UNDER ARMOUR, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
Form 10-Q
______________________________________
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2014
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File No. 001-33202
______________________________________
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
______________________________________
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Maryland
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52-1990078
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1020 Hull Street
Baltimore, Maryland 21230
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(410) 454-6428
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(Address of principal executive offices) (Zip Code)
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(Registrant’s telephone number, including area code)
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______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
þ
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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þ
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
þ
As of
September 30, 2014
there were
176,021,944
shares of Class A Common Stock and
37,675,000
shares of Class B Convertible Common Stock outstanding.
UNDER ARMOUR, INC.
September 30, 2014
INDEX TO FORM 10-Q
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PART I.
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||
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Item 1.
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||
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Unaudited Consolidated Balance Sheets as of September 30, 2014, December 31, 2013 and September 30, 2013
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||
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Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013
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||
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Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013
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Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
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||
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Item 2.
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||
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Item 3.
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||
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Item 4.
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||
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PART II.
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Item 1A.
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||
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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Item 6.
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||
Under Armour, Inc. and Subsidiaries
(In thousands, except share data)
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September 30,
2014 |
December 31,
2013 |
September 30,
2013 |
|||||||||
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Assets
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|||||||||||
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Current assets
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|||||||||||
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Cash and cash equivalents
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$
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249,469
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$
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347,489
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$
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186,377
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||
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Accounts receivable, net
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449,221
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209,952
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353,257
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|||||
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Inventories
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637,459
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469,006
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497,406
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|||||
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Prepaid expenses and other current assets
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86,914
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63,987
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56,064
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|||||
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Deferred income taxes
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40,840
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38,377
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29,811
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|||||
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Total current assets
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1,463,903
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1,128,811
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1,122,915
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|||||
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Property and equipment, net
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264,629
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223,952
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201,603
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|||||
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Goodwill
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123,356
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122,244
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—
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|||||
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Intangible assets, net
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28,850
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24,097
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3,721
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|||||
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Deferred income taxes
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47,602
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31,094
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26,766
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|||||
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Other long term assets
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49,770
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47,543
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41,985
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|||||
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Total assets
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$
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1,978,110
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$
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1,577,741
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$
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1,396,990
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||
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Liabilities and Stockholders’ Equity
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|||||||||||
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Current liabilities
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|||||||||||
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Revolving credit facility
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$
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—
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$
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100,000
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$
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—
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||
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Accounts payable
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273,687
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165,456
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184,405
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|||||
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Accrued expenses
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143,299
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133,729
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109,344
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|||||
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Current maturities of long term debt
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19,524
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4,972
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5,034
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|||||
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Other current liabilities
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53,969
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22,473
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34,201
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|||||
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Total current liabilities
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490,479
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426,630
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332,984
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|||||
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Long term debt, net of current maturities
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172,124
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47,951
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49,148
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|||||
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Other long term liabilities
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61,366
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49,806
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48,403
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|||||
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Total liabilities
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723,969
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524,387
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430,535
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|||||
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Commitments and contingencies (see Note 4)
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Stockholders’ equity
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|||||||||||
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Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2014, December 31, 2013 and September 30, 2013; 176,021,944 shares issued and outstanding as of September 30, 2014, 171,628,708 shares issued and outstanding as of December 31, 2013 and 170,605,598 shares issued and outstanding as of September 30, 2013
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59
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57
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56
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|||||
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Class B Convertible Common Stock, $0.0003 1/3 par value; 37,675,000 shares authorized, issued and outstanding as of September 30, 2014, 40,000,000 shares authorized, issued and outstanding as of December 31, 2013 and 40,650,000 shares authorized, issued and outstanding as of September 30, 2013
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13
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13
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14
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|||||
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Additional paid-in capital
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490,578
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397,248
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373,381
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|||||
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Retained earnings
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770,484
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653,842
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590,582
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|||||
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Accumulated other comprehensive income (loss)
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(6,993
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)
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2,194
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2,422
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|||||
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Total stockholders’ equity
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1,254,141
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1,053,354
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966,455
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|||||
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Total liabilities and stockholders’ equity
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$
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1,978,110
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$
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1,577,741
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$
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1,396,990
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|
||
See accompanying notes.
1
Under Armour, Inc. and Subsidiaries
(In thousands, except per share amounts)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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|||||||||||||
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2014
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2013
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2014
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2013
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|||||||||||
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Net revenues
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$
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937,908
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$
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723,146
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$
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2,189,169
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$
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1,649,295
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|||
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Cost of goods sold
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472,608
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373,011
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1,123,227
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862,978
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|||||||
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Gross profit
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465,300
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350,135
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1,065,942
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786,317
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|||||||
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Selling, general and administrative expenses
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319,194
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229,306
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858,286
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619,686
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|||||||
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Income from operations
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146,106
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120,829
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207,656
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166,631
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|||||||
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Interest expense, net
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(1,535
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)
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(691
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)
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(3,608
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)
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(2,127
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)
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|||||||
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Other expense, net
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(3,355
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)
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(113
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)
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(3,982
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)
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(670
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)
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|||||||
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Income before income taxes
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141,216
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120,025
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200,066
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163,834
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|||||||
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Provision for income taxes
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52,111
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47,241
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79,733
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65,670
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|||||||
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Net income
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$
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89,105
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$
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72,784
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$
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120,333
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$
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98,164
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|
|||
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Net income available per common share
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|||||||||||||||
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Basic
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$
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0.42
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$
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0.34
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$
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0.56
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$
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0.47
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|||
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Diluted
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$
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0.41
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$
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0.34
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$
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0.55
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$
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0.46
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|||
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Weighted average common shares outstanding
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|||||||||||||||
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Basic
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213,522
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211,054
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213,035
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210,458
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|||||||
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Diluted
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217,982
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215,536
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217,601
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214,852
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|||||||
See accompanying notes.
2
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
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|
2014
|
2013
|
2014
|
2013
|
|||||||||||
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Net income
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$
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89,105
|
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$
|
72,784
|
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$
|
120,333
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$
|
98,164
|
|
|||
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Other comprehensive income (loss):
|
|||||||||||||||
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Foreign currency translation adjustment
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(8,218
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)
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2,717
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(9,436
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)
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(385
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)
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|||||||
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Unrealized gain (loss) on cash flow hedge, net of tax of $404 and ($37) for the three months ended September 30, 2014 and 2013, respectively, and $39 and $308 for the nine months ended September 30, 2014 and 2013, respectively.
|
771
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|
(65
|
)
|
249
|
|
439
|
|
|||||||
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Total other comprehensive income (loss)
|
(7,447
|
)
|
2,652
|
|
(9,187
|
)
|
54
|
|
|||||||
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Comprehensive income
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$
|
81,658
|
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$
|
75,436
|
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$
|
111,146
|
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$
|
98,218
|
|
|||
See accompanying notes.
3
Under Armour, Inc. and Subsidiaries
(In thousands)
|
|
Nine Months Ended September 30,
|
||||||
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|
2014
|
2013
|
|||||
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Cash flows from operating activities
|
|||||||
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Net income
|
$
|
120,333
|
|
$
|
98,164
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities
|
|||||||
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Depreciation and amortization
|
52,391
|
|
36,052
|
|
|||
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Unrealized foreign currency exchange rate losses
|
4,881
|
|
1,021
|
|
|||
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Loss on disposal of property and equipment
|
78
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|
598
|
|
|||
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Stock-based compensation
|
38,965
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25,586
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|
|||
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Deferred income taxes
|
(19,783
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)
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(10,691
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)
|
|||
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Changes in reserves and allowances
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10,794
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12,007
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|
|||
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Changes in operating assets and liabilities, net of effects of acquisitions:
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|||||||
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Accounts receivable
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(248,256
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)
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(181,100
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)
|
|||
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Inventories
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(176,770
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)
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(186,276
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)
|
|||
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Prepaid expenses and other assets
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(20,282
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)
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(7,027
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)
|
|||
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Accounts payable
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118,236
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42,344
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|
|||
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Accrued expenses and other liabilities
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20,180
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37,404
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|
|||
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Income taxes payable and receivable
|
26,737
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|
19,577
|
|
|||
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Net cash used in operating activities
|
(72,496
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)
|
(112,341
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)
|
|||
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Cash flows from investing activities
|
|||||||
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Purchases of property and equipment
|
(96,596
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)
|
(62,058
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)
|
|||
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Purchase of business
|
(10,924
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)
|
—
|
|
|||
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Purchases of other assets
|
(724
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)
|
(475
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)
|
|||
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Change in loans receivable
|
—
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|
(1,700
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)
|
|||
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Net cash used in investing activities
|
(108,244
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)
|
(64,233
|
)
|
|||
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Cash flows from financing activities
|
|||||||
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Payments on revolving credit facility
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(100,000
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)
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—
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|
|||
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Proceeds from term loan
|
150,000
|
|
—
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|
|||
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Payments on long term debt
|
(11,275
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)
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(4,212
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)
|
|||
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Excess tax benefits from stock-based compensation arrangements
|
33,056
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13,770
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|||
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Proceeds from exercise of stock options and other stock issuances
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14,060
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12,727
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|
|||
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Payments of debt financing costs
|
(1,714
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)
|
—
|
|
|||
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Net cash provided by financing activities
|
84,127
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|
22,285
|
|
|||
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Effect of exchange rate changes on cash and cash equivalents
|
(1,407
|
)
|
(1,175
|
)
|
|||
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Net decrease in cash and cash equivalents
|
(98,020
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)
|
(155,464
|
)
|
|||
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Cash and cash equivalents
|
|||||||
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Beginning of period
|
347,489
|
|
341,841
|
|
|||
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End of period
|
$
|
249,469
|
|
$
|
186,377
|
|
|
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Non-cash investing and financing activities
|
|||||||
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Decrease in accrual for property and equipment
|
$
|
(10,601
|
)
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$
|
(6,289
|
)
|
|
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Non-cash acquisition of business
|
11,233
|
|
—
|
|
|||
See accompanying notes.
