured Credit Facilities”).
The 2020 Senior Subordinated Notes and the guarantees are MSI’s and the guarantors’ unsecured
senior subordinated obligations and are (i) subordinated in right of payment to all of MSI’s and the guarantors’
existing and future senior debt, including the Senior Secured Credit Facilities; (ii) rank equally in right of
payment to all of MSI’s and the guarantors’ future senior subordinated debt; (iii) effectively subordinated to all
of MSI’s and the guarantors’ existing and future secured debt (including the Senior Secured Credit Facilities)
to the extent of the value of the assets securing such debt; (iv) rank senior in right of payment to all of the
MSI’s and the guarantors’ existing and future debt and other obligations that are, by their terms, expressly
subordinated in right of payment to the 2020 Senior Subordinated Notes; and (v) are structurally subordinated
to all obligations of MSI’s subsidiaries that are not guarantors of the 2020 Senior Subordinated Notes.
MSI may redeem all or part of the 2020 Senior Subordinated Notes, upon notice, at the redemption
prices set forth below (expressed as percentages of the principal amount of the 2020 Senior Subordinated
Notes to be redeemed), plus any unpaid interest through the applicable date of redemption, if redeemed during
the twelve-month period beginning on December 15 of each of the years indicated below:
Year
2016
2017
2018 and thereafter
Percentage
102.938 %
101.469 %
100.000 %
Upon a change in control, MSI is required to offer to purchase all of the 2020 Senior Subordinated
Notes at a price in cash equal to 101% of the aggregate principal amount, plus any unpaid interest. The 2020
Senior Subordinated Indenture contains covenants limiting MSI’s ability, and the ability of MSI’s restricted
subsidiaries, to incur or guarantee additional debt, prepay debt that is subordinated to the 2020 Senior
Subordinated Notes, issue stock of subsidiaries, make certain investments, loans, advances and acquisitions,
create liens on MSI’s and such subsidiaries’ assets to secure debt, enter into transactions with affiliates, merge
or consolidate with another company; and sell or otherwise transfer assets. The covenants also limit MSI’s
ability, and the ability of MSI’s restricted subsidiaries, to pay dividends or distributions on MSI’s capital stock
or repurchase MSI’s capital stock, subject to certain exceptions, including dividends, distributions and
repurchases up to an amount in excess of (i) $100.0 million plus (ii) a basket that builds based on 50% of
MSI’s consolidated net income (as defined in the 2020 Senior Subordinated Indenture) and certain other
amounts, in each case, to the extent such payment capacity is not applied as otherwise permitted under the
2020 Senior Subordinated Indenture and subject to certain conditions. However, there are no limitations on
dividends and certain other restricted payments so long as (a) no default shall have occurred and be continuing
and (b) immediately after giving pro forma effect to such restricted payment(s) and the application of proceeds
therefrom, the consolidated total leverage ratio is less than or equal to 3.25 to 1.00. As of January 28, 2017, the
permitted restricted payment amount was $658.5 million. As of January 28, 2017, MSI was in compliance with
all covenants.
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Revolving Credit Facility
On September 17, 2012, MSI entered into a second amended and restated credit agreement (the
“Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) and other lenders to amend
various terms of MSI’s then existing senior secured asset-based revolving credit facility. The Credit
Agreement, together with related security, guarantee and other agreements, is referred to as the “Revolving
Credit Facility”. On May 27, 2016, MSI entered into an amended and restated credit agreement with Wells
Fargo and other lenders to, among other things, increase the availability and extend the maturity date of our
Revolving Credit Facility. The amended credit agreement, together with the related security, guarantee and
other agreements, is referred to as the “Amended Revolving Credit Facility”.
The Amended Revolving Credit Facility provides for senior secured financing of up to $850.0
million, subject to a borrowing base. The borrowing base under the Amended Revolving Credit Facility equals
the sum of: (i) 90% of eligible credit card receivables, (ii) 85% of eligible trade receivables, (iii) 90% to 92.5%
of the appraised value of eligible inventory, plus (iv) 90% to 92.5% of the lesser of (a) the appraised value of
eligible inventory supported by letters of credit, and (b) the face amount of the letters of credit, less (v) certain
reserves. The Amended Revolving Credit Facility matures in May 2021, subject to a springing maturity date if
certain of our outstanding indebtedness has not been repaid, redeemed, refinanced, cash collateralized or if the
necessary availability reserves have not been established prior to such time (the “ABL Maturity Date”).
As of January 28, 2017 and January 30, 2016, the borrowing base was $793.1 million and $650.0
million, respectively, of which MSI had availability of $735.5 million and $586.8 million, respectively.
Borrowing capacity is available for letters of credit and borrowings on same-day notice. Outstanding standby
letters of credit as of January 28, 2017 totaled $57.6 million.
The Amended Revolving Credit Facility also provides MSI with the right to request up to $200.0
million of additional commitments. The lenders will not be under any obligation to provide any such additional
commitments, and any increase in commitments is subject to customary conditions. If we were to request
additional commitments, and the lenders were to agree to provide such commitments, the facility size could be
increased up to $1,050.0 million, however, MSI’s ability to borrow would still be limited by the borrowing
base.
Borrowings under the Amended Revolving Credit Facility bear interest at a rate per annum equal to,
at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Wells Fargo,
(2) the federal funds effective rate plus 0.50% and (3) LIBOR subject to certain adjustments plus 1.00% or
(b) LIBOR subject to certain adjustments, in each case plus an applicable margin. The initial applicable margin
is (a) 0.25% for prime rate borrowings and 1.25% for LIBOR borrowings. The applicable margin is subject to
adjustment each fiscal quarter based on the excess availability under the Amended Revolving Credit Facility.
Excess availability is defined as the Loan Cap (as defined below) plus certain unrestricted cash of Holdings,
MSI and the Subsidiary Guarantors, less the outstanding credit extensions. Same-day borrowings bear interest
at the base rate plus the applicable margin.
MSI is required to pay a commitment fee on the unutilized commitments under the Amended
Revolving Credit Facility, which initially is 0.25% per annum. In addition, MSI must pay customary letter of
credit fees and agency fees.
All obligations under the Amended Revolving Credit Facility are unconditionally guaranteed, jointly
and severally, by Holdings and all of MSI’s existing domestic material subsidiaries and are required to be
guaranteed by the Subsidiary Guarantors. All obligations under the Amended Revolving Credit Facility, and
the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets
of Holdings, MSI and the Subsidiary Guarantors, including:
·
a first-priority security interest in personal property consisting of inventory and related accounts,
cash, deposit accounts, all payments received by Holdings, MSI or the Subsidiary Guarantors
from credit card clearinghouses and processors or otherwise in respect of all credit card charges
and debit card charges for sales of inventory by Holdings, MSI and the Subsidiary Guarantors,
and certain related assets and proceeds of the foregoing;
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·
·
a second-priority pledge of all of MSI’s capital stock and the capital stock held directly by MSI
and the Subsidiary Guarantors (which pledge, in the case of the capital stock of any foreign
subsidiary, is limited to 65% of the voting stock of such foreign subsidiary and 100% of the non-
voting stock of such subsidiary); and
a second-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor, including substantially all of
MSI’s and its subsidiaries’ owned real property and equipment.
If, at any time, the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and
undrawn letters of credit under the Amended Revolving Credit Facility exceeds the lesser of (i) the
commitment amount and (ii) the borrowing base (the “Loan Cap”), MSI will be required to repay outstanding
loans and cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of
the commitment amount. If availability under the Amended Revolving Credit Facility is less than the greater
of (i) 10.0% of the Loan Cap and (ii) $50.0 million for five consecutive business days, or, if certain events of
default have occurred, MSI will be required to repay outstanding loans and cash collateralize letters of credit
with the cash MSI is required to deposit daily in a collection account maintained with the agent under the
Amended Revolving Credit Facility. Availability under the Amended Revolving Credit Facility means the
Loan Cap minus the outstanding credit extensions. MSI may voluntarily reduce the unutilized portion of the
commitment amount and repay outstanding loans at any time without premium or penalty, other than
customary breakage costs with respect to LIBOR loans. There is no scheduled amortization under the
Amended Revolving Credit Facility. The principal amount of the loans outstanding is due and payable in full
on the ABL Maturity Date.
The covenants limiting dividends and other restricted payments, investments, loans, advances and
acquisitions, and prepayments or redemptions of indebtedness, each permit the restricted actions in an
unlimited amount, subject to the satisfaction of certain payment conditions, principally that MSI must meet
specified excess availability requirements and minimum consolidated fixed charge coverage ratios, to be tested
on a pro forma basis as of the date of the restricted action and for the 90-day period preceding such restricted
action. Adjusted EBITDA, as defined in the Amended Revolving Credit Facility, is used in the calculation of
the consolidated fixed charge coverage ratios.
From the time when MSI has excess availability less than the greater of (a) 10.0% of the Loan Cap
and (b) $50.0 million, until the time when MSI has excess availability greater than the greater of (a) 10.0% of
the Loan Cap and (b) $50.0 million for 30 consecutive days, the Amended Revolving Credit Facility will
require MSI to maintain a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The Amended
Revolving Credit Facility also contains certain customary representations and warranties, affirmative
covenants and provisions relating to events of default (including change of control and cross-default to material
indebtedness).
The Amended Revolving Credit Facility contains a number of covenants that, among other things and
subject to certain exceptions, restrict MSI’s ability, and the ability of its restricted subsidiaries, to:
·
·
incur or guarantee additional indebtedness;
pay dividends on MSI’s capital stock or redeem, repurchase or retire MSI’s capital stock;
· make investments, loans, advances and acquisitions;
·
·
·
·
·
create restrictions on the payment of dividends or other amounts to MSI from its restricted
subsidiaries;
engage in transactions with MSI’s affiliates;
sell assets, including capital stock of MSI’s subsidiaries;
prepay or redeem indebtedness;
consolidate or merge; and
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·
create liens.
PIK Toggle Notes
On July 29, 2013, Michaels FinCo Holdings, LLC (“FinCo Holdings”) and Michaels FinCo, Inc.
(“FinCo Inc.”) issued $800.0 million aggregate principal amount of PIK Notes in a private transaction. On
July 2, 2014, the Company completed an IPO and received net proceeds totaling $445.7 million. The net
proceeds were used to redeem $439.1 million of the outstanding PIK Notes and to pay other expenses of the
offering. The aggregate redemption price (including redemption premium and any unpaid interest) was $473.5
million. On December 10, 2014, the Company redeemed $180.0 million of the PIK Notes for an aggregate
redemption price (including redemption premium and any unpaid interest) of $188.4 million.
On May 6, 2015, the Company redeemed the remaining $180.9 million of the PIK Notes for an
aggregate redemption price (including redemption premium and any unpaid interest) of $188.0 million. This
final payment retired the PIK Notes and discharged the obligations under the indenture governing the PIK
Notes.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. We
do not typically enter into off-balance sheet arrangements, except for arrangements related to operating lease
commitments, service contract commitments and trade letters of credit, as disclosed in the contractual
obligations table below. Neither we nor our subsidiaries typically guarantee the obligations of unrelated
parties.
Contractual Obligations
As of January 28, 2017, our contractual obligations were as follows (in thousands):
Payments Due By Fiscal Year
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
(1)
Total debt
Operating lease commitments
Interest payments
Other commitments
(3)
(4)
(2)
$ 2,773,475 $ 31,125 $
2,049,987 422,885
703,051 117,058
148,340 115,481
553,575 $ 2,138,975
462,982
465,795
158,804
—
$ 5,674,853 $ 686,549 $ 1,011,758 $ 1,215,785 $ 2,760,761
49,800 $
698,325
195,873
231,316
32,317
542
(1) Total debt only includes principal payments owed on the 2020 Senior Subordinated Notes and the Amended Term Loan
Credit Facility. The amounts shown above do not include unamortized premiums/discounts and deferred debt issuance costs
reflected in the Company’s consolidated balance sheets since they do not represent contractual obligations.
(2) Our operating lease commitments generally include non-cancelable leases for property and equipment used in our operations.
Excluded from our operating lease commitments are amounts related to insurance, taxes and common area maintenance
associated with property and equipment. Such amounts historically represented approximately 34% of the total lease obligation
over the previous three fiscal years.
(3) Debt associated with our Amended Term Loan Credit Facility was $2,263.5 million at January 28, 2017 and is subject to
variable interest rates. The amounts included in interest payments in the table for the Amended Term Loan Credit Facility
were based on the indexed interest rate in effect at January 28, 2017. Debt associated with the 2020 Senior Subordinated
Notes was $510.0 million at January 28, 2017 and was subject to fixed interest rates. We had no outstanding borrowings under
our Amended Revolving Credit Facility at January 28, 2017. Under our Amended Revolving Credit Facility, we are required to
pay a commitment fee of 0.25% per year on the unutilized commitments. The amounts included in interest payments for the
Amended Revolving Credit Facility were based on this annual commitment fee.
(4) Other commitments include trade letters of credit and service contract obligations. Our service contract obligations were
calculated based on the time period remaining in the contract or to the earliest possible date of termination, if permitted to be
terminated by Michaels upon notice, whichever is shorter.
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Non-GAAP Measures
The following table sets forth certain non-GAAP measures the Company uses to manage our
performance and measure compliance with certain debt covenants. The Company defines “EBITDA
(excluding losses on early extinguishments of debt and refinancing costs)” as net income before interest,
income taxes, depreciation, amortization and losses on early extinguishments of debt and refinancing costs.
The Company defines “Adjusted EBITDA” as EBITDA (excluding losses on early extinguishments of debt
and refinancing costs) adjusted for certain defined amounts in accordance with the Company’s Amended Term
Loan Credit Facility and Amended Revolving Credit Facility (collectively, the “Adjustments”).
The Company has presented EBITDA (excluding losses on early extinguishments of debt and
refinancing costs) and Adjusted EBITDA to provide investors with additional information to evaluate our
operating performance and our ability to service our debt. Adjusted EBITDA is a required calculation under
the Company’s Senior Secured Credit Facilities. As it relates to the Senior Secured Credit Facilities, Adjusted
EBITDA is used in the calculations of fixed charge coverage and leverage ratios, which under certain
circumstances determine mandatory repayments or maintenance covenants and may restrict the Company’s
ability to make certain payments (characterized as restricted payments), investments (including acquisitions)
and debt repayments.
As EBITDA (excluding losses on early extinguishments of debt and refinancing costs) and Adjusted
EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S. generally
accepted accounting principles (“GAAP”), these measures should not be considered in isolation of, or as a
substitute for, net income, as an indicator of operating performance, or net cash provided by operating
activities as an indicator of liquidity. Our computation of EBITDA (excluding losses on early extinguishments
of debt and refinancing costs) and Adjusted EBITDA may differ from similarly titled measures used by other
companies.
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The following table shows a reconciliation of EBITDA (excluding losses on early extinguishments of
debt and refinancing costs) and Adjusted EBITDA to net income and net cash provided by operating activities
(in thousands):
Fiscal Year
Net cash provided by operating activities
Depreciation and amortization
Share-based compensation
Debt issuance costs amortization
Accretion of long-term debt, net
Deferred income taxes
Losses on early extinguishments of debt and refinancing costs
(Losses) gains on disposition of property and equipment
Excess tax benefits from share-based compensation
Changes in assets and liabilities
Net income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Income taxes
Depreciation and amortization
Interest income
EBITDA (excluding losses on early extinguishments of debt and
refinancing costs)
Adjustments:
Share-based compensation
Management fees to Sponsors and others
Severance costs
Store pre-opening costs
Store remodel costs
Foreign currency transaction losses
Store closing costs
Lamrite integration costs
IPO costs
Other
(1)
Adjusted EBITDA
2016
2014
2015
$ 564,417 $ 504,047 $ 441,997
(110,858)
(114,756)
(19,387)
(15,064)
(10,333)
(8,467)
516
150
(15,282)
(8,611)
(74,312)
(8,485)
(3,995)
25
5,081
14,507
3,968
(434)
217,395
362,912
198,409
139,405
74,312
8,485
133,639
209,208
110,858
114,756
(363)
(615)
(115,801)
(16,506)
(6,583)
334
(4,570)
(7,292)
(120)
10,027
(45,747)
378,159
126,270
7,292
203,614
115,801
(820)
830,316
834,151
734,250
16,506
—
6,113
4,554
895
667
2,877
7,390
—
3,382
19,387
35,682
4,123
5,172
3,886
2,757
1,931
—
2,134
3,497
$ 872,700 $ 866,171 $ 812,819
15,064
—
2,733
4,858
4,554
579
(104)
—
—
4,336
(1) Other adjustments primarily relate to items such as moving and relocation expenses, franchise taxes, sign on
bonuses and certain legal expenses.