4
Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. These products are sold worldwide and worn by athletes at all levels, from youth to professional on playing fields around the globe, as well as by consumers with active lifestyles.
2
. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America for interim consolidated financial statements. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. All intercompany balances and transactions were eliminated. The consolidated balance sheet as of
December 31, 2013
is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2013
(the “
2013
Form 10-K”), which should be read in conjunction with these consolidated financial statements. The results for the
nine months ended September 30, 2014
are not necessarily indicative of the results to be expected for the year ending
December 31, 2014
or any other portions thereof.
On December 6, 2013, the Company acquired
100%
of the outstanding equity of MapMyFitness, Inc. ("MapMyFitness"), a digital connected fitness platform, for
$150.0 million
. During the three months ended March 31, 2014, the Company finalized its valuation of the assets acquired and liabilities assumed as of the acquisition date and no adjustments were made to the preliminary purchase price allocation.
On March 17, 2014 the Board of Directors declared a two-for-one stock split of the Company’s Class A and Class B common stock, which was effected in the form of a
100%
common stock dividend distributed on April 14, 2014. Stockholders' equity and all references to share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect the two-for-one stock split for all periods presented.
Concentration of Credit Risk
Financial instruments that subject the Company to a significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable are due from large sporting goods retailers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is generally not required. The most significant customers that accounted for a large portion of net revenues and accounts receivable were as follows:
|
Customer
A
|
Customer
B
|
Customer
C
|
||||||
|
Net revenues
|
||||||||
|
Nine months ended September 30, 2014
|
15.0
|
%
|
4.7
|
%
|
4.8
|
%
|
||
|
Nine months ended September 30, 2013
|
17.2
|
%
|
5.5
|
%
|
5.2
|
%
|
||
|
Accounts receivable
|
||||||||
|
As of September 30, 2014
|
24.7
|
%
|
7.1
|
%
|
6.2
|
%
|
||
|
As of December 31, 2013
|
27.1
|
%
|
9.1
|
%
|
5.1
|
%
|
||
|
As of September 30, 2013
|
27.5
|
%
|
8.3
|
%
|
5.5
|
%
|
||
Allowance for Doubtful Accounts
As of
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, the allowance for doubtful accounts was
$3.5 million
,
$2.9 million
and
$2.9 million
, respectively.
5
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs, included within selling, general and administrative expenses, were
$16.7 million
and
$13.8 million
for the
three months ended September 30, 2014
and
2013
, respectively, and
$39.7 million
and
$33.3 million
for the
nine months ended September 30, 2014
and
2013
, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently Issued Accounting Standards
I
n May 2014,
the Financial Accounting Standards Board (“FASB”)
issued an Accounting Standards Update which supersedes the most current revenue recognition requirements. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the standard to determine the impact of its adoption on the Company's consolidated financial statements.
3
. Credit Facility and Other Long Term Debt
Credit Facility
In May 2014, the Company entered into a new unsecured
$650.0 million
credit facility and terminated its prior
$325.0 million
secured revolving credit facility. The credit agreement has a term of
five years
through
May 2019
, with permitted extensions under certain circumstances. The credit agreement provides for a committed revolving credit facility of
$400.0 million
, in addition to an aggregate term loan commitment of
$250.0 million
, consisting of a
$150.0 million
initial term loan, which was drawn in full at the closing of the credit agreement, and
$100.0 million
of delayed draw term loans available to be borrowed prior to
November 28, 2014
. The Company plans to draw the
$100.0 million
delayed draw term loan in full in November 2014 for general corporate purposes. At the Company's request and the lenders' consent, the revolving credit facility or term loans may be increased by up to an additional
$150.0 million
. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, Pounds Sterling, Japanese Yen and Canadian Dollars. Up to
$50.0 million
of the facility may be used for the issuance of letters of credit and up to
$50.0 million
of the facility may be used for the issuance of swingline loans. There were no letters of credit or swingline loans outstanding as of
September 30, 2014
.
The credit agreement contains negative covenants that, subject to significant exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The Company is also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than
3.50
to
1.00
and is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than
3.25
to
1.00
("consolidated leverage ratio"). As of
September 30, 2014
, the Company was in compliance with these ratios. In addition, the credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at the Company’s option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between
1.00%
to
1.25%
for adjusted LIBOR loans and
0.00%
to
0.25%
for alternate base rate loans. The interest rate under the initial term loan was
1.2%
during the three months ended
September 30, 2014
. No balance was outstanding under the Company’s revolving credit facility as of
September 30, 2014
. Additionally, the Company pays a commitment fee on the average daily unused amount of the revolving credit facility, a ticking fee on the undrawn amounts under the delayed draw term loan and certain fees with respect to letters of credit. As of
September 30, 2014
, the commitment fee was
12.5
basis points.
6
The Company used
$100.0
million of the proceeds from the initial term loan to repay the
$100.0
million outstanding under the Company's prior revolving credit facility. The Company incurred and capitalized
$1.7
million in deferred financing costs in connection with the credit facility. No penalties or other early termination fees were incurred in connection with the termination of the prior revolving credit facility.
Other Long Term Debt
The Company has long term debt agreements with various lenders to finance the acquisition or lease of qualifying capital investments. Loans under these agreements are collateralized by a first lien on the related assets acquired. As these agreements are not committed facilities, each advance is subject to approval by the lenders. Additionally, these agreements include a cross default provision whereby an event of default under other debt obligations, including the Company’s credit facility, will be considered an event of default under these agreements. These agreements require a prepayment fee if the Company pays outstanding amounts ahead of the scheduled terms. At
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, the outstanding principal balance under these agreements was
$2.6 million
,
$4.9 million
and
$5.7 million
, respectively. Currently, advances under these agreements bear interest rates which are fixed at the time of each advance. The weighted average interest rates on outstanding borrowings were
3.0%
and
3.2%
for the
three months ended September 30, 2014
and
2013
, respectively, and
3.2%
and
2.6%
for the
nine months ended September 30, 2014
and
2013
, respectively.
In December 2012, the Company entered into a
$50.0 million
recourse loan collateralized by the land, buildings and tenant improvements comprising the Company's corporate headquarters. The loan has a
seven
year term and maturity date of
December 2019
. The loan bears interest at one month LIBOR plus a margin of
1.50%
, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with the new credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, the outstanding balance on the loan was
$46.5 million
,
$48.0 million
and
$48.5 million
, respectively. The weighted average interest rate on the loan was
1.7%
for the three and
nine months ended September 30, 2014
and
2013
.
Interest expense, net was
$1.5 million
and
$0.7 million
for the
three months ended September 30, 2014
and
2013
, respectively, and
$3.6 million
and
$2.1 million
for the
nine months ended September 30, 2014
and
2013
, respectively. Interest expense includes the amortization of deferred financing costs and interest expense under the credit and other long term debt facilities.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.
4. Commitments and Contingencies
There were no significant changes to the contractual obligations reported in the
2013
Form 10-K other than those which occur in the normal course of business.
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. The Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
5
. Fair Value Measurements
Fair value is defined as 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 (an exit price). The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:
|
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Financial assets and (liabilities) measured at fair value are set forth in the table below:
7
|
September 30, 2014
|
September 30, 2013
|
|||||||||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||
|
Derivative foreign currency forward contracts (see Note 7)
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(55
|
)
|
$
|
—
|
|
||||||
|
Interest rate swap contracts (see Note 7)
|
—
|
|
1,182
|
|
—
|
|
—
|
|
835
|
|
—
|
|
||||||||||||
|
TOLI policies held by the Rabbi Trust
|
—
|
|
4,665
|
|
—
|
|
—
|
|
4,469
|
|
—
|
|
||||||||||||
|
Deferred Compensation Plan obligations
|
—
|
|
(4,252
|
)
|
—
|
|
—
|
|
(3,112
|
)
|
—
|
|
||||||||||||
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency forward contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
The carrying value of the Company's long term debt approximated its fair value as of
September 30, 2014
and
2013
. The fair value of the Company's long term debt was estimated based upon quoted prices for similar instruments (Level 2 input).
6. Stock-Based Compensation
During the
nine months ended September 30, 2014
,
1.0 million
performance-based restricted stock units were awarded to certain officers and key employees under the Company's Amended and Restated 2005 Omnibus Long-Term Incentive Plan. The awards have vesting conditions tied to the achievement of certain combined annual operating income targets for 2014 and 2015. Upon the achievement of the targets, one third of the restricted stock units will vest each in
February 2016
,
February 2017
and
February 2018
. If certain lower levels of combined annual operating income for 2014 and 2015 are achieved, fewer or no restricted stock units will vest and the remaining restricted stock units will be forfeited. The Company deemed the achievement of certain operating income targets for 2014 and 2015 probable during the three months ended March 31, 2014. The Company assesses the probability of the achievement of the remaining operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based restricted stock units will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. During the three months ended September 30, 2014, the Company deemed the achievement of certain additional operating income targets for 2014 and 2015 probable and recorded a cumulative adjustment of
$3.8 million
. Additional stock based compensation of up to
$1.9 million
would have been recorded during the
nine months ended September 30, 2014
, for these performance-based restricted stock units had the achievement of the remaining operating income targets been deemed probable.
During 2012 and 2013, the Company granted performance-based restricted stock units with vesting conditions tied to the achievement of certain combined annual operating income targets for 2013 and 2014. During the three months ended March 31, 2013, the Company deemed the achievement of certain operating income targets for 2013 and 2014 probable and recorded a cumulative adjustment of
$4.8 million
. During the three months ended March 31, 2014, the Company deemed the achievement of the remaining operating income targets for 2013 and 2014 probable and recorded a cumulative adjustment of
$6.6 million
.
During 2011, the Company granted performance-based restricted stock units with vesting conditions tied to the achievement of certain combined annual operating income targets for 2012 and 2013. During the three months ended March 31, 2013, the Company deemed the achievement of certain operating income targets for 2012 and 2013 probable and recorded a cumulative adjustment of
$4.6 million
for a portion of these awards.
7. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions and inventory purchases denominated in currencies other than the functional
8
currency of the purchasing entity. From time to time, the Company may elect to enter into foreign currency forward contracts to reduce the risk associated with foreign currency exchange rate fluctuations on intercompany transactions and projected inventory purchases for its international subsidiaries. As the Company expands its international business, it may expand the current hedging program to include additional currency pairs and instruments.
As of
September 30, 2014
, the aggregate notional value of the Company's outstanding foreign currency forward contracts was
$70.4 million
, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, and Pound Sterling/Euro currency pairs with contract maturities ranging from
one
to
two months
. The majority of the Company's foreign currency forward contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. During the second quarter of 2014, the Company began entering into foreign currency forward contracts designated as cash flow hedges. For foreign currency forward contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. During the three and
nine months ended September 30, 2014
, the Company reclassified
$0.2 million
from other comprehensive income to cost of goods sold related to foreign currency forward contracts designated as cash flow hedges. The fair values of the Company's foreign currency forward contracts were assets of
$8.0 thousand
and
$12.1 thousand
as of
September 30, 2014
and
December 31, 2013
, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. The fair value of the Company's foreign currency forward contracts were liabilities of
$55.5 thousand
as of
September 30, 2013
, and were included in accrued expenses on the consolidated balance sheet. Refer to Note
5
for a discussion of the fair value measurements. Included in other expense, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Unrealized foreign currency exchange rate gains (losses)
|
$
|
(4,981
|
)
|
$
|
596
|
|
$
|
(4,881
|
)
|
$
|
(1,021
|
)
|
|||
|
Realized foreign currency exchange rate gains (losses)
|
81
|
|
374
|
|
303
|
|
168
|
|
|||||||
|
Unrealized derivative gains (losses)
|
(134
|
)
|
(35
|
)
|
(152
|
)
|
(61
|
)
|
|||||||
|
Realized derivative gains (losses)
|
1,679
|
|
(1,048
|
)
|
748
|
|
244
|
|
|||||||
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company enters into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in their fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation.
Refer to Note
3
for a discussion of long term debt.
As of
September 30, 2014
, the notional value of the Company's outstanding interest rate swap contracts was $
167.5 million
. During the
three months ended September 30, 2014
and
2013
, the Company recorded a
$0.6 million
and
$0.1 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the
nine months ended September 30, 2014
and
2013
, the Company recorded a
$1.0 million
and
$0.3 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of
$1.2 million
,
$1.1 million
and
$0.8 million
as of
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, respectively, and was included in other long term assets on the consolidated balance sheets.
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the foreign currency forward contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
8. Provision for Income Taxes
The effective rates for income taxes were
39.9%
and
40.1%
for the
nine months ended September 30, 2014
and
2013
, respectively. The Company’s annual
2014
effective tax rate is expected to be approximately
40.0%
.
9
9. Earnings per Share
The following represents a reconciliation from basic earnings per share to diluted earnings per share:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands, except per share amounts)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Numerator
|
|||||||||||||||
|
Net income
|
$
|
89,105
|
|
$
|
72,784
|
|
$
|
120,333
|
|
$
|
98,164
|
|
|||
|
Denominator
|
|||||||||||||||
|
Weighted average common shares outstanding
|
213,522
|
|
211,054
|
|
213,035
|
|
210,458
|
|
|||||||
|
Effect of dilutive securities
|
4,460
|
|
4,482
|
|
4,566
|
|
4,394
|
|
|||||||
|
Weighted average common shares and dilutive securities outstanding
|
217,982
|
|
215,536
|
|
217,601
|
|
214,852
|
|
|||||||
|
Earnings per share - basic
|
$
|
0.42
|
|
$
|
0.34
|
|
$
|
0.56
|
|
$
|
0.47
|
|
|||
|
Earnings per share - diluted
|
$
|
0.41
|
|
$
|
0.34
|
|
$
|
0.55
|
|
$
|
0.46
|
|
|||
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing
5.2 thousand
and
5.6 thousand
shares of common stock outstanding for the
three months ended September 30, 2014
and
2013
, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing
27.0 thousand
and
95.8 thousand
shares of common stock outstanding for the
nine months ended September 30, 2014
and
2013
, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
10. Segment Data and Related Information
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America; Latin America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. Beginning in the fourth quarter of 2013, the CODM also receives discrete financial information for the Company's acquired MapMyFitness business. Due to the insignificance of the Latin America, EMEA, Asia-Pacific and MapMyFitness operating segments, they have been combined into other foreign countries and businesses for disclosure purposes.