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in conformity with U.S. GAAP. These
consolidated financial statements include some amounts that are based on our informed judgments and
estimates. Our significant accounting policies are discussed in Note 1 to the consolidated financial statements.
Our critical accounting policies represent those policies that are subject to judgments and uncertainties. The
following discussion addresses our most critical accounting policies, which are those that are both important to
the portrayal of our financial condition and results of operations and that require significant judgment or use of
complex estimates.
Merchandise Inventories. Merchandise inventories are valued at the lower of cost or market, with
cost determined using a weighted-average method. Cost is calculated based upon the purchase price of an item
at the time it is received by us, and also includes the cost of warehousing, handling, purchasing, and importing,
as well as inbound and
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outbound transportation, partially offset by vendor allowances. This net inventory cost is recognized through
cost of sales when the inventory is sold. It is impractical for us to assign specific allocated overhead costs and
vendor allowances to individual units of inventory. As such, to match net inventory costs against the related
revenues, we estimate the net inventory costs to be deferred and recognized each period as the inventory is
sold.
We utilize perpetual inventory records to value inventory in our stores. Physical inventory counts are
performed in a significant number of stores during each fiscal quarter by a third-party inventory counting
service, with substantially all stores open longer than one year subject to at least one count each fiscal year.
We adjust our perpetual records based on the results of the physical counts. We maintain a provision for
estimated shrinkage based on the actual historical results of our physical inventories. We compare our
estimates to the actual results of the physical inventory counts as they are taken and adjust the shrink estimates
accordingly. A 10% change in our estimated shrinkage reserve would have affected net income by $1.0
million for fiscal 2016. We also evaluate our merchandise to ensure that the expected net realizable value of
the merchandise held at the end of a fiscal period exceeds cost. In the event that the expected net realizable
value is less than cost, we reduce the value of that inventory accordingly. A 10% change in our inventory
valuation reserve would have affected net income by $0.9 million in fiscal 2016.
Vendor allowances, which primarily represent volume rebates and cooperative advertising funds, are
recorded as a reduction of the cost of the merchandise inventories and a subsequent reduction in cost of sales
when the inventory is sold. We generally earn vendor allowances as a percentage of certain merchandise
purchases with no minimum purchase requirements.
Goodwill and Other Indefinite-Lived Intangible Assets. We review goodwill and other indefinite-
lived intangible assets for impairment each year in the fourth quarter, or more frequently if events occur which
indicate the carrying value may not be recoverable. We elected to perform a qualitative assessment for our
Michaels-U.S. reporting unit to determine whether it is more likely than not (that is, a likelihood of more than
50 percent) that the fair value of the goodwill is less than its carrying value. Factors used in our qualitative
assessment include, but are not limited to, macroeconomic conditions, industry and market conditions, cost
factors, overall financial performance and Company and reporting unit specific events. If, based on our
qualitative assessment, we determine that it is more likely than not that the fair value is less than the carrying
amount, we will compare the carrying value of the Michaels-U.S. goodwill to its estimated fair value. If the
carrying value of the goodwill exceeds the estimated fair value, we determine the fair value of all assets and
liabilities of the reporting unit, including the implied fair value of goodwill. If the carrying value of goodwill
exceeds the implied fair value, we recognize an impairment charge equal to the difference.
For all other reporting units, we estimated the fair value of goodwill and indefinite-lived intangible
assets using the present value of future cash flows expected to be generated by the reporting units. If the
carrying value of the goodwill or indefinite-lived intangible assets exceeds the estimated fair value, an
impairment charge is recorded to write the assets down to their estimated fair value.
We estimate fair value using the present value of future cash flows expected to be generated by the
reporting unit using a weighted-average cost of capital, terminal values and updated financial projections. If
our actual results are not consistent with the estimates and assumptions used to calculate fair value, we could
be required to recognize an impairment. Based on the results of our assessments, no impairments were
required for the fiscal periods presented in the consolidated financial statements.
Long-Lived Assets. Long-lived assets other than goodwill and assets with indefinite lives, such as
property and equipment and intangible assets subject to amortization, are evaluated for indicators of
impairment whenever events or changes in circumstances indicate their carrying amounts may not be
recoverable. For store assets, we evaluate the performance of individual stores for indicators of impairment and
underperforming stores are selected for further evaluation to determine whether their carrying amounts are
recoverable.
Our initial indicator that store assets are considered to be recoverable is that the estimated
undiscounted cash flows for the remaining lease term exceed the carrying value of the assets. If the evaluation
indicates that the carrying value of the asset may not be recoverable, the potential impairment is measured
based on a projected discounted cash flow method using assumptions about key store variables, including sales,
growth rate, gross margin, payroll and other
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controllable expenses. Furthermore, management considers other factors when evaluating stores for
impairment, including the individual store’s execution of its operating plan and other local market conditions.
If the carrying value exceeds the fair value, an impairment is recorded.
Our evaluation requires consideration of a number of factors including changes in consumer
demographics, key store level assumptions and other uncertain future events. Accordingly, our accounting
estimates may change from period to period. These factors could cause management to conclude impairment
indicators exist and require that tests be performed, which could result in a determination that the value of
long-lived assets is impaired, resulting in a write down to fair value.
Self-Insurance. We have insurance coverage for losses in excess of self-insurance limits for medical
claims, general liability and workers’ compensation claims. Our liability represents an estimate of the ultimate
cost of claims incurred as of the balance sheet dates. The estimated liability is not discounted and is established
based upon analysis of historical data and actuarial estimates. While we believe these estimates are reasonable
based on the information currently available, if actual trends, including the severity or frequency of claims,
medical cost inflation, or fluctuations in premiums differ from our estimates, our results of operations could be
impacted. A 10% change in our self-insurance reserves would have affected net income by $4.2 million in
fiscal 2016.
Share-Based Compensation. ASC 718, Stock Compensation (“ASC 718”) requires all share-based
payments to employees, including grants of employee stock options and restricted shares, to be recognized
using the fair value method of accounting. Share-based awards are recognized ratably over the requisite service
period. All grants of our stock options have an exercise price equal to the fair market value of our common
stock on the date of grant. Because we were privately held prior to June 27, 2014 and there was no public
market for the common stock, the fair value of our equity was estimated by our management, relying in part on
an independent appraisal of the fair market value by a third-party valuation firm and approved by our Board at
the time option grants were awarded. For the first and second quarters of fiscal 2014, valuations completed
relied on projections of our future performance, estimates of our weighted-average cost of capital, and metrics
based on the performance of a peer group of similar companies, including valuation multiples and stock price
volatility. Following our IPO, the exercise price of stock options are based on the closing market price of our
common stock on the grant date.
The following table details information on stock options granted by quarter for fiscal 2016:
Quarter end date
April 30, 2016
July 30, 2016
October 29, 2016
January 28, 2017
Number of
options
granted
Weighted-
average
exercise
price
Weighted-
average fair
value of options
at grant
226,730 $ 27.49 $
30,150 $ 28.74 $
1,424,995 $ 23.94 $
63,575 $ 24.38 $
6.94
7.41
6.13
6.49
Other assumptions used in the option value models for estimating the fair value of stock option
awards include expected volatility of our common stock share price, expected terms of the options, expected
dividends and risk-free interest rates. The expected volatility rate is based on our historical volatility as well as
historical and implied volatilities from the exchange-traded options on the common stock of a peer group of
companies. We utilize historical exercise and post-vesting employment behavior to estimate the expected
terms of the options and assume a zero dividend rate. The risk-free interest rate is based on the yields of U.S.
Treasury instruments with approximately the same term as the expected life of the stock option award. Our
forfeiture assumptions are estimated based on historical experience and anticipated events. We update our
assumptions quarterly based on historical trends and current market observations.
Income Taxes. Deferred tax assets, including the benefit of net operating loss and tax credit
carryforwards, are evaluated based on the guidelines for realization and are reduced by a valuation allowance if
it is deemed more likely than not that such assets will not be realized. We consider several factors in evaluating
the realizability of our deferred tax assets, including the nature, frequency and severity of recent losses, the
remaining years available for carryforward, the tax laws of the applicable jurisdiction, the future profitability
of the operations in the jurisdiction, and tax planning
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strategies. Our judgments and estimates concerning realizability of deferred tax assets could change if any of
the evaluation factors change, resulting in an increase or decrease to income tax expense in any period.
We record a liability for uncertain tax positions to the extent a tax position taken or expected to be
taken in a tax return does not meet certain recognition or measurement criteria. Considerable management
judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws,
regulations and taxing authority rulings, as well as to the expiration of statutes of limitations in the numerous
and varied jurisdictions in which we operate. Our judgments and estimates may change as a result of evaluation
of new information, such as the outcome of tax audits or changes to or further interpretations of tax laws and
regulations, resulting in an increase or decrease to income tax expense in any period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Risk
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the
functional currency of our Canadian subsidiaries. Our sales, costs and expenses of our Canadian subsidiaries,
when translated into U.S. dollars, can fluctuate due to exchange rate movement. A 10% increase or decrease in
the exchange rate of the Canadian dollar would have increased or decreased net income by approximately $11
million for fiscal 2016.
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our Amended Term Loan
Credit Facility and our Amended Revolving Credit Facility. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt” for
further detail. The interest rates on our Amended Term Loan Credit Facility and our Amended Revolving
Credit Facility will reprice periodically, which will impact our earnings and cash flow. The interest rate on our
2020 Senior Subordinated Notes is fixed. Based on our overall interest rate exposure to variable rate debt
outstanding as of January 28, 2017, a 1% change in interest rates would impact income before income taxes by
approximately $23 million for fiscal 2016. A 1% change in interest rates would impact the fair value of our
long-term fixed rate debt by approximately $14 million. A change in interest rates would not materially affect
the fair value of our variable rate debt as the debt reprices periodically.
Inflation Risk
We do not believe inflation and changing commodity prices have had a material impact on our net
sales, income from continuing operations, plans for expansion or other capital expenditures for any year during
the three-year period ended January 28, 2017. However, we cannot be sure inflation and changing commodity
prices will not have an adverse impact on our operating results, financial condition, plans for expansion or
other capital expenditures in future periods.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Consolidated Financial Statements and Supplementary Data on page F-1. The
Consolidated Financial Statements and Supplementary Data are included on pages F-2 through F-36 and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Included in this Annual Report on Form 10-K are certifications by our Chief Executive Officer and
our Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act
of 1934, as amended.
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This section includes information concerning the controls and controls evaluation referred to in the
certifications. Page F-2 of this Report includes the attestation report of Ernst & Young LLP, our independent
registered public accounting firm, regarding its audit of the effectiveness of our internal control over financial
reporting. This section should be read in conjunction with the Ernst & Young LLP attestation for a complete
understanding of this section.
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) promulgated by the SEC under the Securities Exchange Act of 1934) designed to provide reasonable
assurance information, which is required to be timely disclosed, is accumulated and communicated to
management in a timely fashion. We note the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions.
An evaluation was carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls are effective to
provide reasonable assurance that information required to be disclosed in the reports that we file or submit
under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to
management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions
regarding required disclosure and are effective to provide reasonable assurance that such information is
recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter ended
January 28, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended. Internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally accepted accounting principles,
and that receipts and expenditures are being made only in accordance with authorizations of management and
directors of the company, and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance
with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness
to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or
deterioration in the degree of compliance.
Management assessed the effectiveness of our internal control over financial reporting as of January
28, 2017. Management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in its Internal Control—Integrated Framework (2013). Management’s
assessment included the evaluation of such elements as the design and operating effectiveness of financial
reporting controls, process documentation, accounting policies and the overall control environment. This
assessment is supported by testing and monitoring performed or supervised by our Internal Audit organization.
Based on management’s assessment, management has concluded that the Company’s internal control
over financial reporting was effective as of January 28, 2017. The independent registered public accounting
firm, Ernst & Young
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LLP, issued an attestation report on the effectiveness of our internal control over financial reporting. The
Ernst & Young LLP report is included on Page F-2 of this Annual Report on Form 10-K.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements and Supplementary Data on page F-1.
(2) Financial Statement Schedules:
All financial statement schedules are omitted because they are not required or are not applicable, or
the required information is provided in the consolidated financial statements or notes described in 15(1) above.
(3)
Exhibits:
The exhibits listed in the accompanying Index to Exhibits attached hereto are filed or incorporated by
reference into this Annual Report on Form 10-K.
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Table of Contents
THE MICHAELS COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income for the fiscal years ended January 28, 2017,
January 30, 2016 and January 31, 2015
Consolidated Balance Sheets at January 28, 2017 and January 30, 2016
Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2017, January 30, 2016
and January 31, 2015
Consolidated Statements of Stockholders’ Deficit for the fiscal years ended January 28, 2017, January
30, 2016 and January 31, 2015
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-4
F-5
F-6
F-7
F-8
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
The Michaels Companies, Inc.
We have audited The Michaels Companies, Inc.’s (the Company) internal control over financial
reporting as of January 28, 2017, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the
COSO criteria). The Michaels Companies, Inc.’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management Report on Internal Control over Financial Reporting (see
Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (U.S.). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, The Michaels Companies, Inc. maintained, in all material respects, effective internal
control over financial reporting as of January 28, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (U.S.), the consolidated balance sheets as of January 28, 2017 and January 30, 2016 and the related
consolidated statements of comprehensive income, stockholders’ deficit and cash flows for the three years in
the period ended January 28, 2017 and our report dated March 7, 2017 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Dallas, TX
March 7, 2017
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
The Michaels Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Michaels Companies, Inc.
(the Company) as of January 28, 2017 and January 30, 2016 and the related consolidated statements of
comprehensive income, stockholders’ deficit and cash flows for each of the three years in the period ended
January 28, 2017. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (U.S.). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of The Michaels Companies, Inc. at January 28, 2017 and January 30, 2016 and
the consolidated results of its operations and its cash flows for each of the three years in the period ended
January 28, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (U.S.), The Michaels Companies, Inc.’s internal control over financial reporting as of January 28, 2017,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated March 7, 2017 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, TX
March 7, 2017
F-3
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
2016
Fiscal Year
2015
2014
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Related party expenses
Store pre-opening costs
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing
costs
Other (income) expense, net
Income before income taxes
Income taxes
Net income
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other
Comprehensive income
Earnings per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
$ 5,197,292 $ 4,912,782 $ 4,738,144
2,836,965
1,901,179
1,233,901
35,682
5,067
626,529
198,409
3,169,476
2,027,816
1,308,052
—
4,484
715,280
126,270
2,944,431
1,968,351
1,242,961
—
4,786
720,604
139,405
7,292
(55)
581,773
203,614
378,159
7,832
385,991
1.84
1.82
$
$
$
$
8,485
594
572,120
209,208
362,912
(10,251)
352,661
1.75
1.72
$
$
$
$
74,312
2,774
351,034
133,639
217,395
(12,003)
205,392
1.07
1.05
$
$
$
$
204,735
206,354
206,845
209,346
203,229
207,101
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
Current Assets:
Cash and equivalents
Merchandise inventories
Prepaid expenses and other
Accounts receivable, net
Income taxes receivable
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Deferred income taxes
Other assets
Total assets
THE MICHAELS COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
January 28,
January 30,
2017
2016
5,825
298,813 $
87,175
23,215
$
409,391
1,127,777 1,002,607
85,010
9,484
1,231
1,542,805 1,507,723
378,507
94,290
471
40,399
9,897
$ 2,147,640 $ 2,031,287
413,164
119,074
23,702
36,834
12,061
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable
Accrued liabilities and other
Current portion of long-term debt
Income taxes payable
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ Deficit:
Common stock, $0.06775 par value, 350,000 shares authorized; 193,311
shares issued and outstanding at January 28, 2017 and 208,996 shares issued
and outstanding at January 30, 2016
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
$
457,704
517,268 $
385,616
397,497
24,900
31,125
44,640
78,334
1,024,224
912,860
2,723,187 2,744,942
97,580
3,846,066 3,755,382
98,655
12,948
233,129
13,979
592,420
(1,930,279) (2,308,438)
(22,056)
(14,224)
(1,698,426) (1,724,095)
$ 2,147,640 $ 2,031,287
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Share-based compensation
Debt issuance costs amortization
Accretion of long-term debt, net
Deferred income taxes
Losses on early extinguishments of debt and refinancing costs
Losses (gains) on disposition of property and equipment
Excess tax benefits from share-based compensation
Changes in assets and liabilities, excluding acquired net assets:
Merchandise inventories
Prepaid expenses and other
Accounts receivable
Other assets
Accounts payable
Accrued interest
Accrued liabilities and other
Income taxes
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Acquisition of Lamrite West, net of cash acquired
Purchases of long-term investments
Net cash used in investing activities
Cash flows from financing activities:
Common stock repurchased
Payment of PIK notes
Borrowings on term loan credit facility
Payments on term loan credit facility
Borrowings on asset-based revolving credit facility
Payments on asset-based revolving credit facility
Payment of 2018 senior notes
Issuance of 2020 senior subordinated notes
Issuance of common stock
Payment of debt issuance costs
Payment of dividends
Proceeds from stock options exercised
Excess tax benefits from share-based compensation
Other financing activities
Net cash used in financing activities
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
2016
Fiscal Year
2015
2014
$ 378,159 $ 362,912 $
217,395
115,801
16,506
6,583
(334)
4,570
7,292
120
(10,027)
(40,800)
(1,004)
8,948
(711)
38,248
7,015
(4,806)
37,276
1,581
564,417
114,756
15,064
8,467
(150)
8,611
8,485
(25)
(14,507)
(44,213)
(4,875)
3,725
(34)
24,217
1,852
(23,530)
44,941
(1,649)
504,047
110,858
19,387
10,333
(516)
15,282
74,312
3,995
(5,081)
(60,343)
8,379
2,234
(324)
76,710
(45,647)
14,294
1,006
(277)
441,997
(114,462)
(151,100)
(1,325)
(266,887)
(123,920)
—
(5,000)
(128,920)
(137,780)
—
—
(137,780)
(404,971)
—
—
(18,675)
42,000
(42,000)
—
—
—
(11,326)
(415)
17,252
10,027
—
(408,108)
(21,977)
(184,467)
—
(174,900)
45,047
(45,047)
—
—
—
—
(492)
22,655
14,507
643
(344,031)
(21,557)
(627,142)
845,750
(20,650)
23,000
(23,000)
(1,057,239)
255,000
445,660
(12,363)
(530)
27,211
5,081
(4,007)
(164,786)
(110,578)
409,391
31,096
378,295
$ 298,813 $ 409,391 $
139,431
238,864
378,295
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Three Years Ended January 28, 2017
(in thousands)
Number
of
Common Common
Shares Stock
175,024 $ 11,889 $
—
—
Accumulated
Other
Accumulated Comprehensive
Income (Loss)
Deficit
Total
Additional
Paid-in
Capital
94,376 $ (2,888,745) $
—
217,395
198 $ (2,782,282)
217,395
—
—
—
—
—
—
15,983
3,221
218
26,993
(1,278)
(190)
(21,367)
—
—
—
—
(12,003)
—
(12,003)
15,983
—
27,211
—
(21,557)
1,058
27,778 1,882 441,846
—
—
—
205,803 13,799 557,831 (2,671,350)
362,912
—
—
—
—
—
—
443,728
—
(11,805) (2,111,525)
362,912
—
—
—
—
—
—
15,502
3,447
233
41,011
—
—
—
(10,251)
—
(10,251)
15,502
—
41,244
(1,055)
801
208,996
(53)
—
13,979
(21,924)
—
592,420
—
—
—
—
—
(2,308,438)
378,159
—
—
(22,056)
—
(21,977)
—
(1,724,095)
378,159
—
—
—
—
—
17,379
2,160
147
(17,845) (1,178) (403,802)
27,132
—
—
—
—
7,832
—
7,832
17,379
—
—
27,279
(404,980)
193,311 $ 12,948 $ 233,129 $ (1,930,279) $
(14,224) $ (1,698,426)
Balance at February 1, 2014
Net income
Foreign currency translation and
other
Share-based compensation
Exercise of stock options and
other awards
Repurchase of stock and
retirements
Issuance of common stock in
IPO
Issuance of restricted shares, net
Balance at January 31, 2015
Net income
Foreign currency translation and
other
Share-based compensation
Exercise of stock options and
other awards
Repurchase of stock and
retirements
Issuance of restricted shares, net
Balance at January 30, 2016
Net income
Foreign currency translation and
other
Share-based compensation
Exercise of stock options and
other awards
Repurchase of stock and
retirements
Balance at January 28, 2017
See accompanying notes to consolidated financial statements.
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THE MICHAELS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Michaels Companies, Inc. owns and operates specialty retail stores in 49 states and Canada
featuring arts, crafts, framing, floral, home décor and seasonal merchandise for the hobbyist and do-it-yourself
home decorator. All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are
references to The Michaels Companies, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise
expressly stated or the context otherwise requires. Our consolidated financial statements include the accounts
of The Michaels Companies, Inc. and our wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of
Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels
Companies, Inc. incorporated in Delaware in connection with the reorganization. In July 2014, we completed
an initial public offering (“IPO”) of 27.8 million shares of common stock at a public offering price of $17.00
per share, resulting in net proceeds of $445.7 million.
Fiscal Year
We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest to
January 31. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal
2016” relate to the 52 weeks ended January 28, 2017, references to “fiscal 2015” relate to the 52 weeks ended
January 30, 2016 and references to “fiscal 2014” relate to the 52 weeks ended January 31, 2015.
Preferred Shares
The Company’s Board of Directors has authorized the issuance of 50.0 million shares of preferred
stock under The Michaels Companies, Inc. Certificate of Incorporation. No preferred shares have been issued
as of January 28, 2017.
Share Repurchase Program
In fiscal 2016, the Board of Directors authorized the Company to purchase $500.0 million of the
Company’s common stock on the open market. The share repurchase program does not have an expiration
date, and the timing and number of repurchase transactions under the program will depend on market
conditions, corporate considerations, debt agreements and regulatory requirements. Shares repurchased under
the program are held as treasury shares until retired. During fiscal 2016, we repurchased 17.2 million shares
for an aggregate amount of $400.7 million. During the first quarter of fiscal 2017, we repurchased an
additional 4.8 million shares of our common stock for an aggregate amount of $99.3 million, utilizing the
remaining availability under our share repurchase program.
Foreign Currency
The functional currency of our Canadian operations is the Canadian dollar. Translation adjustments
result from translating our Canadian subsidiaries’ financial statements into U.S. dollars. Balance sheet
accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are
translated at average exchange rates during the year. Translation adjustments are recorded as a component of
accumulated other comprehensive income in our consolidated statements of stockholders’ deficit. The
translation adjustments recorded in accumulated other comprehensive loss, net of taxes, was a gain of $7.8
million in fiscal 2016 and a loss of $10.3 million and $12.0 million in fiscal 2015 and fiscal 2014, respectively.
Transaction gains and losses are recorded as a part of other (income) expense, net in our consolidated
statements of comprehensive income and were immaterial in fiscal 2016, fiscal 2015 and fiscal 2014.
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Cash and Equivalents
Cash and equivalents are comprised of cash, money market mutual funds, and short-term interest
bearing securities with original maturities of three months or less. Cash and equivalents also include proceeds
due from credit card transactions with settlement terms of less than five days. The carrying amount of cash
equivalents approximates fair value due to the short-term maturity of those instruments.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, with cost determined using a
weighted-average method. Cost is calculated based upon the purchase price of an item at the time it is received
by us and also includes the cost of warehousing, handling, purchasing, and importing, as well as inbound and
outbound transportation, partially offset by vendor allowances. This net inventory cost is recognized through
cost of sales when the inventory is sold. It is impractical for us to assign specific allocated overhead costs and
vendor allowances to individual units of inventory. As such, to match net inventory costs against the related
revenues, we estimate the net inventory costs to be deferred and recognized each period as the inventory is
sold.
We utilize perpetual inventory records to value inventory in our stores. Physical inventory counts are
performed in a significant number of stores during each fiscal quarter by a third-party inventory counting
service, with substantially all stores open longer than one year subject to at least one count each fiscal year.
We adjust our perpetual records based on the results of the physical counts. We maintain a provision for
estimated shrinkage based on the actual historical results of our physical inventories. We compare our
estimates to the actual results of the physical inventory counts as they are taken and adjust the shrink estimates
accordingly.
Vendor allowances, which primarily represent volume rebates and cooperative advertising funds, are
recorded as a reduction to the cost of the merchandise inventories and a subsequent reduction in cost of sales
when the inventory is sold. We generally earn vendor allowances as a percentage of certain merchandise
purchases with no minimum purchase requirements. We recognized vendor allowances of $83.1 million, or
1.6% of net sales, in fiscal 2016, $82.3 million, or 1.7% of net sales, in fiscal 2015, and $91.8 million, or 1.9%
of net sales, in fiscal 2014.
We routinely identify merchandise that requires some price reduction to accelerate sales of the
product. The need for this reduction is generally attributable to clearance of seasonal merchandise or product
that is being displaced from its assigned location in the store to make room for new merchandise. Additional
stock keeping units (“SKUs”) that are candidates for repricing are identified using our perpetual inventory
data. In each case, the appropriate repricing is determined centrally at our store support center. Price changes
are transmitted electronically to the store and instructions are provided to our stores regarding product
placement, signage and display to ensure the product is effectively cleared.
We also evaluate our merchandise to ensure that the expected net realizable value of the merchandise
held at the end of a fiscal period exceeds cost. In the event that the expected net realizable value is less than
cost, we reduce the value of that inventory accordingly.
Accounts Receivable, net
Accounts receivable consist primarily of trade receivables related to Darice's wholesale business and
amounts due from taxing authorities. The Company assesses the collectability of all receivables on an ongoing
basis and establishes an allowance for doubtful accounts, if necessary. Factors such as payment terms,
historical loss experience and economic conditions are generally considered in determining the allowance for
doubtful accounts. The allowance for doubtful accounts was immaterial in fiscal 2016 and fiscal 2015.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the assets. Amortization of property under capital leases is on a straight-line basis
over the lease term and is included in depreciation expense. We expense repairs and maintenance costs as
incurred. We capitalize and depreciate
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significant renewals or betterments that substantially extend the life of the asset. Useful lives are generally
estimated as follows:
Buildings
Leasehold improvements
Fixtures and equipment
Computer equipment
Capitalized software
(a)
Years
30
10
8
5
5
(a) We amortize leasehold improvements over the lesser of the useful life of the asset or the remaining lease term of the
underlying facility.
Capitalized Software Costs
We capitalize certain costs related to the acquisition and development of internal use software that is
expected to benefit future periods. These costs are being amortized on a straight-line basis over the estimated
useful life, which is generally five years. As of January 28, 2017 and January 30, 2016, we had unamortized
capitalized software costs of $81.8 million and $83.2 million, respectively. These amounts are included in
property and equipment, net in the consolidated balance sheets. Amortization expense related to capitalized
software costs totaled $29.9 million, $31.2 million and $40.5 million in fiscal 2016, fiscal 2015 and fiscal
2014, respectively.
Goodwill and Other Indefinite-Lived Intangible Assets
Under the provisions of Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and
Other, we review goodwill and other indefinite-lived intangible assets for impairment each year in the fourth
quarter, or more frequently if events occur which indicate the carrying value may not be recoverable. We
elected to perform a qualitative assessment for our Michaels-U.S. reporting unit to determine whether it is
more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the goodwill is less
than its carrying value. Factors used in our qualitative assessment include, but are not limited to,
macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and
Company and reporting unit specific events. For all other reporting units, we estimated the fair value of each
reporting unit using the present value of future cash flows expected to be generated using a weighted-average
cost of capital, terminal values and updated financial projections for the next five years, all of which are Level
3 fair value inputs. Based on the results of our assessments, no impairments were required for the fiscal periods
presented in the consolidated financial statements. If our actual results are not consistent with the estimates and
assumptions used to calculate fair value, we could be required to recognize an impairment.
Long-Lived Assets
Long-lived assets other than goodwill and assets with indefinite lives, such as property and equipment
and intangible assets subject to amortization, are evaluated for indicators of impairment whenever events or
changes in circumstances indicate their carrying amounts may not be recoverable. Our evaluation compares the
carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an
impairment loss has occurred, the loss would be recognized based on the estimated fair value of the assets. Our
impairment analysis contains management assumptions about key variables including sales, growth rate, gross
margin, payroll and other controllable expenses. If actual results differ from these estimates, we may be
exposed to additional impairment losses that may be material. As a result of our impairment review, there were
no material impairment charges recorded in the fiscal periods presented in the consolidated financial
statements.
Reserve for Closed Facilities
We maintain a reserve for future rental obligations, carrying costs and other closing costs related to
closed facilities, which consists primarily of closed and relocated stores. In accordance with ASC 420, Exit or
Disposal Cost Obligations, we recognize exit costs for any store closures at the time the store is closed. Such
costs are recorded within the cost of sales and occupancy expense line item in our consolidated statements of
comprehensive income.
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The cost of closing a store or facility is recorded at the estimated fair value of expected cash flows
which we calculate as the lesser of the present value of future rental obligations remaining under the lease (less
estimated sublease rental income) or the lease termination fee (if an executed termination agreement exists).
The determination of the reserves is dependent on our ability to make reasonable estimates of costs to be
incurred post-closure and of rental income to be received from subleases.
The following is activity related to closed facilities (in thousands):
Fiscal Year
2015
2016
2014
Balance at beginning of fiscal year
Additions charged to costs and expenses
Payment of rental obligations and other
Balance at end of fiscal year
Self-Insurance
$
915 $ 3,386 $ 4,598
1,931
(3,143)
915 $ 3,386
1,946
(4,417)
2,877
(1,538)
$ 2,254 $
We have insurance coverage for losses in excess of self-insurance limits for medical claims, general
liability and workers’ compensation claims. Our liability represents an estimate of the ultimate cost of claims
incurred as of the balance sheet dates. The estimated liability is not discounted and is established based upon
analysis of historical data and actuarial estimates. While we believe these estimates are reasonable based on
the information currently available, if actual trends, including the severity or frequency of claims, medical cost
inflation, or fluctuations in premiums differ from our estimates, our results of operations could be impacted. In
the event our insurance carriers are unable to pay claims submitted to them, we would record a liability for
such estimated payments we expect to incur.
Revenue Recognition
Revenue from sales of our merchandise is recognized when the customer takes possession of the
merchandise. Revenue is presented net of point-of-sale coupons, discounts and sales taxes collected. Sales
related to custom framing are recognized when the order is picked up by the customer. We allow for
merchandise to be returned under most circumstances up to 180 days after purchase and provide a reserve for
estimated returns. We use historical customer return behavior to estimate our reserve requirements.
We record a gift card liability on the date we issue the gift card to the customer. We record revenue
and reduce the gift card liability as the customer redeems the gift card or when the likelihood of redemption by
the customer is remote (“gift card breakage”). We estimate gift card breakage based on customers’ historical
redemption rates and patterns. If actual redemption patterns vary from the Company’s estimates or if
regulations change, actual gift card breakage may differ from the amounts recorded. Gift card breakage income
is recorded in net sales in the consolidated statements of comprehensive income over the estimated redemption
period.