The net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment. In addition to net revenues, operating income (loss) is a primary financial measure used by the Company to evaluate performance of each segment. Intercompany balances were eliminated for separate disclosure. The majority of corporate services costs within North America have not been allocated to other foreign countries and businesses; however, certain corporate services costs, included within North America in the prior period, have been allocated to other foreign countries and businesses in the current period. Prior period segment data has been recast within the tables below to conform to current period presentation.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Net revenues
|
|||||||||||||||
|
North America
|
$
|
847,563
|
|
$
|
678,894
|
|
$
|
1,988,156
|
|
$
|
1,548,621
|
|
|||
|
Other foreign countries and businesses
|
90,345
|
|
44,252
|
|
201,013
|
|
100,674
|
|
|||||||
|
Total net revenues
|
$
|
937,908
|
|
$
|
723,146
|
|
$
|
2,189,169
|
|
$
|
1,649,295
|
|
|||
10
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Operating income (loss)
|
|||||||||||||||
|
North America
|
$
|
146,034
|
|
$
|
117,978
|
|
$
|
221,411
|
|
$
|
168,050
|
|
|||
|
Other foreign countries and businesses
|
72
|
|
2,851
|
|
(13,755
|
)
|
(1,419
|
)
|
|||||||
|
Total operating income
|
146,106
|
|
120,829
|
|
207,656
|
|
166,631
|
|
|||||||
|
Interest expense, net
|
(1,535
|
)
|
(691
|
)
|
(3,608
|
)
|
(2,127
|
)
|
|||||||
|
Other expense, net
|
(3,355
|
)
|
(113
|
)
|
(3,982
|
)
|
(670
|
)
|
|||||||
|
Income before income taxes
|
$
|
141,216
|
|
$
|
120,025
|
|
$
|
200,066
|
|
$
|
163,834
|
|
|||
Net revenues by product category are as follows:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Apparel
|
$
|
704,557
|
|
$
|
560,899
|
|
$
|
1,583,834
|
|
$
|
1,216,645
|
|
|||
|
Footwear
|
121,597
|
|
81,024
|
|
345,177
|
|
243,458
|
|
|||||||
|
Accessories
|
84,949
|
|
64,373
|
|
196,434
|
|
151,480
|
|
|||||||
|
Total net sales
|
911,103
|
|
706,296
|
|
2,125,445
|
|
1,611,583
|
|
|||||||
|
License and other revenues
|
26,805
|
|
16,850
|
|
63,724
|
|
37,712
|
|
|||||||
|
Total net revenues
|
$
|
937,908
|
|
$
|
723,146
|
|
$
|
2,189,169
|
|
$
|
1,649,295
|
|
|||
11
Forward-Looking Statements
Some of the statements contained in this Form 10-Q constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to, those factors described in our Annual Report on Form 10-K for the year ended
December 31, 2013
filed with the Securities and Exchange Commission (“SEC”) (our “
2013
Form 10-K”) or in this Form 10-Q under “Risk Factors”, if included herein, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). These factors include without limitation:
|
•
|
changes in general economic or market conditions that could affect consumer spending and the financial health of our retail customers;
|
|
•
|
our ability to effectively manage our growth and a more complex global business;
|
|
•
|
our ability to effectively develop and launch new, innovative and updated products;
|
|
•
|
our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands;
|
|
•
|
increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;
|
|
•
|
fluctuations in the costs of our products;
|
|
•
|
loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
|
|
•
|
our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
|
|
•
|
our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
|
|
•
|
our ability to effectively market and maintain a positive brand image;
|
|
•
|
our ability to comply with trade and other regulations;
|
|
•
|
the availability, integration and effective operation of management information systems and other technology, as well as any potential interruption or security lapse in such systems or technology;
|
|
•
|
our ability to effectively integrate new businesses and investments into our company;
|
|
•
|
our potential exposure to litigation and other proceedings; and
|
|
•
|
our ability to attract and retain the services of our senior management and key employees.
|
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Overview
We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. The brand’s moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to
12
provide a performance alternative to traditional products. Our products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
Our net revenues grew to
$2,332.1 million
in
2013
from
$856.4 million
in
2009
. We reported net revenues of
$2,189.2 million
for the first nine months of
2014
, which represented a
32.7%
increase from the first nine months of
2013
. We believe that our growth in net revenues has been driven by a growing interest in performance products and the strength of the Under Armour brand in the marketplace. We plan to continue to increase our net revenues over the long term by increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution sales channel, growth in our direct to consumer sales channel and expansion in international markets. Our direct to consumer sales channel includes our brand and factory house stores and websites. New product offerings for
2014
include ArmourVent
®
apparel, the SpeedForm
TM
Apollo running shoe, and ClutchFit
TM
Drive basketball shoe.
Our operating segments include North America; Latin America; Europe, the Middle East and Africa (“EMEA”); Asia-Pacific; and MapMyFitness. We acquired the MapMyFitness business in December 2013. Due to the insignificance of the Latin America, EMEA, Asia-Pacific and MapMyFitness operating segments, they have been combined into other foreign countries and businesses for disclosure purposes.
Segment operating income consists of the revenues generated by that segment, less the cost of goods sold and selling, general and administrative costs that are incurred directly by that segment, as well as an allocation of certain centrally managed costs. Corporate services costs, which are generally included in our North America operating segment, include company-wide administrative costs.
General
Net revenues comprise both net sales and license and other revenues. Net sales comprise sales from our primary product categories, which are apparel, footwear and accessories. Our license and other revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on core products, such as socks, team uniforms, baby and kids’ apparel, eyewear, inflatable footballs and basketballs, as well as the distribution of our products in Japan. Beginning in December 2013, license and other revenues includes platform license, subscription and digital advertising revenues generated from our MapMyFitness business.
Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence. The fabrics in many of our products are made primarily of petroleum-based synthetic materials. Therefore our product costs, as well as our inbound and outbound freight costs, could be affected by long term pricing trends of oil. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. A limited portion of cost of goods sold is associated with license and other revenues, primarily website hosting and other costs related to our MapMyFitness business.
We include outbound freight costs associated with shipping goods to customers as cost of goods sold; however, we include the majority of outbound handling costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were
$16.7 million
and
$13.8 million
for the
three months ended September 30, 2014
and
2013
, respectively, and
$39.7 million
and
$33.3 million
for the
nine months ended September 30, 2014
and
2013
, respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. Personnel costs are included in these categories based on the employees’ function. Personnel costs include salaries, benefits and incentive and stock-based compensation related to our employees. Our marketing costs are an important driver of our growth. Marketing costs consist primarily of commercials, print ads, league, team, player and event sponsorships and depreciation expense specific to our in-store fixture program for our concept shops. Selling costs consist primarily of costs relating to sales through our wholesale channel, commissions paid to third parties and the majority of our direct to consumer sales channel costs, including the cost of brand and factory house store leases. Product innovation and supply chain costs include development and innovation costs associated with our apparel, footwear and accessories products and our MapMyFitness business, along with our sourcing and distribution facility operating costs. Costs relating to our Jakarta, Indonesia and Hong Kong and Guangzhou, China offices which help support product design, manufacturing, quality assurance and sourcing efforts are also included in product innovation and supply chain costs. Corporate services costs primarily consist of company-wide administrative expenses.
13
Other expense, net consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments not designated as cash flow hedges and unrealized and realized gains and losses that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Net revenues
|
$
|
937,908
|
|
$
|
723,146
|
|
$
|
2,189,169
|
|
$
|
1,649,295
|
|
|||
|
Cost of goods sold
|
472,608
|
|
373,011
|
|
1,123,227
|
|
862,978
|
|
|||||||
|
Gross profit
|
465,300
|
|
350,135
|
|
1,065,942
|
|
786,317
|
|
|||||||
|
Selling, general and administrative expenses
|
319,194
|
|
229,306
|
|
858,286
|
|
619,686
|
|
|||||||
|
Income from operations
|
146,106
|
|
120,829
|
|
207,656
|
|
166,631
|
|
|||||||
|
Interest expense, net
|
(1,535
|
)
|
(691
|
)
|
(3,608
|
)
|
(2,127
|
)
|
|||||||
|
Other expense, net
|
(3,355
|
)
|
(113
|
)
|
(3,982
|
)
|
(670
|
)
|
|||||||
|
Income before income taxes
|
141,216
|
|
120,025
|
|
200,066
|
|
163,834
|
|
|||||||
|
Provision for income taxes
|
52,111
|
|
47,241
|
|
79,733
|
|
65,670
|
|
|||||||
|
Net income
|
$
|
89,105
|
|
$
|
72,784
|
|
$
|
120,333
|
|
$
|
98,164
|
|
|||
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||
|
(As a percentage of net revenues)
|
2014
|
2013
|
2014
|
2013
|
|||||||
|
Net revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||
|
Cost of goods sold
|
50.4
|
%
|
51.6
|
%
|
51.3
|
%
|
52.3
|
%
|
|||
|
Gross profit
|
49.6
|
%
|
48.4
|
%
|
48.7
|
%
|
47.7
|
%
|
|||
|
Selling, general and administrative expenses
|
34.0
|
%
|
31.7
|
%
|
39.2
|
%
|
37.6
|
%
|
|||
|
Income from operations
|
15.6
|
%
|
16.7
|
%
|
9.5
|
%
|
10.1
|
%
|
|||
|
Interest expense, net
|
(0.2
|
)%
|
(0.1
|
)%
|
(0.2
|
)%
|
(0.2
|
)%
|
|||
|
Other expense, net
|
(0.3
|
)%
|
—
|
%
|
(0.2
|
)%
|
—
|
%
|
|||
|
Income before income taxes
|
15.1
|
%
|
16.6
|
%
|
9.1
|
%
|
9.9
|
%
|
|||
|
Provision for income taxes
|
5.6
|
%
|
6.5
|
%
|
3.6
|
%
|
3.9
|
%
|
|||
|
Net income
|
9.5
|
%
|
10.1
|
%
|
5.5
|
%
|
6.0
|
%
|
|||
Consolidated Results of Operations
Three Months Ended
September 30, 2014
Compared to Three Months Ended
September 30, 2013
Net revenues
increased
$214.8 million
, or
29.7%
, to
$937.9 million
for the
three months ended September 30, 2014
from $
723.1 million
for the same period in
2013
. Net revenues by product category are summarized below:
|
|
Three Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Apparel
|
$
|
704,557
|
|
$
|
560,899
|
|
$
|
143,658
|
|
25.6
|
%
|
|||
|
Footwear
|
121,597
|
|
81,024
|
|
40,573
|
|
50.1
|
%
|
||||||
|
Accessories
|
84,949
|
|
64,373
|
|
20,576
|
|
32.0
|
%
|
||||||
|
Total net sales
|
911,103
|
|
706,296
|
|
204,807
|
|
29.0
|
%
|
||||||
|
License and other revenues
|
26,805
|
|
16,850
|
|
9,955
|
|
59.1
|
%
|
||||||
|
Total net revenues
|
$
|
937,908
|
|
$
|
723,146
|
|
$
|
214,762
|
|
29.7
|
%
|
|||
Net sales
increased
$204.8 million
, or
29.0%
, to
$
911.1 million
for the
three months ended September 30, 2014
from $
706.3 million
during the same period in
2013
. The increase in net sales primarily reflects:
14
|
•
|
$61.9 million, or 34.4%, increase in North America direct to consumer sales driven by an 18% increase in square footage in our factory house stores, including a 9% increase in new stores, since September 2013, along with continued growth in our e-commerce business;
|
|
•
|
$39.1 million, or 98.2% increase in net sales in other foreign countries, due to increased distribution and unit volume growth in our EMEA and Latin America operating segments;
and
|
|
•
|
unit growth driven by increased distribution and new offerings in multiple product categories, including continued growth of our training, outdoor and golf apparel product lines, along with
growth in footwear due to a broader assortment of running and basketball shoes, including our new
UA SpeedForm
TM
and ClutchFit
TM
Drive footwear.
|
License and other revenues
increased
$9.9 million
, or
59.1%
, to $
26.8 million
for the
three months ended September 30, 2014
from $
16.9 million
during the same period in
2013
. This increase in license and other revenues was primarily due to $4.5 million of revenues generated through our MapMyFitness business, which was acquired in December 2013, along with increased distribution and unit volume growth of our licensed products.
Gross profit
increased
$115.2 million
to
$465.3 million
for the
three months ended September 30, 2014
from $
350.1 million
for the same period in
2013
. Gross profit as a percentage of net revenues, or gross margin, increased
120
basis points to
49.6%
for the
three months ended September 30, 2014
compared to
48.4%
during the same period in
2013
. The increase in gross margin percentage was primarily driven by the following:
|
•
|
approximate 90 basis point increase as a result of higher duty costs recorded during the prior year period on certain products imported in previous periods. We do not expect this favorable impact to continue during the remainder of 2014; and
|
|
•
|
approximate 70 basis point increase driven primarily by decreased sales mix of excess inventory through our factory house outlet stores. We expect the favorable factory house outlet store sales mix impact will continue through the remainder of 2014, but on a more limited basis.
|
The above increases were partially offset by:
|
•
|
approximate 40 basis point decrease driven by increased liquidation sales of excess apparel and footwear during the third quarter. We expect this unfavorable liquidation sales impact will continue through the remainder of 2014, but on a more limited basis.
|
Selling, general and administrative expenses
increased
$89.9 million
to $
319.2 million
for the
three months ended September 30, 2014
from
$229.3 million
for the same period in
2013
. As a percentage of net revenues, selling, general and administrative expenses increased to
34.0%
for the
three months ended September 30, 2014
compared to
31.7%
for the same period in
2013
. These changes were primarily attributable to the following:
|
•
|
Marketing costs
increased
$25.6 million
to
$99.8 million
for the
three months ended September 30, 2014
from
$74.2 million
for the same period in
2013
primarily due to increased sponsorship of collegiate and professional teams and athletes. As a percentage of net revenues, marketing costs
increased
to
10.6%
for the
three months ended September 30, 2014
from
10.3%
for the same period in
2013
primarily due to increased sponsorships in other foreign countries.
|
|
•
|
Selling costs
increased
$24.2 million
to
$83.1 million
for the
three months ended September 30, 2014
from
$58.9 million
for the same period in
2013
. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, including increased investment in our factory house and brand house store strategies. As a percentage of net revenues, selling costs
increased
to
8.9%
for the
three months ended September 30, 2014
from
8.1%
for the same period in
2013
primarily due to the items noted above.
|
|
•
|
Product innovation and supply chain costs
increased
$27.1 million
to
$80.0 million
for the
three months ended September 30, 2014
from
$52.9 million
for the same period in
2013
primarily due to higher personnel costs to support our growth in net revenues, along with costs related to our MapMyFitness business. As a percentage of net revenues, product innovation and supply chain costs
increased
to
8.5%
for the
three months ended September 30, 2014
compared to
7.3%
for the same period in
2013
primarily due to the items noted above.
|
|
•
|
Corporate services costs
increased
$13.0 million
to
$56.3 million
for the
three months ended September 30, 2014
from
$43.3 million
for the same period in
2013
. This increase was primarily attributable to higher incentive compensation and other personnel costs necessary to support our growth. As a percentage of net revenues, corporate services costs remained unchanged at
6.0%
for the
three months ended September 30, 2014
and
2013
.
|
Income from operations
increased
$25.3 million
, or
20.9%
, to $
146.1 million
for the
three months ended September 30, 2014
from $
120.8 million
for the same period in
2013
. Income from operations as a percentage of net revenues decreased to
15.6%
for the
three months ended September 30, 2014
from
16.7%
for the same period in
2013
. This decrease was primarily driven by the increased investments in product innovation and supply chain discussed above.
15
Interest expense, net
increased
$0.8 million
to $
1.5 million
for the
three months ended September 30, 2014
from $
0.7 million
for the same period in
2013
. This increase was primarily due to interest on the new $150.0 million term loan during the
three months ended September 30, 2014
.
Other expense, net
increased
$3.3 million
to
$3.4 million
for the
three months ended September 30, 2014
from
$0.1 million
for the same period in
2013
. This increase was due to higher net losses on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our derivative financial instruments as compared to the prior period.
Provision for income taxes
increased
$4.9 million
to $
52.1 million
during the
three months ended September 30, 2014
from $
47.2 million
during the same period in
2013
. For the
three months ended September 30, 2014
, our effective tax rate was
36.9%
compared to
39.4%
for the same period in
2013
. The effective rate for the
three months ended September 30, 2014
was lower than the effective rate for the
three months ended September 30, 2013
due to increased profitability in Asia-Pacific, partially offset by increased investments in Latin America associated with our market entries in Brazil and Chile. Our annual 2014 effective tax rate is expected to be approximately
40.0%
.