Costs of Sales and Occupancy Expense
The costs of merchandise sales are expensed as the merchandise is sold. Included in our costs of sales
are the following:
·
·
·
purchase price of merchandise, net of vendor allowances and rebates;
costs associated with our international direct sourcing business;
inbound freight, inspection costs, duties and import agent commissions;
· warehousing, handling, transportation (including internal transfer costs such as distribution
center-to-store freight costs), purchasing and receiving costs; and
·
share-based compensation costs for those employees involved in preparing inventory for sale.
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Included in our occupancy expenses are the following costs which are recognized as period costs as
described below:
·
·
·
·
store expenses such as rent, insurance, taxes, common area maintenance, utilities, repairs and
maintenance;
amortization of store buildings and leasehold improvements;
store closure costs; and
store remodel costs.
Rent is recognized on a straight-line basis, including consideration of rent holiday, tenant
improvement allowances received from the landlords and applicable rent escalations over the term of the lease.
The commencement date of the lease term is the earlier of the date when we become legally obligated for the
rent payments or the date when we take possession of the building for construction purposes.
Selling, General and Administrative
Included in selling, general and administrative (“SG&A”) are store personnel costs, store operating
expenses, advertising, store depreciation and corporate overhead costs. Advertising costs are expensed in the
period in which the advertising first occurs. Advertising costs totaled $194.6 million, $188.9 million and
$185.0 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
Store Pre-Opening Costs
We expense all start-up activity costs as incurred. Store pre-opening costs consist primarily of
payroll-related costs incurred prior to the store opening.
Income Taxes
We record income tax expense using the liability method and are subject to income tax in many
jurisdictions, including the U.S., numerous states and localities, Canada, and other foreign countries. Income
taxes payable or receivable are recorded for tax liabilities or refunds reflected on filed, or expected to be filed,
tax returns. Deferred income taxes arise from temporary differences between amounts recorded in the
consolidated statements of comprehensive income and tax bases of assets and liabilities measured using
enacted tax rates in effect for the years in which the differences are expected to reverse. The effect of a change
in tax rates is recognized as income tax expense or benefit in the period of the enactment date. Deferred tax
assets, including the benefit of net operating loss and tax credit carryforwards, are evaluated based on the
guidelines for realization and are reduced by a valuation allowance if it is deemed more likely than not that
such assets will not be realized.
We recognize the income tax benefit from an uncertain tax position when it is more likely than not
that, based on technical merits, the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes. We recognize accrued interest and penalties related to uncertain tax
positions as a component of income tax expense.
Share-Based Compensation
ASC 718, Stock Compensation (“ASC 718”), requires all share-based compensation to employees,
including grants of employee stock options and restricted shares, to be recognized using the fair value method
of accounting. Share-based awards are recognized ratably over the requisite service period.
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Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified in the accompanying consolidated financial
statements to conform to our fiscal 2016 presentation.
Accounting Pronouncements Recently Adopted
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2015-05, “Intangibles — Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). ASU 2015-05
provides guidance to customers about whether a cloud computing arrangement includes a software license. If a
cloud computing arrangement includes a software license, the customer should account for the software license
element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing
arrangement does not include a software license, the customer should account for the arrangement as a service
contract. The new guidance does not change the accounting for a customer’s accounting for service contracts.
We adopted ASU 2015-05 in the first quarter of fiscal 2016 and its adoption did not have a material impact to
the consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the measurement
of goodwill impairment by removing the second step of the goodwill impairment test, which requires the
determination of the fair value of individual assets and liabilities of a reporting unit. Under ASU 2017-04,
goodwill impairment is to be measured as the amount by which a reporting unit’s carrying value exceeds its
fair value with the loss recognized not to exceed the total amount of goodwill allocated to the reporting unit.
ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for
interim or annual goodwill impairment tests performed after January 1, 2017. The standard is to be applied on a
prospective basis. We do not anticipate a material impact to the consolidated financial statements once
implemented.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other than Inventory” (“ASU 2016-16”). ASU 2016-16 requires entities to recognize
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting
periods within that reporting period, with early adoption permitted. We are currently evaluating the new
standard but do not anticipate a material impact to the consolidated financial statements once implemented.
In August 2016, the FASB issued ASU No. 2016-15, “ Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies how
companies should present and classify certain cash receipts and cash payments in the statement of cash flows.
ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim reporting
periods within that reporting period, with early adoption permitted. We are currently evaluating the new
standard but do not anticipate a material impact to the consolidated financial statements once implemented.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09
identifies areas for simplification involving several aspects of accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, an
option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. ASU 2016-09 is effective for annual periods
beginning after December 15, 2016, including interim periods within that
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reporting period, with early adoption permitted. We are currently evaluating the impact that ASU 2016-09 will
have on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-04, “Liabilities – Extinguishment of Liabilities
(Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products” (“ASU 2016-04”).
ASU 2016-04 requires that breakage on prepaid stored-value product liabilities (for example, prepaid gift
cards) be accounted for consistent with the breakage guidance in Topic 606: Revenue from Contracts with
Customers. ASU 2016-04 is effective for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period, with early adoption permitted. This standard is
to be applied either using a modified retrospective approach or retrospectively to each period presented. We
have evaluated the new standard and it will not have a material impact to the consolidated financial statements
once implemented.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02").
Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its
balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required
to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial
statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is
effective for annual reporting periods beginning after December 15, 2018, including interim periods within that
reporting period, with early adoption permitted. At adoption, this update will be applied using a modified
retrospective approach. We are currently evaluating the impact that ASU 2016-02 will have on the
consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic
605)”, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in
exchange for those goods or services. In March 2016, the FASB issued ASU No. 2016-08 , “Revenue from
Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net)” (“ASU 2016-08”) which is intended to improve the operability and understandability of the
implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No.
2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing” (“ASU 2016-10”) which provides further guidance on identifying performance obligations and
improves the operability and understandability of the licensing implementation guidance. In May 2016, the
FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”) which narrowly amended the revenue recognition
guidance regarding collectability, noncash consideration, presentation of sales tax and transition. The guidance
under these standards is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period. These standards are to be applied using a modified retrospective
approach or retrospectively, with early application permitted for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. We are currently evaluating the
impact that the new standards will have on the consolidated financial statements.
2. FAIR VALUE MEASUREMENTS
As defined in ASC 820, Fair Value Measurements (“ASC 820”), fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820 establishes a three-level valuation hierarchy for fair value measurements.
These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect less transparent active
market data, as well as internal assumptions. These two types of inputs create the following fair value
hierarchy:
·
·
Level 1—Quoted prices for identical instruments in active markets;
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations whose
significant inputs are observable; and
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·
Level 3—Instruments with significant unobservable inputs.
Impairment losses related to store-level property and equipment are calculated using significant
unobservable inputs including the present value of future cash flows expected to be generated using a risk-
adjusted weighted-average cost of capital and comparable store sales growth assumptions, and therefore are
classified as a Level 3 measurement in the fair value hierarchy.
The carrying value of cash and cash equivalents, accounts receivable and accounts payable
approximates their estimated fair values due to the short maturities of these instruments.
The table below provides the fair values of our Amended Term Loan Credit Facility and our 2020
Senior Subordinated Notes (as defined in Note 7) as of January 28, 2017 and January 30, 2016. The fair values
of our Amended Term Loan Credit Facility and our 2020 Senior Subordinated Notes were determined based on
quoted market prices which are considered Level 2 inputs within the fair value hierarchy.
Term loan credit facility
Senior subordinated notes
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
Buildings and leasehold improvements
Fixtures and equipment
Capitalized software
Construction in progress
Less accumulated depreciation and amortization
January 28,
2017
January 30,
2016
(in thousands)
$2,266,304 $2,251,354
525,300
526,575
January 28,
January 30,
$
2017
514,937 $
764,498
154,422
54,279
1,488,136
(1,074,972)
2016
480,468
907,457
241,915
31,394
1,661,234
(1,282,727)
378,507
$
413,164 $
During fiscal 2016, we retired approximately $320.0 million of fully depreciated assets that were no
longer in service.
4. ACQUISITION
On February 2, 2016, we acquired Lamrite for $150.0 million, prior to certain purchase price
adjustments, utilizing our cash on hand. Lamrite operates an international wholesale business under the Darice
brand name and 35 arts and crafts retail stores (32 as of the acquisition date), located primarily in Ohio and the
surrounding states, under the Pat Catan’s brand name. We incurred integration related costs of $7.4 million
during fiscal 2016. These expenses have been included in SG&A in the consolidated statements of
comprehensive income.
The acquisition was accounted for using the purchase method of accounting in accordance with ASC
805, Business Combinations. The acquisition resulted in goodwill primarily related to the expected benefits
resulting from enhancements to our private brand development capability, direct sourcing initiatives and
business-to-business capabilities, as well as the value of the existing Lamrite workforce. The goodwill
recognized is expected to be deductible for tax purposes.
The fair values of the intangible assets acquired were primarily determined by using the income
approach. The income approach indicates value for a subject based on the present value of cash flows expected
to be generated by the asset. Projected cash flows are discounted at a market rate of return that reflects the
relative risk of achieving the cash
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flows and the time value of money. The fair value of inventory was determined based on the estimated selling
price of the inventory less the expected costs of selling efforts and a reasonable profit margin.
The following table summarizes the cash consideration for the acquisition of Lamrite (in thousands):
Purchase contract amount
Additional consideration to Lamrite shareholders for taxes
Working capital and other adjustments
Total purchase consideration
$ 150,000
6,500
(3,090)
$ 153,410
The following table summarizes the fair values of the assets acquired and liabilities assumed from the
acquisition of Lamrite as of February 2, 2016 (in thousands):
Cash and cash equivalents
Trade accounts receivable
Merchandise inventory
Other current assets
Property, plant and equipment
Net favorable leases
Intangible assets
Other assets
Current liabilities
Other long-term liabilities
(2)
(1)
Fair value of net assets acquired
Goodwill
Total purchase consideration
$
2,310
22,254
83,700
1,202
25,367
2,450
21,800
306
(30,490)
(273)
128,626
24,784
$ 153,410
(1)
(2)
Includes customer relationships, trade and brand names and proprietary product designed. Intangible assets
include $9.4 million of assets that are being amortized over a range of 6 to 18 years.
Includes accounts payable, accrued expenses, accrued payroll and accrued taxes.
Since the date of acquisition, the results of Lamrite's operations have been included in the Company’s
results of operations. The Company has not presented pro forma financial information for prior periods
because the impact on our previously reported consolidated financial statements would not have been material.
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5. GOODWILL AND INTANGIBLE ASSETS
The gross carrying amounts and accumulated amortization of our intangible assets, including amounts
acquired in the Lamrite acquisition (see Note 4), for the year ended January 28, 2017 were as follows (in
thousands):
Definite-lived intangible assets:
Customer relationships
Proprietary product designs
Other intangible assets
Indefinite-lived intangible assets:
Darice branded products
Tradenames
Amortization
Period
(in years)
16-18
7
2-23
Weighted
Average
Remaining
Amortization
Period
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
16.93
6.00
9.77
$ 5,600 $
3,400
4,229
13,229
(637) $ 4,963
2,424
(976)
2,590
(1,639)
9,977
(3,252)
6,200
7,525
13,725
6,200
7,525
13,725
Total intangible assets
$26,954 $
(3,252) $23,702
In fiscal 2016, we recognized amortization expense of $2.4 million related to definite-lived intangible assets.
Amortization expense was immaterial in fiscal 2015 and fiscal 2014. As of January 28, 2017, the amortization
expense related to our definite-lived intangible assets for the next five years will be approximately $1.0 million
to $2.0 million each year.
As of January 28, 2017, goodwill totaled $119.1 million, including $94.3 million related to Michaels-U.S. and
$24.8 million related to the acquisition of Lamrite on February 2, 2016.
6. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following (in thousands):
Accrued payroll
Self-insurance
Accrued interest
Property, sales and use taxes
Gift card liability
Accrued and straight-line rent
Other
January 28,
2017
$
$
68,118
77,317
18,793
89,655
49,869
23,396
70,349
397,497
January 30,
2016
119,124
73,726
11,778
56,594
42,577
19,694
62,123
385,616
$
$
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7. DEBT
Long-term debt consists of the following (in thousands):
Term loan credit facility
Senior subordinated notes
Total debt
Less unamortized discount/premium and debt costs
Total debt, net
Less current portion
Long-term debt
Interest Rate
Variable $
5.875 %
$
January 28,
January 30,
2017
2,263,475
510,000
2,773,475
(19,163)
2,754,312
(31,125)
2,723,187
$
$
2016
2,282,150
510,000
2,792,150
(22,308)
2,769,842
(24,900)
2,744,942
The aggregate amount of scheduled maturities of debt for the next five years and thereafter is as
follows (in thousands):
Fiscal Year
2017
2018
2019
2020
2021
Thereafter
Total debt payments
$
31,125
24,900
24,900
534,900
18,675
2,138,975
$ 2,773,475
As of January 28, 2017 and January 30, 2016, the weighted-average interest rate of the variable debt
was 3.75% and 3.83%, respectively. Cash paid for interest totaled $113.3 million, $129.3 million and $234.3
million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
As of January 28, 2017, net debt issuance costs totaled $25.4 million. We amortize debt issuance
costs using the straight-line method over the terms of the respective debt agreements (which range from five to
seven years). Amortization expense related to debt issuance costs is recorded in interest expense in the
accompanying consolidated statements of comprehensive income. The straight-line method produces results
materially consistent with the effective interest method. Our expected amortization expense related to the debt
issuance costs for each of the next five years and thereafter is as follows (in thousands):
Fiscal Year
2017
2018
2019
2020
2021
Thereafter
Total amortization expense
Term Loan Credit Facility
$
$
5,098
5,098
5,098
4,965
2,752
2,380
25,391
On January 28, 2013, MSI entered into an amended and restated credit agreement maturing on January
28, 2020 (the “Credit Agreement”) to amend various terms of MSI’s then existing term loan credit agreement
with Deutsche Bank AG New York Branch (“Deutsche Bank”) and other lenders. The Credit Agreement,
together with the related security, guarantee and other agreements, is referred to as the “Term Loan Credit
Facility”.
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On July 2, 2014, MSI issued an additional $850.0 million of debt under the Term Loan Credit Facility
maturing in 2020 (“Additional Term Loan”). The Additional Term Loan was issued at 99.5% of face value,
resulting in an effective interest rate of 4.02%. The net proceeds from this borrowing and the issuance of an
additional $250.0 million of the 5.875% senior subordinated notes were used to fully redeem the then
outstanding 7.75% Senior Notes due 2018 (“2018 Senior Notes”) and to pay the applicable make-whole
premium and accrued interest.
On December 28, 2015, MSI voluntarily prepaid $150.0 million in principal of the Additional Term
Loan for an aggregate redemption price (including any unpaid interest) of $151.0 million.
On September 28, 2016, MSI entered into an amendment with Deutsche Bank and other lenders to
amend and restate our Term Loan Credit Facility. The amended and restated credit agreement, together with
the related security, guarantee and other agreements, is referred to as the “Amended Term Loan Credit
Facility”. The Amended Term Loan Credit Facility matures on January 28, 2023.
As of January 28, 2017, the Amended Term Loan Credit Facility provides for senior secured
financing of $2,263.5 million. MSI has the right under the Amended Term Loan Credit Facility to request
additional term loans (a) in the aggregate amount of up to $750.0 million or (b) at MSI’s election, an amount of
additional term loans if the consolidated secured debt ratio (as defined in the Amended Term Loan Credit
Facility) is no more than 3.25 to 1.00 on a pro forma basis as of the last day of the most recently ended four
quarter period, subject to certain adjustments. The lenders under the Amended Term Loan Credit Facility will
not be under any obligation to provide any such additional term loans, and the incurrence of any such
additional term loans is subject to customary conditions.