Nine Months Ended
September 30, 2014
Compared to
Nine Months Ended
September 30, 2013
Net revenues
increased
$539.9 million
, or
32.7%
, to
$2,189.2 million
for the
nine months ended September 30, 2014
from
$1,649.3 million
for the same period in
2013
. Net revenues by product category are summarized below:
|
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
Apparel
|
$
|
1,583,834
|
|
$
|
1,216,645
|
|
$
|
367,189
|
|
30.2
|
%
|
|||
|
Footwear
|
345,177
|
|
243,458
|
|
101,719
|
|
41.8
|
%
|
||||||
|
Accessories
|
196,434
|
|
151,480
|
|
44,954
|
|
29.7
|
%
|
||||||
|
Total net sales
|
2,125,445
|
|
1,611,583
|
|
513,862
|
|
31.9
|
%
|
||||||
|
License and other revenues
|
63,724
|
|
37,712
|
|
26,012
|
|
69.0
|
%
|
||||||
|
Total net revenues
|
$
|
2,189,169
|
|
$
|
1,649,295
|
|
$
|
539,874
|
|
32.7
|
%
|
|||
Net sales
increased
$513.8 million
, or
31.9%
, to
$2,125.4 million
for the
nine months ended September 30, 2014
from
$1,611.6 million
during the same period in
2013
. The increase in net sales primarily reflects:
|
•
|
$152.5 million, or 34.8%, increase in North America direct to consumer sales driven by an 18% increase in square footage in our factory house stores, including a 9% increase in new stores, since September 2013, along with continued growth in our e-commerce business;
|
|
•
|
$81.4 million, or 90.5% increase in net sales in other foreign countries, due to increased distribution and unit volume growth in our EMEA and Asia-Pacific operating segments;
and
|
|
•
|
unit growth driven by increased distribution and new offerings in multiple product categories, including continued growth of our training, outdoor and golf apparel product lines, along with
growth in footwear due to a broader assortment of running and basketball shoes, including our new
UA SpeedForm
TM
and ClutchFit
TM
Drive footwear.
|
License and other revenues
increased
$26.0 million
, or
69.0%
, to
$63.7 million
for
nine months ended September 30, 2014
from
$37.7 million
during the same period in
2013
. This increase in license and other revenues was primarily due to $13.9 million of revenues generated through our MapMyFitness business, which was acquired in December 2013, along with increased distribution and unit volume growth of our licensed products.
Gross profit
increased
$279.6 million
to
$1,065.9 million
for the
nine months ended September 30, 2014
from
$786.3 million
for the same period in
2013
. Gross profit as a percentage of net revenues, or gross margin, increased
100
basis points to
48.7%
for the
nine months ended September 30, 2014
compared to
47.7%
during the same period in
2013
. The increase in gross margin percentage was primarily driven by the following:
|
•
|
approximate 40 basis point increase driven primarily by decreased sales mix of excess inventory through our factory house outlet stores. We expect the favorable factory house outlet store sales mix impact will continue through the remainder of 2014, but on a more limited basis;
|
|
•
|
approximate 40 basis point increase as a result of higher duty costs recorded during the prior year period on certain products imported in previous periods. We do not expect this favorable impact to continue during the remainder of 2014; and
|
|
•
|
approximate 20 basis point increase driven by lower outbound freight to our customers. We do not expect this year over year favorability will continue through the remainder of 2014.
|
16
Selling, general and administrative expenses
increased
$238.6 million
to
$858.3 million
for the
nine months ended September 30, 2014
from
$619.7 million
for the same period in
2013
. As a percentage of net revenues, selling, general and administrative expenses increased to
39.2%
for the
nine months ended September 30, 2014
compared to
37.6%
for the same period in
2013
. These changes were primarily attributable to the following:
|
•
|
Marketing costs
increased
$72.3 million
to
$258.3 million
for the
nine months ended September 30, 2014
from
$186.0 million
for the same period in
2013
primarily due to increased sponsorship of collegiate and professional teams and athletes. As a percentage of net revenues, marketing costs
increased
to
11.8%
for the
nine months ended September 30, 2014
from
11.3%
for the same period in
2013
primarily due to increased media spend in North America and sponsorships in other foreign countries.
|
|
•
|
Selling costs
increased
$61.4 million
to
$222.3 million
for the
nine months ended September 30, 2014
from
$160.9 million
for the same period in
2013
.
This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, including increased investment in our factory house and brand house store strategies.
As a percentage of net revenues, selling costs
increased
to
10.2%
for the
nine months ended September 30, 2014
from
9.8%
for the same period in
2013
primarily due to the items noted above.
|
|
•
|
Product innovation and supply chain costs
increased
$68.8 million
to
$217.0 million
for the
nine months ended September 30, 2014
from
$148.2 million
for the same period in
2013
primarily due to higher personnel costs to support our growth in net revenues, along with costs related to our MapMyFitness business. As a percentage of net revenues, product innovation and supply chain costs
increased
to
9.9%
for the
nine months ended September 30, 2014
compared to
9.0%
for the same period in
2013
primarily due to the items noted above.
|
|
•
|
Corporate services costs
increased
$36.1 million
to
$160.7 million
for the
nine months ended September 30, 2014
from
$124.6 million
for the same period in
2013
primarily due to higher personnel and other administrative costs necessary to support our growth. As a percentage of net revenues, corporate services costs
decreased
to
7.3%
for the
nine months ended September 30, 2014
compared to
7.5%
for the same period in
2013
.
|
Income from operations
increased
$41.1 million
, or
24.6%
, to
$207.7 million
for the
nine months ended September 30, 2014
from
$166.6 million
for the same period in
2013
. Income from operations as a percentage of net revenues decreased to
9.5%
for the
nine months ended September 30, 2014
from
10.1%
for the same period in
2013
. This decrease was primarily driven by the increased investments in product innovation and supply chain discussed above.
Interest expense, net
increased
$1.5 million
to
$3.6 million
for the
nine months ended September 30, 2014
from
$2.1 million
for the same period in
2013
. This increase was primarily due to interest on the $100.0 million of debt outstanding under the revolving credit facility and interest on the $150.0 million term loan during the
nine months ended September 30, 2014
.
Other expense, net
increased
$3.3 million
to
$4.0 million
for the
nine months ended September 30, 2014
from
$0.7 million
for the same period in
2013
. This increase was due to higher net losses on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our derivative financial instruments as compared to the prior period.
Provision for income taxes
increased
$14.0 million
to
$79.7 million
during the
nine months ended September 30, 2014
from
$65.7 million
during the same period in
2013
. For the
nine months ended September 30, 2014
, our effective tax rate was
39.9%
compared to
40.1%
for the same period in
2013
.
Our annual 2014 effective tax rate is expected to be approximately
40.0%
.
Segment Results of Operations
The net revenues and operating income (loss) associated with our segments are summarized in the following tables. The majority of corporate services costs within North America have not been allocated to other foreign countries and businesses; however, certain corporate services costs, included within North America in the prior period, have been allocated to other foreign countries and businesses in the current period. Prior period segment data has been recast within the tables to conform to the current period presentation.
17
Three Months Ended
September 30, 2014
Compared to Three Months Ended
September 30, 2013
Net revenues
by segment are summarized below:
|
|
Three Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
847,563
|
|
$
|
678,894
|
|
$
|
168,669
|
|
24.8
|
%
|
|||
|
Other foreign countries and businesses
|
90,345
|
|
44,252
|
|
46,093
|
|
104.2
|
%
|
||||||
|
Total net revenues
|
$
|
937,908
|
|
$
|
723,146
|
|
$
|
214,762
|
|
29.7
|
%
|
|||
Net revenues in our North America operating segment
increased
$168.7 million
to
$847.6 million
for the
three months ended September 30, 2014
from
$678.9 million
for the same period in
2013
primarily due to the items discussed above in the Consolidated Results of Operations. Net revenues in other foreign countries and businesses
increased
$46.0 million
to
$90.3 million
for the
three months ended September 30, 2014
from
$44.3 million
for the same period in
2013
primarily due to unit sales growth in our EMEA and Latin America operating segments, along with revenues generated through our MapMyFitness business, which was acquired in December 2013. Our Latin America, EMEA and Asia-Pacific operating segments in aggregate increased $41.6 million, or 94.0%, to $85.8 million for the
three months ended September 30, 2014
, as compared to the same period in
2013
.
Operating income
by segment is summarized below:
|
|
Three Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
146,034
|
|
$
|
117,978
|
|
$
|
28,056
|
|
23.8
|
%
|
|||
|
Other foreign countries and businesses
|
72
|
|
2,851
|
|
(2,779
|
)
|
(97.5
|
)%
|
||||||
|
Total operating income
|
$
|
146,106
|
|
$
|
120,829
|
|
$
|
25,277
|
|
20.9
|
%
|
|||
Operating income in our North America operating segment
increased
$28.0 million
to
$146.0 million
for the
three months ended September 30, 2014
from
$118.0 million
for the same period in
2013
primarily due to the items discussed above in the Consolidated Results of Operations. Operating income in other foreign countries and businesses decreased
$2.8 million
to
$0.1 million
for the
three months ended September 30, 2014
from
$2.9 million
for the same period in
2013
primarily due to investments to support growth in our Latin America and MapMyFitness operating segments.
Nine Months Ended
September 30, 2014
Compared to
Nine Months Ended
September 30, 2013
Net revenues
by segment are summarized below:
|
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
1,988,156
|
|
$
|
1,548,621
|
|
$
|
439,535
|
|
28.4
|
%
|
|||
|
Other foreign countries and businesses
|
201,013
|
|
100,674
|
|
100,339
|
|
99.7
|
%
|
||||||
|
Total net revenues
|
$
|
2,189,169
|
|
$
|
1,649,295
|
|
$
|
539,874
|
|
32.7
|
%
|
|||
Net revenues in our North America operating segment
increased
$439.6 million
to
$1,988.2 million
for the
nine months ended September 30, 2014
from
$1,548.6 million
for the same period in
2013
primarily due to the items discussed above in the Consolidated Results of Operations. Net revenues in other foreign countries and businesses
increased
$100.3 million
to
$201.0 million
for the
nine months ended September 30, 2014
from
$100.7 million
for the same period in
2013
primarily due to unit sales growth in our EMEA and Asia-Pacific operating segments, along with revenues generated through our MapMyFitness business, which was acquired in December 2013. Our Latin America, EMEA and Asia-Pacific operating segments in aggregate increased $86.4 million, or 85.8%, to $187.1 million for the
nine months ended September 30, 2014
, as compared to the same period in
2013
.
Operating income (loss)
by segment is summarized below
|
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
221,411
|
|
$
|
168,050
|
|
$
|
53,361
|
|
31.8
|
%
|
|||
|
Other foreign countries and businesses
|
(13,755
|
)
|
(1,419
|
)
|
(12,336
|
)
|
(869.3
|
)%
|
||||||
|
Total operating income
|
$
|
207,656
|
|
$
|
166,631
|
|
$
|
41,025
|
|
24.6
|
%
|
|||
18
Operating income in our North America operating segment
increased
$53.3 million
to
$221.4 million
for the
nine months ended September 30, 2014
from
$168.1 million
for the same period in
2013
primarily due to the items discussed above in the Consolidated Results of Operations. Operating loss in other foreign countries and businesses increased
$12.4 million
to
$13.8 million
for the
nine months ended September 30, 2014
from
$1.4 million
for the same period in
2013
primarily due to investments to support growth in our Latin America and MapMyFitness operating segments.
Seasonality
Historically, we have recognized a majority of our net revenues and a significant portion of our income from operations in the last two quarters of the year, driven primarily by increased sales volume of our products during the fall selling season, including our higher priced cold weather products, along with a larger proportion of higher margin direct to consumer sales. The level of our working capital generally reflects the seasonality and growth in our business.
Financial Position, Capital Resources and Liquidity
Our cash requirements have principally been for working capital and capital expenditures. We fund our working capital, primarily inventory, and capital investments from cash flows from operating activities, cash and cash equivalents on hand and borrowings available under our credit and long term debt facilities. Our working capital requirements generally reflect the seasonality and growth in our business as we recognize the majority of our net revenues in the last two quarters of the year. Our capital investments have included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities to support our growth, leasehold improvements to our brand and factory house stores, and investment and improvements in information technology systems.
Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe will enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our factory house stores and other liquidation channels.
In December 2013, we completed our acquisition of MapMyFitness. The purchase price was initially funded through $50.0 million cash on hand and $100.0 million in debt under our revolving credit facility. In May 2014, we repaid the $100.0 million with a portion of the $150.0 million proceeds from the initial term loan under our credit facility.
We believe our cash and cash equivalents on hand, cash from operations and borrowings available to us under our credit agreement and other financing instruments are adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. Although we believe we have adequate sources of liquidity over the long term, an economic recession or a slow recovery could adversely affect our business and liquidity. In addition, instability in or tightening of the capital markets could adversely affect our ability to obtain additional capital to grow our business and will affect the cost and terms of such capital.
Cash Flows
The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods presented:
|
|
Nine Months Ended September 30,
|
||||||
|
(In thousands)
|
2014
|
2013
|
|||||
|
Net cash provided by (used in):
|
|||||||
|
Operating activities
|
$
|
(72,496
|
)
|
$
|
(112,341
|
)
|
|
|
Investing activities
|
(108,244
|
)
|
(64,233
|
)
|
|||
|
Financing activities
|
84,127
|
|
22,285
|
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
(1,407
|
)
|
(1,175
|
)
|
|||
|
Net decrease in cash and cash equivalents
|
$
|
(98,020
|
)
|
$
|
(155,464
|
)
|
|
Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization, unrealized foreign currency exchange rate gains and losses, losses on disposals of property and equipment, stock-based compensation, deferred income taxes and changes in reserves and
19
allowances. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable and receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash used in operating activities decreased
$39.8 million
to
$72.5 million
for the
nine months ended September 30, 2014
from
$112.3 million
during the same period in
2013
. The decrease in cash used in operating activities was due to an increase in adjustments to net income for non-cash items of
$22.7 million
and an increase in net income of
$22.2 million
, partially offset by an increase in net cash outflows from operating assets and liabilities of
$5.1 million
. The increase in cash outflows related to changes in operating assets and liabilities period over period was primarily driven by the following:
|
•
|
a larger increase in accounts receivable of
$67.2 million
in the current period as compared to the prior period primarily due to a
31.9%
increase in net sales during the first nine months of
2014
; and
|
|
•
|
a smaller decrease in accrued expenses and other liabilities of
$17.2 million
in the current period compared to the prior period, primarily due to a larger increase in accrual for our performance incentive plan in the prior period; partially offset by
|
|
•
|
a larger increase in accounts payable of
$75.9 million
in the current period as compared to the prior period, due to the timing of payments.
|
Adjustments to net income for non-cash items increased in the
nine months ended September 30, 2014
as compared to the same period in
2013
primarily due to increased depreciation and amortization expense in the current period as compared to the prior period related to the expansion of our distribution and corporate facilities, along with increased stock-based compensation expense.
Investing Activities
Cash used in investing activities increased
$44.0 million
to
$108.2 million
for the
nine months ended September 30, 2014
from
$64.2 million
for the same period in
2013
, primarily due to brand and factory house openings and increased costs to improve and expand our distribution facilities, along with the acquisition of certain assets of our former distributor in Mexico during the first quarter of 2014.
Capital expenditures for the full year
2014
are expected to be approximately
$150.0 million
.
Financing Activities
Cash provided by financing activities increased
$61.8 million
to
$84.1 million
for the
nine months ended September 30, 2014
from
$22.3 million
for the same period in
2013
. This increase was primarily due to the $150.0 million proceeds from our new term loan, partially offset by the payment of the $100.0 million outstanding under our revolving credit facility.
Credit Facility
In May 2014 we entered into a new unsecured
$650.0 million
credit agreement and terminated our prior
$325.0 million
revolving credit facility. The credit agreement has a term of five years through May 2019, with permitted extensions under certain circumstances. The credit agreement provides for a committed revolving credit facility of
$400.0 million
, in addition to an aggregate term loan commitment of
$250.0 million
, consisting of a
$150.0 million
initial term loan, which was drawn in full at the closing of the credit agreement, and
$100.0 million
of delayed draw term loans available to be borrowed prior to November 28, 2014. We plan to draw the
$100.0 million
delayed draw term loan in full in November 2014 for general corporate purposes. At our request and the lenders’ consent, the revolving credit facility or term loans may be increased by up to an additional
$150.0 million
. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, Pounds Sterling, Japanese Yen and Canadian Dollars. Up to $50.0 million of the facility may be used to support letters of credit and up to
$50.0 million
of the facility may be used to support swingline loans. There were no letters of credit or swingline loans outstanding as of
September 30, 2014
.
The credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. We are also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than 3.50 to 1.00 and we are not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00. As of
September 30, 2014
, we were in compliance with these ratios. In addition, the credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the credit agreement, will be considered an event of default under the credit agreement.