Borrowings under the Amended Term Loan Credit Facility bear interest at a rate per annum, at MSI’s
option, of either (a) a margin of 1.75% plus a base rate defined as the highest of (1) the prime rate of Deutsche
Bank, (2) the federal funds effective rate plus 0.5%, and (3) the one-month London Interbank Offered Rate
(“LIBOR”) plus 1% or (b) a margin of 2.75% plus the applicable LIBOR. Subsequent to the first fiscal quarter
following the amendment, the applicable margin will be 1.50% for base rate loans and 2.50% for LIBOR loans
if our consolidated secured debt ratio is below 1.50:1.00 for the applicable quarter.
There are no limitations on dividends and certain other restricted payments so long as (a) no event of
default shall have occurred and be continuing and (b) immediately after giving pro forma effect to such
restricted payment(s) and the application of proceeds therefrom, the consolidated total leverage ratio is less
than or equal to 3.75 to 1.00.
MSI must offer to prepay outstanding term loans at 100% of the principal amount, plus any unpaid
interest, with the proceeds of certain asset sales or casualty events under certain circumstances. MSI may
voluntarily prepay outstanding loans under the Amended Term Loan Credit Facility at any time without
premium or penalty other than customary breakage costs with respect to LIBOR loans; provided, that if MSI
enters into certain repricing transactions on or before March 28, 2017, the amount of the repricing payment
will be subject to a premium equal to 1.0%.
MSI is required to make scheduled quarterly payments equal to 0.25% of the original principal
amount of the term loans (subject to adjustments relating to the incurrence of additional term loans) for the first
six years and three quarters of the Amended Term Loan Credit Facility, with the balance paid on January 28,
2023.
All obligations under the Amended Term Loan Credit Facility are unconditionally guaranteed, jointly
and severally, by Michaels Funding, Inc. (“Holdings”) and all of MSI’s existing domestic material subsidiaries
and are required to be guaranteed by certain of MSI’s future domestic wholly-owned material subsidiaries
(“the Subsidiary Guarantors”). All obligations under the Amended Term Loan Credit Facility, and the
guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of
Holdings, MSI and the Subsidiary Guarantors, including:
·
a first-priority pledge of MSI’s capital stock and all of the capital stock held directly by MSI and
the Subsidiary Guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65%
of the voting stock of such foreign subsidiary and 100% of the non-voting stock of such
subsidiary);
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·
·
a first-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor, including substantially all of
MSI’s and its subsidiaries’ owned real property and equipment, but excluding, among other
things, the collateral described below; and
a second-priority security interest in personal property consisting of inventory and related
accounts, cash, deposit accounts, all payments received by Holdings, MSI or the Subsidiary
Guarantors from credit card clearinghouses and processors or otherwise in respect of all credit
card charges and debit card charges for sales of inventory by Holdings, MSI and the Subsidiary
Guarantors, and certain related assets and proceeds of the foregoing.
The Amended Term Loan Credit Facility contains a number of negative covenants that are
substantially similar to, but more restrictive in certain respects than, those governing the 2020 Senior
Subordinated Notes (as defined below), as well as certain other customary representations and warranties,
affirmative and negative covenants and events of default. As of January 28, 2017, MSI was in compliance with
all covenants.
As of January 28, 2017, net debt issuance costs totaled $14.3 million and are being amortized as
interest expense over the life of the Amended Term Loan Credit Facility. Debt issuance costs related to this
facility are reflected as a reduction from the carrying value of debt in the consolidated balance sheets. As a
result of the $150.0 million Additional Term Loan prepayment on December 28, 2015, MSI recorded a loss on
the early extinguishment of debt of $2.4 million, consisting of $1.9 million of unamortized debt issuance costs
and $0.5 million of unamortized net discount. As a result of the amendment of our Term Loan Credit Facility
on September 28, 2016, MSI recorded a loss on the early extinguishment of debt of $6.9 million.
5.875% Senior Subordinated Notes due 2020
On December 19, 2013, MSI issued $260.0 million in principal amount of 5.875% senior
subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes”). On June 16, 2014, MSI issued an
additional $250.0 million of the 2020 Senior Subordinated Notes at 102% of face value, resulting in an
effective interest rate of 5.76%. Interest is payable semi-annually on June 15 and December 15 of each year.
The net proceeds from this borrowing, and the $850.0 million Additional Term Loan, were used to fully
redeem the outstanding 2018 Senior Notes and to pay the applicable make-whole premium and accrued interest.
The 2020 Senior Subordinated Notes are guaranteed, jointly and severally, fully and unconditionally,
on an unsecured senior subordinated basis, by each of MSI’s subsidiaries that guarantee indebtedness under the
Amended Revolving Credit Facility and the Amended Term Loan Credit Facility (collectively defined as the
“Senior Secured Credit Facilities”).
The 2020 Senior Subordinated Notes and the guarantees are MSI’s and the guarantors’ unsecured
senior subordinated obligations and are (i) subordinated in right of payment to all of MSI’s and the guarantors’
existing and future senior debt, including the Senior Secured Credit Facilities; (ii) rank equally in right of
payment to all of MSI’s and the guarantors’ future senior subordinated debt; (iii) effectively subordinated to all
of MSI’s and the guarantors’ existing and future secured debt (including the Senior Secured Credit Facilities)
to the extent of the value of the assets securing such debt; (iv) rank senior in right of payment to all of the
MSI’s and the guarantors’ existing and future debt and other obligations that are, by their terms, expressly
subordinated in right of payment to the 2020 Senior Subordinated Notes; and (v) are structurally subordinated
to all obligations of MSI’s subsidiaries that are not guarantors of the 2020 Senior Subordinated Notes.
MSI may redeem all or part of the 2020 Senior Subordinated Notes, upon notice, at the redemption
prices set forth below (expressed as percentages of the principal amount of the 2020 Senior Subordinated
Notes to be redeemed),
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plus any unpaid interest thereon to the applicable date of redemption, if redeemed during the twelve-month
period beginning on December 15 of each of the years indicated below:
Year
2016
2017
2018 and thereafter
Percentage
102.938 %
101.469 %
100.000 %
Upon a change in control, MSI is required to offer to purchase all of the 2020 Senior Subordinated
Notes at a price in cash equal to 101% of the aggregate principal amount, plus any unpaid interest. The 2020
Senior Subordinated Indenture contains covenants limiting MSI’s ability, and the ability of MSI’s restricted
subsidiaries, to incur or guarantee additional debt, prepay debt that is subordinated to the 2020 Senior
Subordinated Notes, issue stock of subsidiaries, make certain investments, loans, advances and acquisitions,
create liens on MSI’s and such subsidiaries’ assets to secure debt, enter into transactions with affiliates, merge
or consolidate with another company; and sell or otherwise transfer assets. The covenants also limit MSI’s
ability, and the ability of MSI’s restricted subsidiaries, to pay dividends or distributions on MSI’s capital stock
or repurchase MSI’s capital stock, subject to certain exceptions, including dividends, distributions and
repurchases up to an amount in excess of (i) $100.0 million plus (ii) a basket that builds based on 50% of
MSI’s consolidated net income (as defined in the 2020 Senior Subordinated Indenture) and certain other
amounts, in each case, to the extent such payment capacity is not applied as otherwise permitted under the
2020 Senior Subordinated Indenture and subject to certain conditions. However, there are no limitations on
dividends and certain other restricted payments so long as (a) no default shall have occurred and be continuing
and (b) immediately after giving pro forma effect to such restricted payment(s) and the application of proceeds
therefrom, the consolidated total leverage ratio is less than or equal to 3.25 to 1.00. As of January 28, 2017, the
permitted restricted payment amount was $658.5 million. As of January 28, 2017, MSI was in compliance with
all covenants.
As of January 28, 2017, net debt issuance costs totaled $6.3 million and are being amortized as
interest expense over the life of the 2020 Senior Subordinated Notes. Debt issuance costs related to these notes
are reflected as a reduction from the carrying value of debt in the consolidated balance sheets.
Revolving Credit Facility
On September 17, 2012, MSI entered into a second amended and restated credit agreement (the
“Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) and other lenders to amend
various terms of MSI’s then existing senior secured asset-based revolving credit facility. The Credit
Agreement, together with related security, guarantee and other agreements, is referred to as the “Revolving
Credit Facility”. On May 27, 2016, MSI entered into an amended and restated credit agreement with Wells
Fargo and other lenders to, among other things, increase the availability and extend the maturity date of our
Revolving Credit Facility. The amended credit agreement, together with the related security, guarantee and
other agreements, is referred to as the “Amended Revolving Credit Facility”.
The Amended Revolving Credit Facility provides for senior secured financing of up to $850.0
million, subject to a borrowing base. The borrowing base under the Amended Revolving Credit Facility equals
the sum of: (i) 90% of eligible credit card receivables, (ii) 85% of eligible trade receivables, (iii) 90% to 92.5%
of the appraised value of eligible inventory, plus (iv) 90% to 92.5% of the lesser of (a) the appraised value of
eligible inventory supported by letters of credit, and (b) the face amount of the letters of credit, less (v) certain
reserves. The Amended Revolving Credit Facility matures in May 2021, subject to a springing maturity date if
certain of our outstanding indebtedness has not been repaid, redeemed, refinanced, cash collateralized or if the
necessary availability reserves have not been established prior to such time (the “ABL Maturity Date”).
As of January 28, 2017 and January 30, 2016, the borrowing base was $793.1 million and $650.0
million, respectively, of which MSI had availability of $735.5 million and $586.8 million, respectively.
Borrowing capacity is available for letters of credit and borrowings on same-day notice. Outstanding standby
letters of credit as of January 28, 2017 totaled $57.6 million.
The Amended Revolving Credit Facility also provides MSI with the right to request up to $200.0
million of additional commitments. The lenders will not be under any obligation to provide any such additional
commitments, and
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any increase in commitments is subject to customary conditions. If we were to request additional commitments,
and the lenders were to agree to provide such commitments, the facility size could be increased up to $1,050.0
million, however, MSI’s ability to borrow would still be limited by the borrowing base.
Borrowings under the Amended Revolving Credit Facility bear interest at a rate per annum equal to,
at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Wells Fargo,
(2) the federal funds effective rate plus 0.50% and (3) LIBOR subject to certain adjustments plus 1.00% or
(b) LIBOR subject to certain adjustments, in each case plus an applicable margin. The initial applicable margin
is (a) 0.25% for prime rate borrowings and 1.25% for LIBOR borrowings. The applicable margin is subject to
adjustment each fiscal quarter based on the excess availability under the Amended Revolving Credit Facility.
Excess availability is defined as the Loan Cap (as defined below) plus certain unrestricted cash of Holdings,
MSI and the Subsidiary Guarantors, less the outstanding credit extensions. Same-day borrowings bear interest
at the base rate plus the applicable margin.
MSI is required to pay a commitment fee on the unutilized commitments under the Amended
Revolving Credit Facility, which initially is 0.25% per annum. In addition, MSI must pay customary letter of
credit fees and agency fees.
All obligations under the Amended Revolving Credit Facility are unconditionally guaranteed, jointly
and severally, by Holdings and all of MSI’s existing domestic material subsidiaries and are required to be
guaranteed by the Subsidiary Guarantors. All obligations under the Amended Revolving Credit Facility, and
the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets
of Holdings, MSI and the Subsidiary Guarantors, including:
·
·
·
a first-priority security interest in personal property consisting of inventory and related accounts,
cash, deposit accounts, all payments received by Holdings, MSI or the Subsidiary Guarantors
from credit card clearinghouses and processors or otherwise in respect of all credit card charges
and debit card charges for sales of inventory by Holdings, MSI and the Subsidiary Guarantors,
and certain related assets and proceeds of the foregoing;
a second-priority pledge of all of MSI’s capital stock and the capital stock held directly by MSI
and the Subsidiary Guarantors (which pledge, in the case of the capital stock of any foreign
subsidiary, is limited to 65% of the voting stock of such foreign subsidiary and 100% of the non-
voting stock of such subsidiary); and
a second-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor, including substantially all of
MSI’s and its subsidiaries’ owned real property and equipment.
If, at any time, the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and
undrawn letters of credit under the Amended Revolving Credit Facility exceeds the lesser of (i) the
commitment amount and (ii) the borrowing base (the “Loan Cap”), MSI will be required to repay outstanding
loans and cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of
the commitment amount. If availability under the Amended Revolving Credit Facility is less than the greater
of (i) 10.0% of the Loan Cap and (ii) $50.0 million for five consecutive business days, or, if certain events of
default have occurred, MSI will be required to repay outstanding loans and cash collateralize letters of credit
with the cash MSI is required to deposit daily in a collection account maintained with the agent under the
Amended Revolving Credit Facility. Availability under the Amended Revolving Credit Facility means the
Loan Cap minus the outstanding credit extensions. MSI may voluntarily reduce the unutilized portion of the
commitment amount and repay outstanding loans at any time without premium or penalty, other than
customary breakage costs with respect to LIBOR loans. There is no scheduled amortization under the
Amended Revolving Credit Facility. The principal amount of the loans outstanding is due and payable in full
on the ABL Maturity Date.
The covenants limiting dividends and other restricted payments, investments, loans, advances and
acquisitions, and prepayments or redemptions of indebtedness, each permit the restricted actions in an
unlimited amount, subject to the satisfaction of certain payment conditions, principally that MSI must meet
specified excess availability requirements and minimum consolidated fixed charge coverage ratios, to be tested
on a pro forma basis as of the date of the restricted action
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and for the 90-day period preceding such restricted action. Adjusted EBITDA, as defined in the Amended
Revolving Credit Facility, is used in the calculation of the consolidated fixed charge coverage ratios.
From the time when MSI has excess availability less than the greater of (a) 10.0% of the Loan Cap
and (b) $50.0 million, until the time when MSI has excess availability greater than the greater of (a) 10.0% of
the Loan Cap and (b) $50.0 million for 30 consecutive days, the Amended Revolving Credit Facility will
require MSI to maintain a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The Amended
Revolving Credit Facility also contains certain customary representations and warranties, affirmative
covenants and provisions relating to events of default (including change of control and cross-default to material
indebtedness).
The Amended Revolving Credit Facility contains a number of covenants that, among other things and
subject to certain exceptions, restrict MSI’s ability, and the ability of its restricted subsidiaries, to:
·
·
incur or guarantee additional indebtedness;
pay dividends on MSI’s capital stock or redeem, repurchase or retire MSI’s capital stock;
· make investments, loans, advances and acquisitions;
·
·
·
·
·
·
create restrictions on the payment of dividends or other amounts to MSI from its restricted
subsidiaries;
engage in transactions with MSI’s affiliates;
sell assets, including capital stock of MSI’s subsidiaries;
prepay or redeem indebtedness;
consolidate or merge; and
create liens.
As of January 28, 2017, net debt issuance costs totaled $4.8 million and are being amortized as
interest expense over the life of the Amended Revolving Credit Facility. As a result of the refinancing of our
Restated Revolving Credit Facility on May 27, 2016, MSI recorded a loss on the early extinguishment of debt
of $0.4 million related to the write-off of net debt issuance costs. Debt issuance costs related to this facility are
reflected as an asset within the consolidated balance sheets.
PIK Toggle Notes
On July 29, 2013, Michaels FinCo Holdings, LLC (“FinCo Holdings”) and Michaels FinCo, Inc.
(“FinCo Inc.”) issued $800.0 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due 2018
(“PIK Notes”) in a private transaction. On July 2, 2014, the Company completed an IPO and received net
proceeds totaling $445.7 million. The net proceeds were used to redeem $439.1 million of the outstanding PIK
Notes and to pay other expenses of the offering. The aggregate redemption price (including redemption
premium and any unpaid interest) was $473.5 million. On December 10, 2014, the Company redeemed $180.0
million of the PIK Notes for an aggregate redemption price (including redemption premium and any unpaid
interest) of $188.4 million.
On May 6, 2015, the Company redeemed the remaining $180.9 million of the PIK Notes for an
aggregate redemption price (including redemption premium and any unpaid interest) of $188.0 million. This
final payment retired the PIK Notes and discharged the obligations under the indenture governing the PIK
Notes.
In fiscal 2014, we recorded a loss on the early extinguishment of debt of $18.4 million related to the
redemption of the PIK Notes. The $18.4 million loss consisted of an $8.0 million redemption premium and a
$10.4 million charge to write off debt issuance costs. In fiscal 2015, we recorded a loss on the early
extinguishment of debt of $6.1 million related
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to the redemption of the PIK Notes. The $6.1 million loss consisted of a $3.6 million redemption premium and
a $2.5 million charge to write off debt issuance costs.
7.75% Senior Notes due 2018
On October 21, 2010, MSI issued $800.0 million aggregate principal amount of 7.75% senior notes
that matured on November 1, 2018 (“Senior Notes”) at a discounted price of 99.262% of face value, resulting
in an effective interest rate of 7.875%. On September 27, 2012, MSI issued an additional $200.0 million
aggregate principal amount of Senior Notes (the “Additional Senior Notes” and, together with the Senior
Notes, the “2018 Senior Notes”) under the indenture (the “2018 Senior Indenture”). The Additional Senior
Notes were issued at a premium of 106.25% of face value, resulting in an effective interest rate of 6.50%. On
July 16, 2014 and August 1, 2014, we redeemed the 2018 Senior Notes in the aggregate principal amounts of
$235.0 million and $765.0 million, respectively, plus the applicable make-whole premium and accrued interest,
and the 2018 Senior Indenture was discharged.
In fiscal 2014, we recorded a loss on the early extinguishment of debt of $55.9 million related to the
redemption of the 2018 Senior Notes. The $55.9 million loss consisted of $50.8 million of redemption
premiums and a $10.2 million charge to write off debt issuance costs. This loss was partially offset by a $5.1
million write-off of unamortized net premiums.
8. LEASES
We operate stores and use distribution centers, office facilities and equipment that are generally leased
under non-cancelable operating leases, the majority of which provide for renewal options. Future minimum
annual rental commitments for all non-cancelable operating leases as of January 28, 2017 are as follows (in
thousands):
Fiscal Year
2017
2018
2019
2020
2021
Thereafter
Total minimum rental commitments
$
422,885
378,368
319,957
259,801
205,994
462,982
$ 2,049,987
Rent expense applicable to non-cancelable operating leases was $416.2 million, $388.1 million and
$376.8 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
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9. INCOME TAXES
The reconciliation of income tax expense computed at the U.S. federal statutory tax rate of 35% to
income tax expense reported in our consolidated statements of comprehensive income is as follows (in
thousands):
Income taxes at statutory rate
State income taxes, net of federal benefit
Foreign tax rate differential
Other
Total
Fiscal Year
2015
$ 203,621 35.0 % $ 200,242 35.0 % $ 122,862 35.0 %
2014
2016
10,665 1.8
(8,820) (1.5)
(1,852) (0.3)
19,131
(2,583)
(7,582)
3.3
(0.4)
(1.3)
11,364 3.2
—
—
(587) (0.1)
$ 203,614 35.0 % $ 209,208 36.6 % $ 133,639 38.1 %
The components of our income tax expense are as follows (in thousands):
Current:
Federal
State
Foreign
Total current income tax expense
Deferred:
Federal
State
Foreign
Total deferred income tax expense
2016
Fiscal Year
2015
2014
$ 171,934 $ 164,384 $ 90,025
19,147
27,167
10,418
9,746
119,590
201,297
15,970
8,487
196,391
4,055
1,139
2,029
7,223
6,300
2,762
(1,151)
7,911
18,665
(1,786)
(2,830)
14,049
Income taxes
$ 203,614 $ 209,208 $ 133,639
The pretax income from foreign operations for fiscal 2016, fiscal 2015 and fiscal 2014 totaled $48.2
million, $33.2 million and $38.0 million, respectively.
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Significant components of deferred income tax assets and liabilities are as follows (in thousands):
Deferred income tax assets:
Accrued liabilities
State income taxes
Vacation accrual
Share-based compensation
Deferred rent
Gift cards
Self-insurance
Original issue discount
State and foreign net operating losses
Other
Total gross deferred income tax assets
Valuation allowance
Total deferred income tax assets, net of valuation allowance
Deferred income tax liabilities:
Merchandise inventories
Property and equipment
Cancellation of debt
Total deferred income tax liabilities
January 28,
2017
January 30,
2016
$
$
16,403
4,077
2,408
9,765
18,714
8,985
24,602
8,845
4,615
2,294
100,708
(3,689)
97,019
(8,152)
(37,895)
(15,143)
(61,190)
13,748
8,156
6,360
9,387
17,880
7,093
17,992
24,672
5,463
8,731
119,482
(3,050)
116,432
(9,350)
(42,495)
(24,188)
(76,033)
Net deferred income tax assets
$
35,829
$
40,399
A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is
more likely than not that such assets will be realized. In evaluating our ability to realize our deferred tax assets
we considered sources of future taxable income, including future reversals of existing taxable temporary
differences, forecast of future profitability, taxable income in prior carryback years and tax-planning strategies.
At January 28, 2017, we had state net operating loss carryforwards to reduce future taxable income of
$4.6 million, net of federal tax benefits, expiring at various dates between fiscal 2017 and fiscal 2036. Cash
paid for income taxes totaled $162.4 million, $154.9 million and $112.4 million in fiscal 2016, fiscal 2015 and
fiscal 2014, respectively.
A provision for income taxes has not been recognized for U.S. taxes on undistributed earnings of our
foreign subsidiaries for fiscal 2016 and fiscal 2015 as these earnings were, and are expected to continue to be,
permanently reinvested. The aggregate undistributed earnings of our foreign subsidiaries for which no deferred
tax liability has been recognized was $99.7 million as of the end of fiscal 2016. If these earnings are remitted
to the U.S. at a future date, additional tax liabilities will be incurred. The unrecognized deferred tax liabilities
on the unremitted earnings was approximately $19.9 million at January 28, 2017.
Unrecognized Tax Benefits
We operate in a number of tax jurisdictions and are subject to examination of our income tax returns
by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the tax
matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is
uncertain. In accordance with ASC 740, Income Taxes, we recognize these tax benefits in our consolidated
financial statements only after determining that it is more likely than not that the tax benefits will be sustained.
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A reconciliation of gross unrecognized tax benefits from the end of fiscal 2015 through the end of
fiscal 2016 is as follows (in thousands):
Balance at beginning of year
Additions based on tax positions related to the current year
Additions for tax positions related to prior years
Balance at end of year
$
$
19,136
4,561
11,192
34,889
Included in the balance of unrecognized tax benefits at January 28, 2017 is $12.3 million which, if
recognized, would affect income tax expense. We do not expect any material changes to our liability for
uncertain tax positions during the next 12 months. At January 28, 2017 and January 30, 2016, the total amount
of interest and penalties accrued within the tax liability was $2.1 million and $4.6 million, respectively. There
was no material interest and penalties recognized in the consolidated statements of comprehensive income in
fiscal 2016, fiscal 2015 and fiscal 2014.
Our income tax returns are subject to examination by taxing authorities in the jurisdictions in which
we operate. The periods subject to examination for our federal return are fiscal 2013 to fiscal 2015 and fiscal
2009 to fiscal 2015 for our Canadian returns. State income tax returns are generally subject to examination for
a period of three to five years after filing. We have various state income tax returns in the process of
examination, appeals or settlements. Our income tax returns for fiscal 2011 and fiscal 2012 are currently under
examination by the Canadian tax authorities. Our federal return for fiscal 2014 is currently under examination
by the Internal Revenue Service. We are not aware of any issues which would result in a material assessment
of tax obligations.
10. SHARE-BASED COMPENSATION
The Michaels Companies, Inc. Amended and Restated 2014 Omnibus Long-Term Incentive Plan
(“2014 Omnibus Plan”) provides for the grant of share-based awards for up to 21.3 million shares of common
stock. As of January 28, 2017, there were 5.4 million shares of common stock remaining available for grant.
Generally, awards vest ratably over four or five years and expire eight to ten years from the grant date. As of
January 28, 2017, unrecognized compensation cost for all unvested share-based awards totaled $56.2 million
and is expected to be recognized over a weighted-average period of 2.9 years. Share-based compensation
expense totaled $16.5 million in fiscal 2016, $15.1 million in fiscal 2015 and $19.4 million in fiscal 2014 and
is recorded in cost of sales and occupancy expense and SG&A in the consolidated statements of comprehensive
income.
Stock Options
The fair value of each stock option is estimated using the Black-Scholes option pricing model. The
following table presents the weighted-average assumptions used during fiscal years 2016, 2015 and 2014:
(1)
Risk-free interest rates
Expected dividend yield
Expected volatility
Expected life of options in years
(2)
(3)
2016
Fiscal Year
2015
2014
1.1 %
0.0 %
29.8 %
4.1
1.2 %
0.0 %
29.7 %
4.0
1.3 %
0.0 %
27.6 %
4.0
(1) Based on interest rates for U.S. Treasury instruments with terms consistent with the expected lives of the awards.
(2) We considered our historical volatility as well as the historical and implied volatilities for exchange-traded options
of a peer group of companies.
(3) Expected lives were based on an analysis of historical exercise and post-vesting employment termination.
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The stock option activity during the fiscal year ended January 28, 2017 was as follows:
Number of
Shares
(in thousands)
Weighted-
Average Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at beginning of year
Granted
Exercised
Expired/Forfeited
Outstanding at end of year
7,972 $
1,746
(1,730)
(326)
7,662
14.84
24.50
9.97
19.50
17.94
6.5 $
27,431
Shares exercisable at end of year
3,306 $
14.11
4.6 $
19,772
The total grant date fair value of options that vested during fiscal 2016, fiscal 2015 and fiscal 2014
was $7.4 million, $7.3 million and $14.5 million, respectively. The intrinsic value for options that vested
during fiscal 2016, fiscal 2015 and fiscal 2014 was $13.1 million, $18.1 million and $33.0 million,
respectively. The intrinsic value for options exercised was $30.8 million in fiscal 2016, $65.6 million in fiscal
2015 and $42.1 million in fiscal 2014. As of the beginning of fiscal 2016, there were 4.3 million nonvested
options with a weighted-average fair value of $4.97 per share. As of the end of fiscal 2016, there were
4.4 million nonvested options with a weighted-average fair value of $5.50 per share. The weighted-average fair
value of options granted during fiscal 2016, fiscal 2015 and fiscal 2014 was $6.27, $6.01 and $3.77,
respectively. During fiscal 2016, there were 1.5 million options that vested and 0.3 million options that were
cancelled with a weighted-average fair value of $5.04 and $5.36 per share, respectively.
Restricted Shares
The Company issues restricted shares to certain key employees and its Board of Directors. Generally,
restricted shares awarded to employees vest ratably over four or five years. Restricted shares awarded to Board
of Director members vest ratably over one year. Compensation expense is recorded for all restricted stock
awards and restricted stock units based on the amortization of the fair market value at the date of grant over the
vesting period.
Restricted stock award activity during the fiscal year ended January 28, 2017 was as follows:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
F-28
Number of
Shares
(in thousands)
Weighted-
Average
Fair Value
20.88
27.65
25.11
21.22
21.58
1,429 $
133
(456)
(142)
964 $
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Restricted stock unit activity during the fiscal year ended January 28, 2017 was as follows:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
11. EARNINGS PER SHARE
Number of
Shares
(in thousands)
Weighted-
Average
Fair Value
23.12
23.93
24.86
23.80
23.91
38 $
801
(9)
(28)
802 $
The Company’s unvested restricted stock awards contain non-forfeitable rights to dividends and meet
the criteria of a participating security as defined by ASC 260, “Earnings Per Share”. In applying the two-class
method, net income is allocated to both common and participating securities based on their respective
weighted-average shares outstanding for the period. Basic earnings per share is computed by dividing net
income allocated to common shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share is computed by dividing income available to common shareholders by
the weighted-average common shares outstanding plus the potential dilutive impact from the exercise of stock
options and restricted stock units. Common equivalent shares are excluded from the computation if their effect
is anti-dilutive. There were 2.3 million, 0.8 million and 0.3 million anti-dilutive shares in fiscal 2016, fiscal
2015 and fiscal 2014, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in thousands,
except per share data):
2016
Fiscal Year
2015
2014
Basic earnings per common share:
Net income
Less income related to unvested restricted shares
Income available to common shareholders - Basic
$378,159 $362,912 $217,395
(835)
$375,836 $361,012 $216,560
(2,323)
(1,900)
Weighted-average common shares outstanding - Basic
204,735
206,845
203,229
Basic earnings per common share
$
1.84 $
1.75 $
1.07
Diluted earnings per common share:
Net income
Less income related to unvested restricted shares
Income available to common shareholders - Diluted
$378,159 $362,912 $217,395
(819)
$375,854 $361,035 $216,576
(1,877)
(2,305)
Weighted-average common shares outstanding - Basic
Effect of dilutive stock options and restricted stock units
Weighted-average common shares outstanding - Diluted
204,735
1,619
206,354
206,845
2,501
209,346
203,229
3,872
207,101
Diluted earnings per common share
$
1.82 $
1.72 $
1.05
12. SEGMENTS AND GEOGRAPHIC INFORMATION
We consider Michaels-U.S., Michaels-Canada, Aaron Brothers, Pat Catan’s and Darice to be our
operating segments for purposes of determining reportable segments based on the criteria of ASC 280,
Segment Reporting (“ASC 280”). We determined that Michaels-U.S., Michaels-Canada, Aaron Brothers and
Pat Catan’s have similar economic characteristics and meet the aggregation criteria set forth in ASC 280.
Therefore, we combine these operating segments
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into one reporting segment. Darice does not meet the materiality criteria in ASC 280 and, therefore, is not
disclosed as a reportable segment.
Our net sales and total assets by country are as follows (in thousands):
2016
Fiscal Year
2015
2014
Net Sales:
United States
Canada
Total
Total Assets:
United States
Canada
Total
$ 4,736,578 $ 4,473,454 $ 4,276,794
461,350
$ 4,738,144
439,328
$ 5,197,292 $ 4,912,782
460,714
$ 1,969,889 $ 1,895,580
135,707
$ 2,147,640 $ 2,031,287
177,751
$ 1,825,562
135,546
$ 1,961,108
We present assets based on their physical, geographic location. Certain assets located in the U.S. are
also used to support our Canadian operations but are not allocated to Canada.
Our net sales by major product categories are as follows (in thousands):
General crafts
Home décor and seasonal
Framing
Papercrafting
Total
2016
Fiscal Year
2015
$ 2,630,398 $ 2,487,288
1,003,436
927,588
494,470
$ 5,197,292 $ 4,912,782
1,088,989
903,143
574,762
2014
$ 2,409,136
971,176
902,934
454,898
$ 4,738,144
Our chief operating decision makers evaluate historical operating performance and forecast future
periods’ operating performance based on operating income and earnings before interest, income taxes,
depreciation, amortization and losses on early extinguishments of debt and refinancing costs (“EBITDA
(excluding losses on early extinguishments of debt and refinancing costs)”). We believe these metrics more
closely reflect the operating effectiveness of factors over which management has control. A reconciliation of
EBITDA (excluding losses on early extinguishments of debt and refinancing costs) to net income is presented
below (in thousands):
Net income
Interest expense
Losses on early extinguishments of debt and refinancing
costs
Income taxes
Depreciation and amortization
Interest income
EBITDA (excluding losses on early extinguishments of debt
and refinancing costs)
13. CONTINGENCIES
Rea Claim
Fiscal Year
2015
2016
378,159 $ 362,912
139,405
126,270
$
2014
$ 217,395
198,409
7,292
203,614
115,801
(820)
8,485
209,208
114,756
(615)
74,312
133,639
110,858
(363)
$
830,316 $ 834,151
$ 734,250
On September 15, 2011, MSI was served with a lawsuit filed in the California Superior Court in and
for the County of Orange (“Superior Court”) by four former store managers as a class action proceeding on
behalf of themselves and certain former and current store managers employed by MSI in California. The
lawsuit alleged that MSI improperly
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classified its store managers as exempt employees and as such failed to pay all wages, overtime and waiting
time penalties and failed to provide accurate wage statements. The lawsuit also alleged that the foregoing
conduct was in breach of various laws, including California’s unfair competition law. On December 3, 2013,
the Superior Court entered an order certifying a class of approximately 200 members. MSI successfully
removed the case to the U.S. District Court for the Central District of California and on May 8, 2014, the class
was decertified. Three of the four named plaintiffs’ claims were resolved in September 2014, but the individual
claims of 26 former class members remain pending in the Central District of California. In addition, a separate
representative action brought on behalf of store managers throughout the state is pending in the California
Superior Court, County of San Diego. We believe we have meritorious defenses and intend to defend the
lawsuits vigorously. We do not believe the resolution of the lawsuits will have a material effect on our
consolidated financial statements.
Fair Credit Reporting Claim
On December 11, 2014, MSI was served with a lawsuit, Christina Graham v. Michaels Stores, Inc.,
filed in the U.S. District Court for the District of New Jersey by a former employee. The lawsuit is a purported
class action, bringing plaintiff’s individual claims, as well as claims on behalf of a putative class of applicants
who applied for employment with Michaels through an online application, and on whom a background check
for employment was procured. The lawsuit alleges that MSI violated the Fair Credit Reporting Act (“FCRA”)
and the New Jersey Fair Credit Reporting Act by failing to provide the proper disclosure and obtain the proper
authorization to conduct background checks. Since the initial filing, another named plaintiff joined the lawsuit,
which was amended in February 2015, Christina Graham and Gary Anderson v. Michaels Stores, Inc., with
substantially similar allegations. The plaintiffs seek statutory and punitive damages as well as attorneys’ fees
and costs.
Following the filing of the Graham case in New Jersey, five additional purported class action lawsuits
with six plaintiffs were filed, Michele Castro and Janice Bercut v. Michaels Stores, Inc., in the U.S. District
Court for the Northern District of Texas, Michelle Bercut v. Michaels Stores, Inc., in the Superior Court of
California for Sonoma County, Raini Burnside v. Michaels Stores, Inc., in the U.S. District Court for the
Western District of Missouri, Sue Gettings v. Michaels Stores, Inc., in the U.S. District Court for the Southern
District of New York, and Barbara Horton v. Michaels Stores, Inc., in the U.S. District Court for the Central
District of California. All of the plaintiffs alleged violations of the FCRA. In addition, the Castro, Horton and
Janice Bercut lawsuits also alleged violations of California’s unfair competition law. The Burnside, Horton and
Gettings lawsuits, as well as the claims by Michele Castro, have been dismissed. The Graham, Janice Bercut
and Michelle Bercut lawsuits were transferred for centralized pretrial proceedings to the District of New
Jersey. On January 25, 2017, the Company’s motion to dismiss was partially granted. On February 23, 2017,
the plaintiffs filed a notice of appeal, appealing a portion of the ruling.
The Company intends to defend the remaining lawsuits vigorously. We cannot reasonably estimate
the potential loss, or range of loss, related to the lawsuits, if any.
Data Security Incident
Five putative class actions were filed against MSI relating to the January 2014 data breach. The
plaintiffs generally alleged that MSI failed to secure and safeguard customers’ private information including
credit and debit card information, and as such, breached an implied contract and violated the Illinois Consumer
Fraud Act (and other states’ similar laws). The plaintiffs are seeking damages including declaratory relief,
actual damages, punitive damages, statutory damages, attorneys’ fees, litigation costs, remedial action, pre and
post judgment interest, and other relief as available. The cases are as follows: Christina Moyer v. Michaels
Stores, Inc., was filed on January 27, 2014; Michael and Jessica Gouwens v. Michaels Stores, Inc., was filed
on January 29, 2014; Nancy Maize and Jessica Gordon v. Michaels Stores, Inc., was filed on February 21,
2014; and Daniel Ripes v. Michaels Stores, Inc., was filed on March 14, 2014. These four cases were filed in
the U.S. District Court for the Northern District of Illinois, Eastern Division. On March 18, 2014, an additional
putative class action was filed in the U.S. District Court for the Eastern District of New York, Mary Jane
Whalen v. Michaels Stores, Inc., but was voluntarily dismissed by the plaintiff on April 11, 2014 without
prejudice to her right to re‑file a complaint. On April 16, 2014, an order was entered consolidating the Illinois
actions. On July 14, 2014, the Company’s motion to dismiss the consolidated complaint was granted.
On December 2, 2014, Whalen filed a new lawsuit against MSI related to the data breach in the U.S.
District Court for the Eastern District of New York, Mary Jane Whalen v. Michaels Stores, Inc., seeking
damages including
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declaratory relief, monetary damages, statutory damages, punitive damages, attorneys’ fees and costs,
injunctive relief, pre and post judgment interest, and other relief as available. The Company filed a motion to
dismiss which was granted on December 28, 2015, and judgment was entered in favor of the Company on
January 8, 2016. Plaintiff filed a notice of appeal on January 27, 2016, appealing the judgment to the U.S.
Court of Appeals for the Second Circuit.
The Company intends to defend this lawsuit vigorously. We cannot reasonably estimate the potential
loss, or range of loss, related to the lawsuit, if any.
Consumer Product Safety Commission Claim
On April 21, 2015, the U.S. Department of Justice, on behalf of the Consumer Product Safety
Commission (the “CPSC”), filed a complaint against MSI and Michaels Stores Procurement Company, Inc.
(“MSPC”) in the U.S. District Court for the Northern District of Texas. The complaint seeks civil penalties for
an alleged failure to timely report a potential product safety hazard to the CPSC related to the breakage of
certain glass vases. The complaint also alleges the report contained a material misrepresentation and seeks
injunctive relief requiring MSI and MSPC to, among other things, establish internal recordkeeping and
compliance monitoring systems. We believe we have meritorious defenses and intend to defend the lawsuit
vigorously. We do not believe the resolution of the lawsuit will have a material effect on our consolidated
financial statements.
General
In addition to the litigation discussed above, we are now, and may be in the future, involved in various
other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are
inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management time and result in diversion of significant
resources.
For some of the matters disclosed above, as well as other lawsuits involving the Company, we are
able to estimate a range of losses in excess of the amounts recorded, if any, in the accompanying consolidated
financial statements. As of January 28, 2017, the aggregate estimated loss was approximately $13 million,
which includes amounts recorded by the Company.
14. RETIREMENT PLANS
We sponsor a 401(k) Savings Plan for our eligible employees and certain of our subsidiaries.
Participation in the 401(k) Savings Plan is voluntary and available to any employee who is at least 21 years of
age and has completed three months of full-time service or one year of part-time service. Participants may
elect to contribute up to 80% of their compensation on a pre-tax basis and up to 10% on an after-tax basis. In
accordance with the provisions of the 401(k) Savings Plan, we make a matching cash contribution to the
account of each participant in an amount equal to 50% of the participant’s pre-tax contributions that do not
exceed 6% of the participant’s compensation for the year. Matching contributions vest to the participants based
on years of service, with 100% vesting after three years. Our matching contribution expense was $4.4 million,
$4.8 million, and $4.1 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
During fiscal 2016, the Company established a nonqualified deferred compensation plan for certain
executives and other highly compensated employees. The deferred compensation plan provides participants
with the opportunity to defer up to 75% of their base salary and up to 100% of their annual earned bonus.
Participants are 100% vested in these deferrals and the associated investment returns. The Company does not
currently make any matching cash contributions to the participant accounts. There were no significant assets or
liabilities related to the deferred compensation plan in the consolidated balance sheet as of January 28, 2017.
15. RELATED PARTY TRANSACTIONS
Affiliates of, or funds advised by, Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone
Group L.P. (“The Blackstone Group”, together with Bain Capital and their applicable affiliates, the
“Sponsors”) owned approximately 38% of our outstanding common stock as of January 28, 2017. Prior to our
IPO on July 2, 2014, the Sponsors and another
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common stockholder, Highfields Capital Management LP (“Highfields”), received annual management fees of
$12.0 million and $1.0 million, respectively. In connection with the IPO, the management agreement was
terminated and the Company paid the Sponsors and Highfields an aggregate $30.2 million termination fee.
During fiscal 2014, we recognized expense of $35.7 million related to management fees and reimbursement of
out-of-pocket expenses.
The Blackstone Group owns a majority equity position in RGIS, a vendor we utilize to count our store
inventory. Payments associated with this vendor totaled $6.0 million, $5.9 million and $5.8 million during
fiscal 2016, fiscal 2015 and fiscal 2014, respectively, and are included in SG&A in the consolidated statements
of comprehensive income.
The Blackstone Group owns an equity position in Vistar, a vendor we utilize for all of the candy-type
items in our stores. Payments associated with this vendor during fiscal 2016, fiscal 2015 and fiscal 2014 were
$26.8 million, $28.6 million and $25.6 million, respectively, and are recognized in cost of sales and occupancy
expense in the consolidated statements of comprehensive income as the sales are incurred.
The Blackstone Group owns a majority equity position in Excel Trust, Inc., Blackstone Real Estate
DDR Retail Holdings III, LLC and Blackstone Real Estate RC Retail Holdings, LLC, vendors we utilize to
lease certain properties. Payments associated with these vendors during fiscal 2016, fiscal 2015 and fiscal 2014
were $5.2 million, $3.5 million and $1.7 million, respectively. These expenses are included in cost of sales and
occupancy expense in the consolidated statements of comprehensive income.
Certain affiliates of The Blackstone Group have significant influence over US Xpress Enterprises,
Inc., a vendor we utilize for transportation services. Payments associated with this vendor during fiscal 2016
and fiscal 2015 were $1.1 million. Payments associated with this vendor during fiscal 2014 were $0.4 million.
These expenses are recognized in cost of sales and occupancy expense in the consolidated statements of
comprehensive income as the sales are incurred.
Four of our current directors, Joshua Bekenstein, Nadim El Gabbani, Lewis S. Klessel and Peter F.
Wallace, are affiliates of Bain Capital or The Blackstone Group. As such, some or all of such directors may
have an indirect material interest in payments with respect to debt securities of the Company that have been
purchased by affiliates of Bain Capital and The Blackstone Group. As of January 28, 2017, affiliates of The
Blackstone Group held $83.6 million of our Amended Term Loan Credit Facility.
16. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Our debt covenants restrict MSI, and certain subsidiaries of MSI, from various activities including the
incurrence of additional debt, payment of dividends and the repurchase of MSI’s capital stock (subject to
certain exceptions), among other things. The following condensed consolidated financial information
represents the financial information of MSI and its wholly-owned subsidiaries subject to these restrictions. The
information is presented in accordance with the requirements of Rule 12-04 under the SEC’s Regulation S-X.
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Michaels Stores, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
ASSETS
Current assets:
Cash and equivalents
Merchandise inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
Accrued liabilities and other
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other liabilities
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
January 28,
January 30,
2017
2016
$
116,072
294,054 $
404,650
1,127,777 1,002,607
95,583
1,537,903 1,502,840
378,507
94,290
56,004
$ 2,143,342 $ 2,031,641
413,164
119,074
73,201
$
457,704
517,268 $
384,002
395,745
24,900
31,125
89,996
123,258
956,602
1,067,396
2,723,187 2,744,942
95,400
(1,751,213) (1,765,303)
$ 2,143,342 $ 2,031,641
103,972
Michaels Stores, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Other operating expense
Operating income
Interest and other expense
Income before income taxes
Income taxes
Net income
2014
2016
Fiscal Year
2015
$5,197,292 $4,912,782 $4,738,144
2,836,965
2,944,431
1,901,179
1,968,351
1,230,639
1,241,876
40,749
4,786
629,791
721,689
213,697
138,662
416,094
583,027
156,976
217,428
$ 379,701 $ 365,599 $ 259,118
3,169,476
2,027,816
1,305,855
4,484
717,477
133,529
583,948
204,247
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other
Comprehensive income
7,832
(10,251)
(12,003)
$ 387,533 $ 355,348 $ 247,115
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Michaels Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Acquisition of Lamrite West, net of cash acquired
Purchases of long-term investments
Net cash used in investing activities
Cash flows from financing activities:
Net repayments of debt
Net borrowings of debt
Payment of dividend to Michaels Funding, Inc.
Other financing activities
Net cash used in financing activities
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
Fiscal Year
2016
2015
2014
$ 577,088 $ 507,806 $
521,109
(114,462)
(151,100)
(1,325)
(266,887)
(123,920)
—
(5,000)
(128,920)
(137,780)
—
—
(137,780)
(60,675)
42,000
(400,823)
(1,299)
(420,797)
(219,947)
45,047
(188,046)
15,151
(347,795)
(1,100,889)
1,123,750
(255,552)
(11,239)
(243,930)
(110,596)
404,650
31,091
373,559
139,399
234,160
$ 294,054 $ 404,650 $
373,559
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for fiscal 2016 and fiscal 2015 were as follows (in
thousands, except per share data):
Fiscal 2016
(1)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Operating income
Losses on early extinguishments of debt and
refinancing costs
Net income
Diluted earnings per common share
$ 1,158,880 $ 1,060,353 $ 1,227,206 $ 1,750,854
1,045,093
705,761
368,960
336,556
669,656
390,697
302,712
87,077
694,129
464,751
317,800
145,325
760,598
466,608
318,580
146,324
—
70,765
405
35,617
6,887
76,459
—
195,318
0.95
0.37 $
$
0.34 $
0.17 $
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Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Operating income
Losses on early extinguishments of debt and
refinancing costs
Net income
Diluted earnings per common share
Fiscal 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 1,077,600 $ 984,270 $ 1,168,423 $ 1,682,489
994,854
687,635
362,987
324,188
610,949
373,321
275,699
96,582
702,825
465,598
308,704
155,852
635,803
441,797
295,571
143,982
—
66,738
6,072
35,711
—
76,797
$
0.32 $
0.17 $
0.37 $
2,413
183,666
0.87
(1) Fiscal 2016 results of operations includes the impact of the acquisition of Lamrite on February 2, 2016, including
non-recurring purchase accounting adjustments and integration costs of $11.4 million. Lamrite’s net sales totaled
$232.3 million in fiscal 2016.
We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday closest to
January 31. Our interim periods each contain 13 weeks ending on the Saturday closest to April 30, July 31 and
October 31.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 7, 2017
THE MICHAELS COMPANIES, INC.
By: /s/ Denise A. Paulonis
Denise A. Paulonis
Executive Vice President & Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Carl S. Rubin
Carl S. Rubin
Chief Executive Officer and Director
(Principal Executive Officer)
March 7, 2017
/s/ Denise A. Paulonis
Denise A. Paulonis
/s/ James E. Sullivan
James E. Sullivan
/s/ Joshua Bekenstein
Joshua Bekenstein
/s/ Monte E. Ford
Monte E. Ford
/s/ Nadim El Gabbani
Nadim El Gabbani
/s/ Karen Kaplan
Karen Kaplan
/s/ Lewis S. Klessel
Lewis S. Klessel
/s/Matthew S. Levin
Matthew S. Levin
/s/ John J. Mahoney
John J. Mahoney
/s/James A. Quella
James A. Quella
/s/ Beryl B. Raff
Beryl B. Raff
/s/ Peter F. Wallace
Peter F. Wallace
Executive Vice President and Chief Financial Officer
March 7, 2017
(Principal Financial Officer)
Chief Accounting Officer and Controller
March 7, 2017
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
March 7, 2017
Table of Contents
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1*
10.2*
10.3*
EXHIBIT INDEX
Description of Exhibit
Agreement and Plan of Merger, dated as of July 22, 2013, by and among Michaels Stores, Inc.,
The Michaels Companies, Inc., Michaels FinCo Holdings, LLC, Michaels Funding, Inc., and
Michaels Stores MergerCo, Inc. (previously filed as Exhibit 2.1 to Form 10-Q filed by Michaels
Stores, Inc. on August 30, 2013, SEC File No. 001-09338).
Second Amended and Restated Certificate of Incorporation of The Michaels Companies, Inc.
(previously filed as Exhibit 3.2 to Form S-1 filed by the Company on June 9, 2014, SEC File
No. 333-193000).
Amended and Restated Bylaws of The Michaels Companies, Inc. (previously filed as Exhibit
3.4 to Form S-1 filed by the Company on June 2, 2014, SEC File No. 333-193000).
Form of Specimen Common Stock Certificate of The Michaels Companies, Inc. (previously
filed as Exhibit 4.1 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-
193000).
Form of Amended and Restated Registration Rights Agreement (previously filed as Exhibit 4.2
to Form S-1 filed by the Company on June 2, 2014, SEC File No. 333-193000).
Form of Investor Agreement (previously filed as Exhibit 4.3 to Form S-1 filed by the Company
on June 2, 2014, SEC File No. 333-193000).
Indenture, dated as of December 19, 2013, by and among Michaels Stores, Inc., the guarantors
named therein and Wells Fargo Bank, National Association, as trustee (previously filed as
Exhibit 4.1 to Form 8-K filed by Michaels Stores, Inc. on December 19, 2013, SEC File
No. 001-09338).
Supplemental Indenture, dated as of June 16, 2014, by and among Michaels Stores, Inc., the
guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously
filed as Exhibit 4.11 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-
193000).
Indenture, dated as of July 29, 2013, among Michaels FinCo Holdings, LLC, Michaels FinCo,
Inc. and Law Debenture Trust Company of New York, as trustee (previously filed as Exhibit
4.12 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-193000).
Registration Rights Agreement, dated as of October 31, 2006, among Michaels Stores, Inc. and
certain stockholders thereof (previously filed as Exhibit 4.7 to Form 10-Q filed by Michaels
Stores, Inc. on December 7, 2006, SEC File No. 001-09338).
Registration Rights Agreement, dated as of September 27, 2012, by and among Michaels
Stores, Inc., the guarantors named therein and the Initial Purchasers named therein (previously
filed as Exhibit 4.2 to Form 8-K filed by Michaels Stores, Inc. on October 2, 2012, SEC File
No. 001-09338).
Michaels Stores, Inc. 2006 Equity Incentive Plan (previously filed as Exhibit 10.1 to Form 8-K
filed by Michaels Stores, Inc. on February 21, 2007, SEC File No. 001-09338).
Form of Stock Option Agreement under the Michaels Stores, Inc. 2006 Equity Incentive Plan
(previously filed as Exhibit 10.2 to Form 8-K filed by Michaels Stores, Inc. on February 21,
2007, SEC File No. 001-09338).
Amended Form of Stock Option Agreement under the Michaels Stores, Inc. 2006 Equity
Incentive Plan (previously filed as Exhibit 10.1 to Form 10-Q filed by Michaels Stores, Inc. on
September 4, 2009, SEC File No. 001-09338).
Table of Contents
Exhibit
Number
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
Description of Exhibit
Form of Restricted Stock Award Agreement under the Michaels Stores, Inc. 2006 Equity
Incentive Plan (previously filed as Exhibit 10.3 to Form 10-Q filed by Michaels Stores, Inc. on
June 6, 2008, SEC File No. 001-09338).
The Michaels Companies, Inc. Equity Incentive Plan (previously filed as Exhibit 10.1 to
Form 10-Q filed by Michaels Stores, Inc. on August 30, 2013, SEC File No. 001-09338).
Form of Stock Option Agreement under The Michaels Companies, Inc. Equity Incentive Plan
(previously filed as Exhibit 10.2 to Form 10-Q filed by Michaels Stores, Inc. on August 30,
2013, SEC File No. 001-09338).
Form of Restricted Stock Award Agreement under The Michaels Companies, Inc. Equity
Incentive Plan (previously filed as Exhibit 10.3 to Form 10-Q filed by Michaels Stores, Inc. on
August 30, 2013, SEC File No. 001-09338).
Form of Restricted Stock Award Agreement for Independent Directors under The Michaels
Companies, Inc. Equity Incentive Plan (previously filed as Exhibit 10.1 to Form 10-Q filed by
Michaels Stores, Inc. on December 10, 2013, SEC File No. 001-09338).
Amended and Restated 2014 Omnibus Long-Term Incentive Plan (previously filed as
Exhibit 10.1 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-193000).
Form of Stock Option Agreement under the Amended and Restated 2014 Omnibus Long-Term
Incentive Plan (previously filed as Exhibit 10.2 to Form S-1 filed by the Company on June 2,
2014, SEC File No. 333-193000).
Form of Stock Option Agreement under the Amended and Restated 2014 Omnibus Long-Term
Incentive Plan (previously filed as Exhibit 10.11 to Form 10-K filed by the Company on March
17, 2016, SEC File No. 001-36501).
Form of Restricted Stock Award Agreement under the Amended and Restated 2014 Omnibus
Long-Term Incentive Plan (previously filed as Exhibit 10.3 to Form S-1 filed by the Company
on June 2, 2014, SEC File No. 333-193000).
Form of Restricted Stock Award Agreement for Independent Directors under the Amended and
Restated 2014 Omnibus Long-Term Incentive Plan (previously filed as Exhibit 10.4 to Form S-
1 filed by the Company on June 2, 2014, SEC File No. 333-193000).
Form of Restricted Stock Unit Agreement under the Amended and Restated 2014 Omnibus
Long-Term Incentive Plan (previously filed as Exhibit 10.1 to Form 10-Q filed by the
Company on August 29, 2014, SEC File No. 001-36501).
Form of Restricted Stock Unit Agreement for Independent Directors under the Amended and
Restated 2014 Omnibus Long-Term Incentive Plan (previously filed as Exhibit 10.1 to Form
10-Q filed by the Company on December 7, 2016, SEC File No. 001-36501).
The Michaels Companies, Inc. Annual Incentive Plan (previously filed as Exhibit 10.14 to
Form S-1 filed by the Company on June 2, 2014, SEC File No. 333-193000).
Employment Agreement, dated February 13, 2013, between Michaels Stores, Inc. and Carl S.
Rubin (previously filed as Exhibit 10.1 to Form 10-Q filed by Michaels Stores, Inc. on May 24,
2013, SEC File No. 001-09338).
Table of Contents
Exhibit
Number
10.18*
10.19*
10.20*
10.21*
10.22
10.23
10.24
10.25
10.26
10.27
Description of Exhibit
Restricted Stock Award Agreements, dated March 18, 2013, between Michaels Stores, Inc. and
Carl S. Rubin (previously filed as Exhibit 10.2 to Form 10-Q filed by Michaels Stores, Inc. on
May 24, 2013, SEC File No. 001-09338).
Stock Option Agreement, dated March 18, 2013, between Michaels Stores, Inc. and Carl S.
Rubin (previously filed as Exhibit 10.1 to Form 10-Q filed by Michaels Stores, Inc. on May 24,
2013, SEC File No. 001-09338).
Letter Agreement, dated September 15, 2010, between Michaels Stores, Inc. and Charles M.
Sonsteby (previously filed as Exhibit 99.2 to Form 8-K filed by Michaels Stores, Inc. on
September 17, 2010, SEC File No. 001-09338).
Michaels Stores, Inc. Amended and Restated Officer Severance Pay Plan (previously filed as
Exhibit 10.26 to Form S-1 filed by the Company on January 12, 2015, SEC File No. 333-
201444).
Form of Director and Officer Indemnification Agreement (previously filed as Exhibit 10.29 to
Form S-1 filed by the Company on June 9, 2014 SEC File No. 333-193000).
Second Amended and Restated Credit Agreement, dated as of September 17, 2012, among
Michaels Stores, Inc., the other borrowers from time to time party thereto, the facility
guarantors from time to time party thereto, the lenders from time to time party thereto, Wells
Fargo Bank, National Association, as administrative agent and collateral agent, and the other
agents named therein (previously filed as Exhibit 10.1 to Form 8-K filed by Michaels
Stores, Inc. on September 18, 2012, SEC File No. 001-09338).
Exhibits and Schedules to Second Amended and Restated Credit Agreement, dated as of
September 17, 2012, among Michaels Stores, Inc., the other borrowers from time to time party
thereto, the facility guarantors from time to time party thereto, the lenders from time to time
party thereto, Wells Fargo Bank, National Association, as administrative agent and collateral
agent, and the other agents named therein (previously filed as Exhibit 10.21 to Form 10-K filed
by Michaels Stores, Inc. on March 15, 2013, SEC File No. 001-09338).
First Amendment to Second Amended and Restated Credit Agreement, dated June 6, 2014, to
the Second Amended and Restated Credit Agreement, dated September 17, 2012, among
Michaels Stores, Inc., the other borrowers named therein, the facility guarantors named therein,
the lenders named therein, Wells Fargo Bank, National Association, as administrative agent,
collateral agent, lender, swingline lender and issuing bank (previously filed as Exhibit 10.2 to
Form 8-K filed by Michaels Stores, Inc. on June 11, 2014, SEC File No. 001-09338).
Third Amended and Restated Credit Agreement, dated as of May 27, 2016, by and among
Michaels Stores, Inc., the other borrowers party thereto, the facility guarantors party thereto,
Wells Fargo Bank, National Association, as administrative agent, collateral agent, issuing bank
and swingline lender, the other lenders party thereto and the other agents named therein
(previously filed as Exhibit 10.1 to Form 8-K filed by the Company on May 27, 2016, SEC File
No. 001-36501).
Amended and Restated Credit Agreement, dated as of January 28, 2013, among Michaels
Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent, and Barclays Bank,
PLC, Credit Suisse Securities (USA), LLC, Goldman Sachs Bank USA, J.P. Morgan Securities,
LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley Senior
Funding, Inc. and Wells Fargo Securities, LLC, as co-documentation agents, and Deutsche
Bank Securities Inc., Barclays Bank PLC, Credit Suisse Securities (USA), LLC, Goldman
Sachs Bank USA, J.P. Morgan Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley Senior Funding, Inc. and Wells Fargo Securities, LLC, as co-lead
arrangers and joint bookrunners (previously filed as Exhibit 10.1 to Form 8-K filed by Michaels
Stores, Inc. on February 1, 2013, SEC File No. 001-09338).
Table of Contents
Exhibit
Number
10.28
10.29
10.30
Description of Exhibit
Exhibits and Schedules to Amended and Restated Credit Agreement, dated as of January 28,
2013, among Michaels Stores, Inc., Deutsche Bank AG New York Branch, as administrative
agent, and Barclays Bank PLC, Credit Suisse Securities (USA), LLC, Goldman Sachs Bank
USA, J.P. Morgan Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley Senior Funding, Inc. and Wells Fargo Securities, LLC, as co-documentation
agents, and Deutsche Bank Securities Inc., Barclays Bank PLC, Credit Suisse Securities (USA),
LLC, Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Morgan Stanley Senior Funding, Inc. and Wells Fargo Securities,
LLC, as co-lead arrangers and joint bookrunners (previously filed as Exhibit 10.29 to Form 10-
K filed by Michaels Stores, Inc. on March 15, 2013, SEC File No. 001-09338).
First Amendment to Amended and Restated Credit Agreement, dated June 10, 2014, to the
Amended and Restated Credit Agreement, dated January 28, 2013, among Michaels
Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent, and the guarantors
named therein (previously filed as Exhibit 10.3 to Form 8-K filed by Michaels Stores, Inc. on
June 11, 2014, SEC File No. 001-09338).
Second Amendment to Amended and Restated Credit Agreement, dated as of September 28,
2016, among Michaels Stores, Inc., Michaels Funding, Inc., various subsidiary of Michaels
Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent and collateral
agent, the 2016 Converting Replacement Term B-1 Loan Lenders (as defined therein), the 2016
New Replacement Term B-1 Loan Lenders (as defined therein), the 2016 Converting
Replacement Term B-2 Loan Lenders (as defined therein), the 2016 New Replacement Term
B-2 Loan Lenders (as defined therein), certain lenders constituting the New Required Lenders
(as defined therein) and the other agents named therein (previously filed as Exhibit 10.1 to
Form 8-K filed by the Company on September 30, 2016, SEC File No. 001-36501).
10.31*
Michaels Stores, Inc. Employees 401(k) Plan, effective March 1, 2009 (previously filed as
Exhibit 10.30 to Form 10-K filed by Michaels Stores, Inc., on April 2, 2009, SEC File No. 001-
09338).
21.1
23.1
31.1
31.2
32.1
Subsidiaries of the Company (filed herewith).
Consent of Ernst & Young LLP (filed herewith).
Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certifications of Denise A. Paulonis pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Management contract or compensatory plan or arrangement.
Exhibit 21.1
Subsidiaries of The Michaels Companies, Inc.
Aaron Brothers, Inc., a Delaware corporation
Aaron Brothers Card Services, LLC, a Virginia limited liability company
ADMACO, Inc., a Delaware corporation
Artistree, Inc., a Delaware corporation
Artistree of Canada, ULC, a Nova Scotia unlimited liability company
Darice Global Sourcing, S.à r.l., a “société à responsabilité limitée” organised under the laws of the
Grand-Duchy of Luxembourg
Darice Holdings Company Ltd., a Hong Kong company
Darice Holdings I S.à r.l., a “société à responsabilité limitée” organised under the laws of the Grand-
Duchy of Luxembourg
Darice Holdings II S.à r.l., a “société à responsabilité limitée” organised under the laws of the Grand-
Duchy of Luxembourg
Darice Imports, Inc., an Ohio corporation
Darice, Inc., an Ohio corporation
Darice International Sourcing Group, a Chinese business trust
Darice International Sourcing Holdings, S.à r.l., a “société à responsabilité limitée” organised under the
laws of the Grand-Duchy of Luxembourg
Darice (Ningbo) Business Consulting Co. Ltd., a Chinese company
Lamrite West, Inc., an Ohio corporation
Michaels Finance Company, Inc., a Delaware corporation
Michaels FinCo Holdings, LLC, a Delaware limited liability company
Michaels FinCo, Inc., a Delaware corporation
Michaels Funding, Inc., a Delaware corporation
Michaels of Canada Holdings LP No. 1, an Alberta limited partnership
Michaels of Canada Holdings LP No. 2, an Alberta limited partnership
Michaels of Canada, ULC, a Nova Scotia unlimited liability company
Michaels of Luxembourg S.à r.l., a “société à responsabilité limitée” organised under the laws of the
Grand-Duchy of Luxembourg
Michaels Stores Card Services, LLC, a Virginia limited liability company
Michaels Stores, Inc., a Delaware corporation
Michaels Stores Procurement Company, Inc., a Delaware corporation
Michaels U.S. Holdings 1, LLC, a Delaware limited liability company
Michaels U.S. Holdings 2, LLC, a Delaware limited liability company
Tiny Crafts, LLC, an Ohio limited liability company
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
1) Registration Statement (Form S-3 No. 333-205583) of The Michaels Companies, Inc.
and the related Prospectus and
2) Registration Statement (Form S-8 No. 333-197218) pertaining to the Amended and
Restated 2014 Omnibus Long-Term Incentive Plan of The Michaels Companies, Inc.;
of our reports dated March 7, 2017, with respect to the consolidated financial statements of The
Michaels Companies, Inc., and the effectiveness of internal control over financial reporting of The
Michaels Companies, Inc. included in this Annual Report (Form 10-K) for the year ended January
28, 2017.
/s/ Ernst & Young LLP
Dallas, TX
March 7, 2017
Exhibit 31.1
I, Carl S. Rubin, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of The Michaels Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2017
/s/ Carl S. Rubin
Carl S. Rubin
Chairman and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Denise A. Paulonis, certify that
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of The Michaels Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2017
/s/ Denise A. Paulonis
Denise A. Paulonis
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO § 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the filing of the Annual Report on Form 10-K of The Michaels Companies, Inc., a
Delaware corporation (the “Company”), for the year ended January 28, 2017, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company
certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that,
to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
6
Date: March 7, 2017
/s/ Carl S. Rubin
Carl S. Rubin
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Denise A. Paulonis
Denise A. Paulonis
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being
filed as part of the Report or as a separate disclosure document.