20
Borrowings under the credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate, or (b) the adjusted LIBOR rate, plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to the Pricing Grid based on the consolidated leverage ratio and ranges between 1.00% to 1.25% for adjusted LIBOR rate loans and 0.00% to 0.25% for alternate base rate loans. The interest rate under the initial term loan was
1.2%
during the three months ended
September 30, 2014
. No balance was outstanding under our revolving credit facility as of
September 30, 2014
. Additionally, we pay a commitment fee on the average daily unused amount of the revolving credit facility, a ticking fee on the undrawn amounts under the delayed draw term loan and certain fees with respect to letters of credit. As of
September 30, 2014
, the commitment fee was 12.5 basis points.
We used $100.0 million of the proceeds from the initial term loan to repay the $100.0 million outstanding under our revolving credit facility. We incurred and capitalized
$1.7
million in deferred financing costs in connection with the credit facility.
We have long term debt agreements with various lenders to finance the acquisition or lease of qualifying capital investments. Loans under these agreements are collateralized by a first lien on the related assets acquired. As these agreements are not committed facilities, each advance is subject to approval by the lenders. Additionally, these agreements include a cross default provision whereby an event of default under other debt obligations, including our credit facility, will be considered an event of default under these agreements. These agreements require a prepayment fee if we pay outstanding amounts ahead of the scheduled terms. At
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, the outstanding principal balance under these agreements was
$2.6 million
,
$4.9 million
and
$5.7 million
, respectively. Currently, advances under these agreements bear interest rates which are fixed at the time of each advance. The weighted average interest rates on outstanding borrowings were
3.0%
and
3.2%
for the
three months ended September 30, 2014
and
2013
, respectively, and
3.2%
and
2.6%
for the
nine months ended September 30, 2014
and
2013
, respectively.
In December 2012, we entered into a
$50.0 million
recourse loan collateralized by the land, buildings and tenant improvements comprising our corporate headquarters. The loan has a seven year term and maturity date of December 2019. The loan bears interest at one month LIBOR plus a margin of
1.50%
, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with the new credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, the outstanding balance on the loan was
$46.5 million
,
$48.0 million
and
$48.5 million
, respectively. The weighted average interest rate on the loan was
1.7%
for the three and
nine months ended September 30, 2014
and
2013
.
Interest expense, net was
$1.5 million
and
$0.7 million
for the
three months ended September 30, 2014
and
2013
, respectively, and
$3.6 million
and
$2.1 million
for the
nine months ended September 30, 2014
and
2013
, respectively. Interest expense includes the amortization of deferred financing costs and interest expense under the credit and long term debt facilities.
We monitor the financial health and stability of our lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.
Contractual Commitments and Contingencies
There were no significant changes to the contractual obligations reported in our
2013
Form 10-K other than those which occur in the normal course of business.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could be significantly different from these estimates. We believe the following addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.
Our significant accounting policies are described in Note 2 of the audited consolidated financial statements included in our
2013
Form 10-K. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our
2013
Form 10-K. There were no significant changes to our critical accounting policies during the
nine months ended
September 30, 2014
.
21
Recently Issued Accounting Standards
In May 2014, the
FASB
issued an Accounting Standards Update which supersedes the most current revenue recognition requirements. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. We are currently evaluating the standard to determine the impact of its adoption on our consolidated financial statements.
22
Foreign Currency Risk
We currently generate a majority of our consolidated net revenues in the United States, and the reporting currency for our consolidated financial statements is the U.S. dollar. As our net revenues and expenses generated outside of the United States increase, our results of operations could be adversely impacted by changes in foreign currency exchange rates. For example, as we recognize foreign revenues in local foreign currencies and if the U.S. dollar strengthens, it could have a negative impact on our foreign revenues upon translation of those results into the U.S. dollar upon consolidation of our financial statements. In addition, we are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates on transactions generated by our foreign subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. These exposures are included in other expense, net on the consolidated statements of income.
From time to time, we may elect to use foreign currency forward contracts to reduce the risk from exchange rate fluctuations primarily on intercompany transactions and projected inventory purchases for our international subsidiaries. As we expand our international business, we anticipate expanding our current hedging program to include additional currency pairs and instruments. We do not enter into derivative financial instruments for speculative or trading purposes.
As of
September 30, 2014
, the aggregate notional value of our outstanding foreign currency forward contracts was
$70.4 million
, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, and Pound Sterling/Euro currency pairs with contract maturities of one to
two months
. The foreign currency forward contracts outstanding as of
September 30, 2014
have weighted average contractual forward foreign currency exchange rates of
1.11
CAD per $1.00,
€0.79
per $1.00 and
£0.78
per
€1.00
. The majority of our foreign currency forward contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. During the second quarter of 2014, we began entering into foreign currency forward contracts designated as cash flow hedges. For foreign currency forward contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, is recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. During the three and
nine months ended September 30, 2014
, we reclassified
$0.2 million
from other comprehensive income to cost of goods sold related to foreign currency forward contracts designated as cash flow hedges. The fair values of our foreign currency forward contracts were assets of
$8.0 thousand
and
$12.1 thousand
as of
September 30, 2014
and
December 31, 2013
, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. The fair value of our foreign currency forward contracts were liabilities of
$55.5 thousand
as of
September 30, 2013
, and were included in accrued expenses on the consolidated balance sheet. Refer to Note
5
to the Consolidated Financial Statements for a discussion of the fair value measurements. Included in other expense, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Unrealized foreign currency exchange rate gains (losses)
|
$
|
(4,981
|
)
|
$
|
596
|
|
$
|
(4,881
|
)
|
$
|
(1,021
|
)
|
|||
|
Realized foreign currency exchange rate gains (losses)
|
81
|
|
374
|
|
303
|
|
168
|
|
|||||||
|
Unrealized derivative gains (losses)
|
(134
|
)
|
(35
|
)
|
(152
|
)
|
(61
|
)
|
|||||||
|
Realized derivative gains (losses)
|
1,679
|
|
(1,048
|
)
|
748
|
|
244
|
|
|||||||
We enter into foreign currency forward contracts with major financial institutions with investment grade credit ratings and are exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the foreign currency forward contracts. However, we monitor the credit quality of these financial institutions and consider the risk of counterparty default to be minimal. Although we have entered into foreign currency forward contracts to minimize some of the impact of foreign currency exchange rate fluctuations on future cash flows, we cannot be assured that foreign currency exchange rate fluctuations will not have a material adverse impact on our financial condition and results of operations.
Interest Rate Risk
I
n order to maintain liquidity and fund business operations, we enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. We may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. We utilize interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate
23
swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation
.
As of
September 30, 2014
, the notional value of our outstanding interest rate swap contracts was $
167.5 million
. During the
three months ended September 30, 2014
and
2013
, we recorded a
$0.6 million
and
$0.1 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the
nine months ended September 30, 2014
and
2013
, we recorded a
$1.0 million
and
$0.3 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of
$1.2 million
,
$1.1 million
and
$0.8 million
as of
September 30, 2014
,
December 31, 2013
and
September 30, 2013
, respectively, and was included in other long term assets on the consolidated balance sheets.
Credit Risk
W
e are exposed to credit risk primarily on our accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by our customer base. We believe that our allowance for doubtful accounts is sufficient to cover customer credit risks as of
September 30, 2014
.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations in recent periods, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.
24
The Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2013
have not materially changed.
From July 1, 2014 through September 30, 2014, we entered into contractual arrangements to issue 97,578 deferred stock units automatically exchangeable for shares of Class A Common Stock on a one-for-one basis to one or more of our marketing partners in connection with their entering into endorsement and other marketing services agreements with us. These offers of our securities were made in reliance upon Section 4(2) under the Securities Act and did not involve any public offering. We did not receive any cash consideration in connection with these arrangements.
|
Exhibit
No.
|
|
|
10.01
|
Supplement to Restricted Stock Unit Grant Agreement for U.S. Employees under the Amended and Restated 2005 Omnibus Long-Term Incentive Plan.
|
|
31.01
|
Section 302 Chief Executive Officer Certification.
|
|
31.02
|
Section 302 Chief Financial Officer Certification.
|
|
32.01
|
Section 906 Chief Executive Officer Certification.
|
|
32.02
|
Section 906 Chief Financial Officer Certification.
|
|
101.INS
|
XBRL Instance Document
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
25
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.
|
UNDER ARMOUR, INC.
|
||
|
By:
|
/s/ B
RAD
D
ICKERSON
|
|
|
Brad Dickerson
|
||
|
Chief Financial Officer
|
||
Date:
November 5, 2014
26
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits