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, 2017
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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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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(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Emerging growth company
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¨
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|||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
þ
As of
October 31, 2017
there were
185,130,747
shares of Class A Common Stock,
34,450,000
shares of Class B Convertible Common Stock and
222,117,109
Class C Common Stock outstanding.
UNDER ARMOUR, INC.
September 30, 2017
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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Item 2.
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Item 3.
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Item 4.
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PART II.
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Item 1.
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||
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Item 1A.
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||
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Item 6.
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||
Under Armour, Inc. and Subsidiaries
(In thousands, except share data)
See accompanying notes.
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September 30,
2017 |
December 31,
2016 |
September 30,
2016 |
|||||||||
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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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258,002
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$
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250,470
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$
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179,954
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||
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Accounts receivable, net
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733,292
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622,685
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713,731
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|||||
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Inventories
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1,180,653
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917,491
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970,621
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|||||
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Prepaid expenses and other current assets
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284,895
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174,507
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162,255
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|||||
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Total current assets
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2,456,842
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1,965,153
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2,026,561
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|||||
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Property and equipment, net
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868,250
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804,211
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751,286
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|||||
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Goodwill
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559,318
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563,591
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576,903
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|||||
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Intangible assets, net
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48,646
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64,310
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68,248
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Deferred income taxes
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97,147
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136,862
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155,592
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|||||
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Other long term assets
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100,162
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110,204
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106,747
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|||||
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Total assets
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$
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4,130,365
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$
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3,644,331
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$
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3,685,337
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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, current
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$
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270,000
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$
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—
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$
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250,000
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||
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Accounts payable
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482,897
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409,679
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254,222
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|||||
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Accrued expenses
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266,074
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208,750
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238,284
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|||||
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Current maturities of long term debt
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27,000
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27,000
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27,000
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|||||
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Other current liabilities
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54,455
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40,387
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87,744
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|||||
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Total current liabilities
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1,100,426
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685,816
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857,250
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|||||
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Long term debt, net of current maturities
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771,382
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790,388
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796,768
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|||||
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Other long term liabilities
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157,861
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137,227
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108,165
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Total liabilities
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2,029,669
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1,613,431
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1,762,183
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Commitments and contingencies (See Note 5)
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Stockholders’ equity
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Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2017, December 31, 2016 and September 30, 2016; 185,128,757 shares issued and outstanding as of September 30, 2017, 183,814,911 shares issued and outstanding as of December 31, 2016, and 183,739,248 shares issued and outstanding as of September 30, 2016.
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61
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61
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61
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|||||
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Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of September 30, 2017, December 31, 2016 and September 30, 2016.
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11
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11
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11
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|||||
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Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2017, December 31, 2016 and September 30, 2016; 222,050,824 shares issued and outstanding as of September 30, 2017, 220,174,048 shares issued and outstanding as of December 31, 2016, and 219,963,397 shares issued and outstanding as of September 30, 2016.
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74
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73
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73
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|||||
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Additional paid-in capital
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864,920
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823,484
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816,390
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|||||
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Retained earnings
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1,272,556
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1,259,414
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1,156,650
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|||||
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Accumulated other comprehensive loss
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(36,926
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)
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(52,143
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)
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(50,031
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)
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|||||
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Total stockholders’ equity
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2,100,696
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2,030,900
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1,923,154
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|||||
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Total liabilities and stockholders’ equity
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$
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4,130,365
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$
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3,644,331
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$
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3,685,337
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||
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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2017
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2016
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2017
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2016
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|||||||||||
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Net revenues
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$
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1,405,615
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$
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1,471,573
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$
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3,611,192
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$
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3,520,058
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|||
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Cost of goods sold
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760,265
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772,949
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1,962,172
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1,863,151
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|||||||
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Gross Profit
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645,350
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698,624
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1,649,020
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1,656,907
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|||||||
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Selling, general and administrative expenses
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498,172
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499,314
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1,495,992
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1,403,336
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|||||||
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Restructuring and impairment charges
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84,998
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—
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88,097
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—
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|||||||
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Income from operations
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62,180
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199,310
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64,931
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253,571
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|||||||
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Interest expense, net
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(9,575
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)
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(8,189
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)
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(25,237
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)
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(18,476
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)
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|||||||
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Other expense, net
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(1,069
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)
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(772
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)
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(1,383
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)
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(1,025
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)
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|||||||
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Income before income taxes
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51,536
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190,349
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38,311
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234,070
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|||||||
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Income tax expense (benefit)
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(2,706
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)
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62,124
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(1,349
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)
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80,322
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|||||||
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Net income
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54,242
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128,225
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39,660
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153,748
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|||||||
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Adjustment payment to Class C capital stockholders
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—
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—
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—
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59,000
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|||||||
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Net income available to all stockholders
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$
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54,242
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$
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128,225
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$
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39,660
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$
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94,748
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|
|||
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Basic net income per share of Class A and B common stock
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$
|
0.12
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$
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0.29
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$
|
0.09
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$
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0.22
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|
|||
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Basic net income per share of Class C common stock
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$
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0.12
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$
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0.29
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$
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0.09
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$
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0.49
|
|
|||
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Diluted net income per share of Class A and B common stock
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$
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0.12
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$
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0.29
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$
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0.09
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$
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0.21
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|
|||
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Diluted net income per share of Class C common stock
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$
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0.12
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$
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0.29
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$
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0.09
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$
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0.48
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|
|||
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Weighted average common shares outstanding Class A and B common stock
|
|||||||||||||||
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Basic
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219,491
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|
218,074
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|
219,125
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|
217,535
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|||||||
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Diluted
|
222,848
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|
222,115
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|
222,871
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|
221,709
|
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|||||||
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Weighted average common shares outstanding Class C common stock
|
|||||||||||||||
|
Basic
|
221,784
|
|
219,756
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|
221,235
|
|
218,147
|
|
|||||||
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Diluted
|
225,591
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|
223,738
|
|
225,390
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|
222,301
|
|
|||||||
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,
|
|||||||||||||
|
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Net income
|
$
|
54,242
|
|
$
|
128,225
|
|
$
|
39,660
|
|
$
|
153,748
|
|
|||
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Other comprehensive income (loss):
|
|
|
|||||||||||||
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Foreign currency translation adjustment
|
13,782
|
|
(6,182
|
)
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28,966
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|
(1,917
|
)
|
|||||||
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Unrealized gain (loss) on cash flow hedge, net of tax of $(1,759) and $769 for the three months ended September 30, 2017 and 2016, respectively, and $(6,270) and $(1,654) for the nine months ended September 30, 2017 and 2016, respectively.
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(6,215
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)
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1,411
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(18,006
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)
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(3,101
|
)
|
|||||||
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Gain on intra-entity foreign currency transactions
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2,539
|
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—
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|
4,257
|
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—
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|
|||||||
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Total other comprehensive income (loss)
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10,106
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(4,771
|
)
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15,217
|
|
(5,018
|
)
|
|||||||
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Comprehensive income
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$
|
64,348
|
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$
|
123,454
|
|
$
|
54,877
|
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$
|
148,730
|
|
|||
See accompanying notes.
3
Under Armour, Inc. and Subsidiaries
(In thousands)
See accompanying notes.
|
|
Nine Months Ended September 30,
|
||||||
|
|
2017
|
2016
|
|||||
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Cash flows from operating activities
|
|||||||
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Net income
|
$
|
39,660
|
|
$
|
153,748
|
|
|
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Adjustments to reconcile net income to net cash used in operating activities
|
|||||||
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Depreciation and amortization
|
128,488
|
|
105,382
|
|
|||
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Unrealized foreign currency exchange rate gains
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(30,429
|
)
|
(4,846
|
)
|
|||
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Loss on disposal of property and equipment
|
1,518
|
|
504
|
|
|||
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Impairment charges
|
55,116
|
|
—
|
|
|||
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Amortization of bond premium
|
190
|
|
—
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|
|||
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Stock-based compensation
|
34,409
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|
43,445
|
|
|||
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Excess tax benefit from stock-based compensation arrangements
|
356
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|
44,444
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|
|||
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Deferred income taxes
|
42,705
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|
(61,561
|
)
|
|||
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Changes in reserves and allowances
|
43,793
|
|
70,565
|
|
|||
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Changes in operating assets and liabilities:
|
|||||||
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Accounts receivable
|
(138,267
|
)
|
(342,342
|
)
|
|||
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Inventories
|
(243,696
|
)
|
(186,472
|
)
|
|||
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Prepaid expenses and other assets
|
(26,215
|
)
|
(19,702
|
)
|
|||
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Other non-current assets
|
(12,554
|
)
|
—
|
|
|||
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Accounts payable
|
86,481
|
|
68,093
|
|
|||
|
Accrued expenses and other liabilities
|
75,526
|
|
51,784
|
|
|||
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Income taxes payable and receivable
|
(86,274
|
)
|
40,925
|
|
|||
|
Net cash provided by (used in) operating activities
|
(29,193
|
)
|
(36,033
|
)
|
|||
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Cash flows from investing activities
|
|||||||
|
Purchases of property and equipment
|
(225,924
|
)
|
(251,378
|
)
|
|||
|
Purchases of property and equipment from related parties
|
—
|
|
(70,288
|
)
|
|||
|
Purchases of available-for-sale securities
|
—
|
|
(24,230
|
)
|
|||
|
Sales of available-for-sale securities
|
—
|
|
30,712
|
|
|||
|
Purchases of other assets
|
(1,648
|
)
|
(858
|
)
|
|||
|
Net cash used in investing activities
|
(227,572
|
)
|
(316,042
|
)
|
|||
|
Cash flows from financing activities
|
|||||||
|
Proceeds from long term debt and revolving credit facility
|
665,000
|
|
1,302,537
|
|
|||
|
Payments on long term debt and revolving credit facility
|
(415,250
|
)
|
(889,000
|
)
|
|||
|
Employee taxes paid for shares withheld for income taxes
|
(2,586
|
)
|
(13,685
|
)
|
|||
|
Proceeds from exercise of stock options and other stock issuances
|
9,717
|
|
13,022
|
|
|||
|
Cash dividends paid
|
—
|
|
(2,927
|
)
|
|||
|
Payments of debt financing costs
|
—
|
|
(5,250
|
)
|
|||
|
Contingent consideration payments for acquisitions
|
—
|
|
(2,424
|
)
|
|||
|
Net cash provided by financing activities
|
256,881
|
|
402,273
|
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
7,416
|
|
(96
|
)
|
|||
|
Net increase in cash and cash equivalents
|
7,532
|
|
50,102
|
|
|||
|
Cash and cash equivalents
|
|||||||
|
Beginning of period
|
250,470
|
|
129,852
|
|
|||
|
End of period
|
$
|
258,002
|
|
$
|
179,954
|
|
|
|
Non-cash investing and financing activities
|
|||||||
|
Change in accrual for property and equipment
|
(31,886
|
)
|
(9,374
|
)
|
|||
|
Non-cash dividends
|
—
|
|
(56,073
|
)
|
|||
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. The Under Armour Connected Fitness
TM
platform powers the world's largest digital health and fitness community. The Company uses this platform to engage its consumers and increase awareness and sales of its products.
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. Intercompany balances and transactions were eliminated. The consolidated balance sheet as of
December 31, 2016
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, 2016
(the “
2016
Form 10-K”), which should be read in conjunction with these consolidated financial statements. The results for the three and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the year ending
December 31, 2017
or any other portions thereof.
On June 3, 2016, the Board of Directors approved the payment of a
$59.0 million
dividend to the holders of the Company's Class C stock in connection with shareholder litigation related to the creation of the Class C stock. The Company's Board of Directors approved the payment of this dividend in the form of additional shares of Class C stock, with cash in lieu of any fractional shares. This dividend was distributed on June 29, 2016, in the form of
1,470,256
shares of Class C stock and
$2.9 million
in cash.
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large retailers. Credit is extended based on an evaluation of each customer’s financial condition and collateral is not required. The Company's largest customer accounted for
13.1%
,
16.0%
and
20.2%
of accounts receivable as of
September 30, 2017
,
December 31, 2016
and
September 30, 2016
, respectively. For the
nine months ended September 30, 2017
, no customer accounted for more than
10%
of the Company's net revenues. For the
nine months ended September 30, 2016
, the Company's largest customer accounted for
11.0%
of net revenues.
Allowance for Doubtful Accounts
As of
September 30, 2017
,
December 31, 2016
and
September 30, 2016
, the allowance for doubtful accounts w
as
$13.1 million
,
$11.3 million
and
$33.6 million
, respectively.
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
$25.5 million
and
$25.7 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$74.5 million
and
$65.1 million
, for the
nine months ended September 30, 2017
and
2016
, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
5
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.
During the three months ending September 30, 2017, as a change in estimate, the Company reversed
$12.3 million
of incentive compensation accruals relating to the first two quarters of 2017.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, which supersedes the most current revenue recognition requirements. This ASU 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 ASU will be effective for annual and interim periods beginning after December 15, 2017, with early adoption for annual and interim periods beginning after December 15, 2016 permitted.
The Company’s initial assessment of the guidance in this ASU has identified wholesale customer support costs, direct to consumer incentive programs and customer related returns as transactions potentially affected by this guidance. While the Company has not completed its evaluation, it expects the impact of the adoption of this ASU would primarily change presentation within our consolidated financial statements but is currently not expected to have a material effect on income from operations.
The Company will adopt the guidance in this new ASU effective January 1, 2018, and plans to use the modified retrospective transition approach, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying this guidance to contracts in effect as of the adoption date. Under this approach, we would not restate the prior financial statements presented. The guidance in this ASU requires us to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018 as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance for leases and will require recognition of operating leases with lease terms of more than twelve months and all financing leases on the balance sheet. For these leases, companies will record assets for the rights and liabilities for the obligations that are created by the leases. This ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating this ASU to determine the impact of its adoption on its consolidated financial statements. The Company currently anticipates adopting the new standard effective January 1, 2019. The Company has formed a committee and initiated the review process for adoption of this ASU. While the Company is still in the process of completing its analysis on the complete impact this ASU will have on its consolidated financial statements and related disclosures, it expects the ASU to have a material impact on its consolidated balance sheet for recognition of lease-related assets and liabilities.
In August 2017, the FASB issued ASU 2017-12, which simplifies the application of hedge accounting and more closely aligns hedge accounting with companies' risk management strategies, thereby making more hedging strategies eligible for hedge accounting. This ASU will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact this ASU will have on its financial statements and related disclosures.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09, which affects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures and the classification of those taxes paid on the statement of cash flows. The Company adopted the provisions of this ASU on January 1, 2017 on a prospective basis and recorded an excess tax deficiency of
$1.3 million
as an increase in income tax expense related to share-based compensation for vested awards. Additionally, the Company made a policy election under the provisions of this ASU to account for forfeitures when they occur rather than estimating the number of awards that are expected to vest. As a result of this election, the Company recorded a
$1.9 million
cumulative-effect benefit to retained earnings as of the date of adoption. The Company adopted the provisions of this ASU related to changes on the Consolidated Statement of Cash Flows on a retrospective basis.
6
Excess tax benefits and deficiencies have been classified within cash flows from operating activities and employee taxes paid for shares withheld for income taxes have been classified within cash flows from financing activities on the Consolidated Statement of Cash Flows. This resulted in an increase of
$44.4 million
to the cash flows from operating activities section and a decrease of
$13.7 million
to the cash flows from financing activities section of the Consolidated Statement of Cash Flows for the nine months ended September 30, 2016.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the provisions of this ASU on a modified retrospective basis on January 1, 2017, resulting in a cumulative-effect benefit to retained earnings of
$26.0 million
as of the date of adoption.
In January 2017, the FASB issued ASU 2017-04, which simplifies how an entity is required to test goodwill for impairment by eliminating step two of the test. The Company adopted the provisions of this ASU on July 1, 2017, and recorded an impairment charge of
$28.6 million
during its interim goodwill impairment test for the Connected Fitness reporting unit.
3
. Restructuring and Impairment
A description of significant restructuring and related impairment charges is included below:
Restructuring
On July 27, 2017, the Company’s Board of Directors approved a restructuring plan (the “restructuring plan”) to more closely align its financial resources with the critical priorities of the business. The Company’s original expectation was to incur estimated pre-tax restructuring and related charges of approximately
$110.0
to
$130.0 million
for the year ended December 31, 2017. In the third quarter of 2017, the Company recognized approximately
$59.9 million
of pre-tax charges in connection with this restructuring plan, which included
$31.2 million
of asset impairments and
$28.7 million
of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, the Company also recognized restructuring related goodwill impairment charges of approximately
$28.6 million
for its Connected Fitness business which was not included in the Company’s original range estimate. Inclusive of the goodwill impairment, the Company now expects to incur total pre-tax restructuring and related charges of approximately
$140.0
to
$150.0
million for the year ending December 31, 2017
.
Impairment
As a part of the restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of
$14.4 million
, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on Management’s forecast of future cash flows expected to be derived from the assets' use.
Additionally, in connection with the restructuring plan, strategic decisions were made during the third quarter in 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of
$12.1 million
, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the assets use. In addition, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the restructuring plan.
The Company determined sufficient indication existed to trigger the performance of an interim goodwill impairment for Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair value of the Connected Fitness reporting unit based on the discounted cash flows model. The carrying value exceeded the fair value, resulting in an impairment of goodwill. As the excess of the carrying value for the Connected Fitness reporting unit was greater than the goodwill for this reporting unit, all
$28.6 million
of goodwill was impaired.
The summary of the costs incurred during the three and nine months ended September 30, 2017, as well as the Company’s current estimates of the amount expected to be incurred during the remainder of 2017, are as follows:
7
|
Restructuring and Impairment Charges incurred
|
Estimated Restructuring and Impairment Charges to be Incurred
|
|||||||||||||||
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
Three Months Ended December 31,
|
Total
|
||||||||||||
|
(In thousands)
|
2017
|
2017
|
2017 (2)
|
2017 (2)
|
||||||||||||
|
Costs recorded in cost of goods sold:
|
||||||||||||||||
|
Inventory write-offs (1)
|
$
|
3,597
|
|
$
|
3,597
|
|
$
|
—
|
|
$
|
3,597
|
|
||||
|
Total costs recorded in cost of goods sold
|
3,597
|
|
3,597
|
|
—
|
|
3,597
|
|
||||||||
|
Costs recorded in restructuring and impairment charges:
|
||||||||||||||||
|
Goodwill impairment
|
28,647
|
|
28,647
|
|
—
|
|
28,647
|
|
||||||||
|
Property and equipment impairment
|
14,415
|
|
14,415
|
|
—
|
|
14,415
|
|
||||||||
|
Employee related costs
|
11,657
|
|
12,159
|
|
3,000
|
|
15,159
|
|
||||||||
|
Intangible asset impairment
|
12,054
|
|
12,054
|
|
—
|
|
12,054
|
|
||||||||
|
Other restructuring related costs
|
12,603
|
|
15,200
|
|
23,000
|
|
38,200
|
|
||||||||
|
Contract exit costs
|
5,622
|
|
5,622
|
|
31,000
|
|
36,622
|
|
||||||||
|
Total costs recorded in restructuring and impairment charges
|
84,998
|
|
88,097
|
|
57,000
|
|
145,097
|
|
||||||||
|
Total restructuring, impairment and restructuring related costs
|
$
|
88,595
|
|
$
|
91,694
|
|
$
|
57,000
|
|
$
|
148,694
|
|
||||
(1) This table includes an additional non-cash charge of
$3.6 million
for the three and nine months ended September 30, 2017 associated with the reduction of inventory outside of current liquidation channels in line with the restructuring plan.
(2) Estimated restructuring and impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken by the Company during 2017 in connection with the restructuring plan.
4
. Long Term Debt
Credit Facility
The Company is
party to a credit agreement that provides revolving credit commitments for up to
$1.25 billion
of borrowings, as well as term loan commitments, in each case maturing in
January 2021
. As of
September 30, 2017
, there was
$270.0 million
outstanding under the revolving credit facility and
$167.5 million
of term loan borrowings outstanding.
At
the Company's
request and the lender's consent, revolving and or term loan borrowings may be increased by up to
$300.0 million
in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time
the Company seeks
to incur such borrowings.
The borrowings under the revolving credit facility have maturities of less than one year. Up to
$50.0 million
of the facility may be used for the issuance of letters of credit. There were
$4.6 million
of letters of credit outstanding as of
September 30, 2017
.
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"). The method of calculating these ratios is set forth in
the Company's
credit agreement and differs from how rating agencies or other companies may calculate similar measures. As of
September 30, 2017
, 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.
8
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 weighted average interest rates under the outstanding term loans and revolving credit facility borrowings were
2.4%
and
2.2%
during the three and
nine months ended September 30, 2017
, respectively. The Company pays
a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit.
As of
September 30, 2017
,
the commitment fee was
15.0
basis points. Since inception,
the Company
incurred and deferred
$3.9 million
in financing costs in connection with the credit agreement.
3.250% Senior Notes
In June 2016,
the Company
issued
$600.0 million
aggregate principal amount of
3.250%
senior unsecured notes due
June 15, 2026
(the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes),
the Company
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole” amount applicable to such Notes as described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes),
the Company
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Notes contains covenants, including limitations that restrict
the Company’s
ability and the ability of certain of
its
subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and
the Company’s
ability to consolidate, merge or transfer all or substantially all of
its
properties or assets to another person, in each case subject to material exceptions described in the indenture.
The Company has
incurred and deferred
$5.3 million
in financing costs in connection with the Notes.
Other Long Term Debt
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 Company's
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, 2017
,
December 31, 2016
and
September 30, 2016
, the outstanding balance on the loan was
$40.5 million
,
$42.0 million
and
$42.5 million
, respectively.
The weighted average interest rate on the loan was
2.7%
and
2.5%
for the three and
nine months ended September 30, 2017
, respectively.
Interest expense, net was
$9.6 million
and
$8.2 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$25.2 million
and
$18.5 million
for the
nine months ended September 30, 2017
, and
2016
, respectively.
Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities
.
The Company
monitor
s
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.
5
. Commitments and Contingencies
There were no significant changes to the contractual obligations reported in the
2016
Form 10-K other than those which occur in the normal course of business.
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company’s historical experience and the estimated probability
9
of future loss, the Company has determined that the fair value of such indemnifications is not material to its consolidated financial position or results of operations.
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. Other than as described below, 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.
On March 23, 2017, three separate securities cases previously filed against the Company in the United States District Court for the District of Maryland were consolidated under the caption
In re Under Armour Securities Litigation
, Case No. 17-cv-00388-RDB (the “Consolidated Action”). On August 4, 2017, the lead plaintiff in the Consolidated Action, North East Scotland Pension Fund (“NESFP”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s Chief Executive Officer and former Chief Financial Officers, Lawrence Molloy and Brad Dickerson. The Amended Complaint alleges violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017.
A new plaintiff, Bucks County Employees Retirement Fund (“Bucks County”), joined NESFP in filing the Amended Complaint. In addition to joining the claims noted above, Bucks County also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted against the Company, the Company’s Chief Executive Officer, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. Bucks County alleges that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
The Company believes that the claims asserted in the Consolidated Action are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
6
. 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:
|
September 30, 2017
|
December 31, 2016
|
September 30, 2016
|
|||||||||||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||
|
Derivative foreign currency contracts (see Note 8)
|
|
|
(7,754
|
)
|
|
|
—
|
|
15,238
|
|
—
|
|
—
|
|
1,577
|
|
—
|
|
|||||||||
|
Interest rate swap contracts (see Note 8)
|
—
|
|
156
|
|
—
|
|
—
|
|
(420
|
)
|
—
|
|
—
|
|
3,953
|
|
—
|
|
|||||||||
|
TOLI policies held by the Rabbi Trust
|
—
|
|
5,539
|
|
—
|
|
—
|
|
4,880
|
|
—
|
|
—
|
|
4,819
|
|
—
|
|
|||||||||
|
Deferred Compensation Plan obligations
|
—
|
|
(9,301
|
)
|
—
|
|
—
|
|
(7,023
|
)
|
—
|
|
—
|
|
(6,486
|
)
|
—
|
|
|||||||||
10
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 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 market 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.
As of
September 30, 2017
, the fair value of the Company's Senior Notes was
$557.3 million
, and as of September 30, 2016, the carrying value approximated the fair value. The carrying value of the Company's other long term debt approximated its fair value as of
September 30, 2017
and
2016
. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that has been reduced to fair value when impaired (see Note
3
). Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
7
. Performance Based Equity Compensation
The Company grants a combination of time-based and performance-based restricted stock units and stock options as part of its incentive compensation. Certain senior executives are eligible to receive performance-based awards. During the
nine months ended September 30, 2017
,
1.8 million
performance-based restricted stock units and
0.5 million
performance-based stock options for shares of our Class C common stock were awarded under the Company's Second Amended and Restated 2005 Omnibus Long-Term Incentive Plan, as amended. The performance-based restricted stock units and options have weighted average grant date fair values of
$19.05
and
$8.17
, respectively, and have vesting conditions tied to the achievement of certain combined revenue and operating income targets for 2017 and 2018. Upon the achievement of the targets, one half of the restricted stock units and options will vest each in
February 2019
and
February 2020
.
If certain lower levels of combined annual revenue and operating income for 2017 and 2018 are achieved, fewer or no restricted stock units or options will vest and the remaining restricted stock units and options will be forfeited. The Company deemed the achievement of certain revenue and operating income targets for 2017 and 2018 probable during the
nine months ended September 30, 2017
. The Company assesses the probability of the achievement of the remaining revenue and 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 and options will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. Additional stock based compensation of up to
$4.2 million
would have been recorded during the
nine months ended September 30, 2017
, for these performance-based restricted stock units and options had the achievement of the remaining revenue and operating income targets been deemed probable.
During 2016, the Company granted performance-based restricted stock units and options with vesting conditions tied to the achievement of certain combined annual operating income targets for 2016 and 2017. As of
September 30, 2017
, the Company deems the achievement of these operating income targets improbable. As such, no expense for these awards has been recorded during the three and nine months ended September 30, 2017.
8
. 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 currency of the purchasing entity. From time to time, the Company may elect to enter into
11
foreign currency contracts to reduce the risk associated with foreign currency exchange rate fluctuations on intercompany transactions and projected inventory purchases for its international subsidiaries.
As of
September 30, 2017
, the aggregate notional value of the Company's outstanding foreign currency contracts was
$338.6 million
, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, Yen/Euro, Mexican Peso/Euro and Pound Sterling/Euro currency pairs with contract maturities ranging from
one
to
fourteen months
. A portion of the Company's foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. The Company also enters into foreign currency contracts designated as cash flow hedges. For foreign currency 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, 2017
, the Company reclassified
$0.1 million
and
$1.8 million
from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges, respectively. The fair values of the Company's foreign currency contracts were a liability of
$7.8 million
as of
September 30, 2017
, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency contracts were assets of
$15.2 million
and
$1.6 million
as of
December 31, 2016
and
September 30, 2016
, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note
6
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 contracts:
|
|
Three Months Ended September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Unrealized foreign currency exchange rate gains (losses)
|
$
|
1,035
|
|
$
|
985
|
|
$
|
30,429
|
|
$
|
4,846
|
|
|||
|
Realized foreign currency exchange rate gains (losses)
|
3,221
|
|
(2,635
|
)
|
865
|
|
(3,094
|
)
|
|||||||
|
Unrealized derivative gains (losses)
|
388
|
|
516
|
|
(838
|
)
|
(401
|
)
|
|||||||
|
Realized derivative gains (losses)
|
(4,182
|
)
|
426
|
|
(26,972
|
)
|
(2,415
|
)
|
|||||||
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. 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
4
for a discussion of long term debt.
As of
September 30, 2017
, the notional value of the Company's outstanding interest rate swap contracts was
$140.0 million
. During the
three months ended September 30, 2017
and
2016
, the Company recorded a
$0.2 million
and
$0.5 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, 2017
and
2016
, the Company recorded a
$0.8 million
and
$1.6 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair values of the interest rate swap contracts were assets of
$0.2 million
and
$4.0 million
as of
September 30, 2017
and
2016
, respectively, and were included in other long term assets on the consolidated balance sheet. The fair value of the interest rate swap contracts was a liability of
$0.4 million
as of December 31, 2016, and was included in other long term liabilities on the consolidated balance sheet.
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 derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
12
9
. Provision for Income Taxes
Provision for income taxes decreased
$81.6 million
to a benefit of
$1.3 million
during the
nine months ended September 30, 2017
from
$80.3 million
during the same period in
2016
. For the
nine months ended September 30, 2017
, the Company's effective tax rate was (
3.5%
) compared to
34.3%
for the same period in
2016
. The effective tax rate for the
nine months ended September 30, 2017
was lower than the effective tax rate for the
nine months ended September 30, 2016
primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges and the recording of certain valuation allowances.
Valuation allowances of
$13.2 million
were recorded discretely against deferred tax assets as of December 31, 2016 for certain U.S. state jurisdictions. Additionally, valuation allowances were recorded against current year deferred tax assets in certain U.S. state jurisdictions. These valuation allowances were recorded due to lower than expected results in the third quarter of 2017 and a significantly reduced outlook for the remainder of the year.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions which are regularly subject to examination by tax authorities. Based on the status of current examinations in various taxing jurisdictions, management believes it is reasonably possible that in the next 12 months the amount of the total liability for unrecognized income tax benefits and interest could decrease by up to
$16 million
.
10
. 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)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Numerator
|
|||||||||||||||
|
Net income
|
$
|
54,242
|
|
$
|
128,225
|
|
$
|
39,660
|
|
$
|
153,748
|
|
|||
|
Adjustment payment to Class C capital stockholders
|
—
|
|
—
|
|
—
|
|
59,000
|
|
|||||||
|
Net income available to all stockholders
|
$
|
54,242
|
|
$
|
128,225
|
|
$
|
39,660
|
|
$
|
94,748
|
|
|||
|
Denominator
|
|||||||||||||||
|
Weighted average common shares outstanding Class A and B
|
219,491
|
|
218,074
|
|
219,125
|
|
217,535
|
|
|||||||
|
Effect of dilutive securities Class A and B
|
3,357
|
|
4,041
|
|
3,746
|
|
4,174
|
|
|||||||
|
Weighted average common shares and dilutive securities outstanding Class A and B
|
222,848
|
|
222,115
|
|
222,871
|
|
221,709
|
|
|||||||
|
Weighted average common shares outstanding Class C
|
221,784
|
|
219,756
|
|
221,235
|
|
218,147
|
|
|||||||
|
Effect of dilutive securities Class C
|
3,807
|
|
3,982
|
|
4,155
|
|
4,154
|
|
|||||||
|
Weighted average common shares and dilutive securities outstanding Class C
|
225,591
|
|
223,738
|
|
225,390
|
|
222,301
|
|
|||||||
|
Basic net income per share of Class A and B common stock
|
$
|
0.12
|
|
$
|
0.29
|
|
$
|
0.09
|
|
$
|
0.22
|
|
|||
|
Basic net income per share of Class C common stock
|
$
|
0.12
|
|
$
|
0.29
|
|
$
|
0.09
|
|
$
|
0.49
|
|
|||
|
Diluted net income per share of Class A and B common stock
|
$
|
0.12
|
|
$
|
0.29
|
|
$
|
0.09
|
|
$
|
0.21
|
|
|||
|
Diluted net income per share of Class C common stock
|
$
|
0.12
|
|
$
|
0.29
|
|
$
|
0.09
|
|
$
|
0.48
|
|
|||
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing
233.8 thousand
and
83.7 thousand
shares of Class A common stock outstanding for the
three months ended September 30, 2017
and 2016, 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
4.0 million
and
1.1 million
shares of Class C common stock outstanding for the
three months ended September 30, 2017
and 2016, 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
272.3 thousand
and
86.9 thousand
shares of Class A common stock outstanding for the
nine months ended September 30, 2017
and 2016, 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
4.1 million
and
0.4 million
shares of Class C common
13
stock outstanding for the
nine months ended September 30, 2017
and 2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
11
. 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. The CODM also receives discrete financial information for the Company's Connected Fitness business. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
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. Intercompany balances were eliminated for separate disclosure. The majority of corporate service costs within North America have not been allocated to the Company's other segments. As the Company continues to grow its business outside of North America, a larger portion of its corporate overhead costs have begun to support global functions. Due to the individual materiality of our Asia-Pacific segment, the Company has separately presented its Asia-Pacific, EMEA and Latin America segments, and will no longer combine these segments for presentation purposes. Net revenues and operating income by segment presented for prior periods have been conformed to the current presentation.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Net revenues
|
|||||||||||||||
|
North America
|
$
|
1,077,088
|
|
$
|
1,225,188
|
|
$
|
2,778,165
|
|
$
|
2,932,915
|
|
|||
|
EMEA
|
127,932
|
|
105,099
|
|
334,683
|
|
237,559
|
|
|||||||
|
Asia-Pacific
|
130,320
|
|
85,810
|
|
309,712
|
|
188,985
|
|
|||||||
|
Latin America
|
46,887
|
|
35,295
|
|
123,342
|
|
99,170
|
|
|||||||
|
Connected Fitness
|
23,388
|
|
20,181
|
|
65,290
|
|
62,179
|
|
|||||||
|
Intersegment eliminations
|
—
|
|
—
|
|
—
|
|
(750
|
)
|
|||||||
|
Total net revenues
|
$
|
1,405,615
|
|
$
|
1,471,573
|
|
$
|
3,611,192
|
|
$
|
3,520,058
|
|
|||
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
||||||||||||
|
(In thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
||||||||
|
Operating income
|
|
|
|
|
|
|
|
||||||||
|
North America
|
$
|
65,827
|
|
|
$
|
182,840
|
|
|
$
|
64,124
|
|
|
$
|
251,084
|
|
|
EMEA
|
16,977
|
|
|
8,383
|
|
|
13,990
|
|
|
8,348
|
|
||||
|
Asia-Pacific
|
34,173
|
|
|
27,151
|
|
|
69,050
|
|
|
54,399
|
|
||||
|
Latin America
|
(10,223
|
)
|
|
(10,550
|
)
|
|
(26,175
|
)
|
|
(27,751
|
)
|
||||
|
Connected Fitness
|
(44,574
|
)
|
|
(8,514
|
)
|
|
(56,058
|
)
|
|
(32,509
|
)
|
||||
|
Total operating income
|
62,180
|
|
|
199,310
|
|
|
64,931
|
|
|
253,571
|
|
||||
|
Interest expense, net
|
(9,575
|
)
|
|
(8,189
|
)
|
|
(25,237
|
)
|
|
(18,476
|
)
|
||||
|
Other expense, net
|
(1,069
|
)
|
|
(772
|
)
|
|
(1,383
|
)
|
|
(1,025
|
)
|
||||
|
Income before income taxes
|
$
|
51,536
|
|
|
$
|
190,349
|
|
|
$
|
38,311
|
|
|
$
|
234,070
|
|
The operating income information presented above includes the impact of restructuring and impairment charges related to the Company's restructuring plan. Charges incurred and expected to be incurred by segment in connection with the restructuring plan are as follows:
14
|
Costs Incurred
|
Estimated Costs to be Incurred
|
|||||||||||||||
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
Three Months Ended December 31,
|
Total
|
||||||||||||
|
(In thousands)
|
2017 (1)
|
2017 (1)
|
2017 (1)
|
2017
|
||||||||||||
|
Costs recorded in restructuring and impairment charges:
|
||||||||||||||||
|
North America
|
$
|
30,965
|
|
$
|
33,563
|
|
$
|
49,000
|
|
$
|
82,563
|
|
||||
|
EMEA
|
184
|
|
184
|
|
8,000
|
|
8,184
|
|
||||||||
|
Asia-Pacific
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
Latin America
|
6,039
|
|
6,540
|
|
—
|
|
6,540
|
|
||||||||
|
Connected Fitness
|
47,810
|
|
47,810
|
|
—
|
|
47,810
|
|
||||||||
|
Total costs recorded in restructuring and impairment charges
|
$
|
84,998
|
|
$
|
88,097
|
|
$
|
57,000
|
|
$
|
145,097
|
|
||||
(1) This table excludes additional non-cash charges of
$3.6 million
for the three and nine months ended September 30, 2017 associated with the reduction of inventory outside of current liquidation channels in line with the restructuring plan.
Net revenues by product category are as follows:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Net Revenues
|
|||||||||||||||
|
Apparel
|
$
|
939,364
|
|
$
|
1,021,185
|
|
$
|
2,335,454
|
|
$
|
2,300,596
|
|
|||
|
Footwear
|
285,052
|
|
278,891
|
|
791,637
|
|
785,843
|
|
|||||||
|
Accessories
|
123,487
|
|
121,832
|
|
335,172
|
|
302,267
|
|
|||||||
|
Total net sales
|
1,347,903
|
|
1,421,908
|
|
3,462,263
|
|
3,388,706
|
|
|||||||
|
License revenues
|
34,324
|
|
29,484
|
|
83,639
|
|
69,923
|
|
|||||||
|
Connected Fitness
|
23,388
|
|
20,181
|
|
65,290
|
|
62,179
|
|
|||||||
|
Intersegment eliminations
|
—
|
|
—
|
|
—
|
|
(750
|
)
|
|||||||
|
Total net revenues
|
$
|
1,405,615
|
|
$
|
1,471,573
|
|
$
|
3,611,192
|
|
$
|
3,520,058
|
|
|||
15
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, our anticipated charges and restructuring costs and the timing of these measures, the development and introduction of new products, the implementation of our marketing and branding strategies and future benefits and opportunities from acquisitions and other significant investments. 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, 2016
filed with the Securities and Exchange Commission (“SEC”) (our “
2016
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.” These factors include without limitation:
|
•
|
changes in general economic or market conditions that could affect overall consumer spending or our industry;
|
|
•
|
changes to the financial health of our customers;
|
|
•
|
our ability to successfully execute our restructuring plan and realize its expected benefits;
|
|
•
|
our ability to effectively drive operational efficiency in our business;
|
|
•
|
any disruptions, delays or deficiencies in the design or implementation of our new global operating and financial reporting information technology system;
|
|
•
|
our ability to effectively manage our growth and a more complex global business;
|
|
•
|
our ability to comply with existing trade and other regulations, and the potential impact of new trade and tax regulations on our profitability;
|
|
•
|
our ability to successfully manage or realize expected results from acquisitions and other significant investments or capital expenditures;
|
|
•
|
our ability to effectively develop and launch new, innovative and updated products;
|
|
•
|
fluctuations in the costs of our 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;
|
|
•
|
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, including due to port disruptions;
|
|
•
|
our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
|
|
•
|
the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology, including risks related to the implementation of our new global operating and financial reporting information technology system;
|
|
•
|
our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
|
16
|
•
|
risks related to foreign currency exchange rate fluctuations;
|
|
•
|
our ability to effectively market and maintain a positive brand image;
|
|
•
|
risks related to data security or privacy breaches;
|
|
•
|
our ability to raise additional capital required to grow our business on terms acceptable to us;
|
|
•
|
our potential exposure to litigation and other proceedings; and
|
|
•
|
our ability to attract key talent and retain the services of 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 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. The Under Armour Connected Fitness platform powers the world's largest digital health and fitness community and our strategy is focused on engaging with these consumers and increasing awareness and sales of our products. We plan to grow this community by developing innovative applications, services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live.
Our net revenues grew to
$4,825.3 million
in
2016
from
$1,834.9 million
in
2012
. We believe that our growth in net revenues has been driven by increasing consumer interest in our products and the strength of the Under Armour brand in the market place. Our long-term growth strategy is focused on increased sales of our products through ongoing product innovation, investment in our distribution channels, international expansion and engaging with consumers through our Connected Fitness business. While we plan to continue to invest in growth, we also plan to improve efficiencies throughout our business as we seek to gain scale through our operations and return on our investments.
Financial highlights for the
three months ended September 30, 2017
as compared to the prior year period include:
|
•
|
Net revenues
decreased
4.5%
.
|
|
•
|
Wholesale revenue
decreased
13.2%
and Direct to Consumer revenue increased
14.6%
.
|
|
•
|
Apparel revenue
decreased
8.0%
. Footwear and accessories revenues
grew
2.2%
and
1.4%
, respectively.
|
|
•
|
Revenue in our North America segment
decreased
12.1%
. Revenue in our Asia-Pacific, EMEA and Latin America segments
grew
51.9%
,
21.7%
and
32.8%
, respectively.
|
|
•
|
Selling, general and administrative expense
decreased
0.2%
.
|
|
•
|
Gross margin
decreased
160
basis points.
|
On July 27, 2017, our Board of Directors approved a restructuring plan (the “restructuring plan”) to more closely align our financial resources with our critical priorities of the business. Our original expectation was to incur estimated pre-tax restructuring and related charges of approximately $110.0 to $130.0 million for the year ended December 31, 2017. In the third quarter of 2017, we recognized approximately
$59.9 million
of pre-tax charges in connection with this restructuring plan, which included
$31.2 million
of asset impairments and
$28.7 million
of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, we also recognized restructuring related goodwill impairment charges of approximately
$28.6 million
for our Connected Fitness business which was not included our original range estimate. Inclusive of the goodwill impairment, we now expect to incur total pre-tax restructuring and related charges of approximately
$140.0
to
$150.0
million for the year ending December 31, 2017
.
General
Net revenues comprise net sales, license revenues and Connected Fitness revenues. Net sales comprise sales from our primary product categories, which are apparel, footwear and accessories. Our license revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on their products. Our Connected Fitness revenues consist of digital advertising, digital fitness platform licenses and subscriptions from our Connected Fitness business.
17
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 Connected Fitness revenues, primarily website hosting costs and other costs related to our Connected Fitness 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
$25.5 million
and
$25.7 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$74.5 million
and
$65.1 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain and corporate services categories. Personnel costs are included in these categories based on the employees’ function. Personnel costs include salaries, benefits, incentives 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.
Other expense, net
consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments and unrealized and realized gains and losses on adjustments 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, |
|||||||||||||
|
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Net revenues
|
$
|
1,405,615
|
|
$
|
1,471,573
|
|
$
|
3,611,192
|
|
$
|
3,520,058
|
|
|||
|
Cost of goods sold
|
760,265
|
|
772,949
|
|
1,962,172
|
|
1,863,151
|
|
|||||||
|
Gross Profit
|
645,350
|
|
698,624
|
|
1,649,020
|
|
1,656,907
|
|
|||||||
|
Selling, general and administrative expenses
|
498,172
|
|
499,314
|
|
1,495,992
|
|
1,403,336
|
|
|||||||
|
Restructuring and impairment charges
|
84,998
|
|
—
|
|
88,097
|
|
—
|
|
|||||||
|
Income from operations
|
62,180
|
|
199,310
|
|
64,931
|
|
253,571
|
|
|||||||
|
Interest expense, net
|
(9,575
|
)
|
(8,189
|
)
|
(25,237
|
)
|
(18,476
|
)
|
|||||||
|
Other expense, net
|
(1,069
|
)
|
(772
|
)
|
(1,383
|
)
|
(1,025
|
)
|
|||||||
|
Income before income taxes
|
51,536
|
|
190,349
|
|
38,311
|
|
234,070
|
|
|||||||
|
Income tax expense (benefit)
|
(2,706
|
)
|
62,124
|
|
(1,349
|
)
|
80,322
|
|
|||||||
|
Net income
|
$
|
54,242
|
|
$
|
128,225
|
|
$
|
39,660
|
|
$
|
153,748
|
|
|||
18
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||
|
(As a percentage of net revenues)
|
2017
|
2016
|
2017
|
2016
|
|||||||
|
Net revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||
|
Cost of goods sold
|
54.1
|
%
|
52.5
|
%
|
54.3
|
%
|
52.9
|
%
|
|||
|
Gross profit
|
45.9
|
%
|
47.5
|
%
|
45.7
|
%
|
47.1
|
%
|
|||
|
Selling, general and administrative expenses
|
35.4
|
%
|
34.0
|
%
|
41.4
|
%
|
39.9
|
%
|
|||
|
Restructuring and impairment charges
|
6.0
|
%
|
—
|
%
|
2.4
|
%
|
—
|
%
|
|||
|
Income from operations
|
4.4
|
%
|
13.5
|
%
|
1.8
|
%
|
7.2
|
%
|
|||
|
Interest expense, net
|
(0.7
|
)%
|
(0.5
|
)%
|
(0.7
|
)%
|
(0.6
|
)%
|
|||
|
Other expense, net
|
(0.1
|
)%
|
(0.1
|
)%
|
—
|
%
|
—
|
%
|
|||
|
Income before income taxes
|
3.7
|
%
|
12.9
|
%
|
1.1
|
%
|
6.6
|
%
|
|||
|
Income tax expense (benefit)
|
(0.2
|
)%
|
4.2
|
%
|
—
|
%
|
2.2
|
%
|
|||
|
Net income
|
3.9
|
%
|
8.7
|
%
|
1.1
|
%
|
4.4
|
%
|
|||
Consolidated Results of Operations
Three Months Ended
September 30, 2017
Compared to Three Months Ended
September 30, 2016
Net revenues
decreased
$66.0 million
, or
4.5%
, to
$1,405.6 million
for the
three months ended September 30, 2017
from
$1,471.6 million
during the same period in
2016
.
Net revenues by product category are summarized below:
|
|
Three Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
||||||||||
|
Apparel
|
$
|
939,364
|
|
$
|
1,021,185
|
|
$
|
(81,821
|
)
|
(8.0
|
)%
|
|||
|
Footwear
|
285,052
|
|
278,891
|
|
6,161
|
|
2.2
|
%
|
||||||
|
Accessories
|
123,487
|
|
121,832
|
|
1,655
|
|
1.4
|
%
|
||||||
|
Total net sales
|
1,347,903
|
|
1,421,908
|
|
(74,005
|
)
|
(5.2
|
)%
|
||||||
|
License revenues
|
34,324
|
|
29,484
|
|
4,840
|
|
16.4
|
%
|
||||||
|
Connected Fitness
|
23,388
|
|
20,181
|
|
3,207
|
|
15.9
|
%
|
||||||
|
Total net revenues
|
$
|
1,405,615
|
|
$
|
1,471,573
|
|
$
|
(65,958
|
)
|
(4.5
|
)%
|
|||
The
decrease
in net sales was driven primarily by:
|
•
|
A decline in apparel unit sales in multiple categories led by outdoor, women's training and youth performance, partially offset by unit sales growth in golf and sportstyle.
|
License revenues
increased
$4.8 million
, or
16.4%
, to
$34.3 million
for the
three months ended September 30, 2017
from
$29.5 million
during the same period in
2016
driven primarily by increased revenue from our licensing partners in North America.
Connected Fitness
revenue
increased
$3.2 million
, or
15.9%
, to
$23.4 million
for the
three months ended September 30, 2017
from
$20.2 million
during the same period in
2016
, primarily driven by an increase in partnership revenue.
Gross profit
decreased
$53.2 million
to
$645.4 million
for the
three months ended September 30, 2017
from $
698.6 million
for the same period in
2016
. Gross profit as a percentage of net revenues, or gross margin,
decreased
160
basis points to
45.9%
for the
three months ended September 30, 2017
compared to
47.5%
during the same period in
2016
. The
decrease
in gross margin percentage was primarily driven by the following:
|
•
|
approximate 100 basis point decrease due to inventory management strategies in North America including pricing and a higher concentration of sales to our off price partners, which we expect to continue for the remainder of the year;
|
|
•
|
approximate 50 basis point decrease driven by higher air freight;
|
|
•
|
approximate 50 basis point decrease due to our international business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and
|
|
•
|
approximate 30 basis point decrease due to the write-off of inventory as a part of our restructuring plan.
|
The above decreases were partially offset by:
19
|
•
|
approximate 50 basis point increase driven by favorable product input costs; and
|
|
•
|
approximate 20 basis point increase driven by the weakening of the U.S. dollar positively impacting our gross margin within our businesses outside of the United States.
|
Selling, general and administrative expenses
decreased
$1.1 million
to $
498.2 million
for the
three months ended September 30, 2017
from
$499.3 million
for the same period in
2016
. Within selling, general and administrative expense:
|
•
|
Marketing costs
increased
$4.4 million
to
$143.9 million
for the
three months ended September 30, 2017
from
$139.5 million
for the same period in
2016
. This
increase
was primarily due to increased marketing in connection with the growth of our international business, partially offset by decreased marketing spend in our North America direct-to-consumer business. As a percentage of net revenues, marketing costs
increased
to
10.2%
for the
three months ended September 30, 2017
from
9.5%
for the same period in
2016
.
|
|
•
|
Other costs
decreased
$5.5 million
to
$354.3 million
for the
three months ended September 30, 2017
from
$359.8 million
for the same period in
2016
. This
decrease
was driven primarily by the reversal of incentive compensation accruals, which was partially offset by higher personnel and other costs incurred for the continued expansion of our direct-to-consumer distribution channel, including increased costs related to retail stores, distribution facilities and our e-commerce business. As a percentage of net revenues, other costs
increased
to
25.2%
for the
three months ended September 30, 2017
from
24.4%
for the same period in
2016
.
|
As a percentage of net revenues, selling, general and administrative expenses
increased
to
35.4%
for the
three months ended September 30, 2017
compared to
34.0%
for the same period in
2016
, primarily due to the decrease in net revenue described above.
Income from operations
decreased
$137.1 million
to $
62.2 million
for the
three months ended September 30, 2017
from income of $
199.3 million
for the same period in
2016
, and as a percentage of net revenues
decreased
to
4.4%
for the
three months ended September 30, 2017
from
13.5%
for the same period in
2016
. Income from operations for the
three months ended September 30, 2017
was negatively impacted by
$85.0 million
of restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net
increased
$1.4 million
to
$9.6 million
for the
three months ended September 30, 2017
from
$8.2 million
for the same period in
2016
. This increase was primarily due to an increase in borrowing on our revolving credit facility.
Other expense, net
increased
$0.3 million
to expense of
$1.1 million
for the
three months ended September 30, 2017
from expense of
$0.8 million
for the same period in
2016
.
Provision for income taxes
decreased
$64.8 million
to a benefit of
$2.7 million
during the
three months ended September 30, 2017
from
$62.1 million
during the same period in
2016
. For the
three months ended September 30, 2017
, our effective tax rate was
(5.3)%
compared to
32.6%
for the same period in
2016
. The effective tax rate for the
three months ended September 30, 2017
was
lower
than the effective tax rate for the
three months ended September 30, 2016
, primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges (See Note
3
to our Consolidated Financial Statements) and the recording of certain valuation allowances.
Nine Months Ended
September 30, 2017
Compared to
Nine Months Ended
September 30, 2016
Net revenues
increased
$91.1 million
, or
2.6%
, to
$3,611.2 million
for the
nine months ended September 30, 2017
from
$3,520.1 million
during the same period in
2016
. Net revenues by product category are summarized below:
|
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
||||||||||
|
Apparel
|
$
|
2,335,454
|
|
$
|
2,300,596
|
|
$
|
34,858
|
|
1.5
|
%
|
|||
|
Footwear
|
791,637
|
|
785,843
|
|
5,794
|
|
0.7
|
%
|
||||||
|
Accessories
|
335,172
|
|
302,267
|
|
32,905
|
|
10.9
|
%
|
||||||
|
Total net sales
|
3,462,263
|
|
3,388,706
|
|
73,557
|
|
2.2
|
%
|
||||||
|
License revenues
|
83,639
|
|
69,923
|
|
13,716
|
|
19.6
|
%
|
||||||
|
Connected Fitness
|
65,290
|
|
62,179
|
|
3,111
|
|
5.0
|
%
|
||||||
|
Intersegment eliminations
|
—
|
|
(750
|
)
|
750
|
|
100.0
|
%
|
||||||
|
Total net revenues
|
$
|
3,611,192
|
|
$
|
3,520,058
|
|
$
|
91,134
|
|
2.6
|
%
|
|||
20
The
increase
in net sales was driven primarily by:
|
•
|
Apparel unit sales growth in men's training and golf, partially offset by unit sales decline in outdoor;
|
|
•
|
Footwear unit sales growth in run, partially offset by unit sales decline in basketball; and
|
|
•
|
Accessories unit sales growth led by men's training.
|
License revenues
increased
$13.7 million
, or
19.6%
, to
$83.6 million
during the
nine months ended September 30, 2017
from
$69.9 million
during the same period in
2016
, driven primarily by increased revenue from our licensing partners in North America.
Connected Fitness
revenue
increased
$3.1 million
, or
5.0%
, to
$65.3 million
during the
nine months ended September 30, 2017
from
$62.2 million
during the same period in
2016
, primarily driven by a increases in paid subscribers and an increase in advertising and partnership revenues, partially offset by a decrease in hardware sales as we discontinued connected hardware sales as part of our restructuring plan.
Gross profit
decreased
$7.9 million
to
$1,649.0 million
for the
nine months ended September 30, 2017
from
$1,656.9 million
for the same period in
2016
. Gross profit as a percentage of net revenues, or gross margin,
decreased
140
basis points to
45.7%
for the
nine months ended September 30, 2017
compared to
47.1%
for the same period in
2016
. The
decrease
in gross margin percentage was primarily driven by the following:
|
•
|
approximate 90 basis point decrease due to inventory management and pricing strategies in North America, which we expect to continue for the remainder of the year;
|
|
•
|
approximate 50 basis point decrease driven by higher air freight;
|
|
•
|
approximate 30 basis point decrease due to our international business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and;
|
|
•
|
approximate 20 basis point decrease driven by the strengthening of the U.S. dollar negatively impacting our gross margins within our businesses outside of the United States.
|
The above decreases were partially offset by:
|
•
|
approximate 50 basis point increase driven by favorable sales channel mix due to higher direct to consumer sales as a percentage of total sales, which we expect to continue for the remainder of the year.
|
Selling, general and administrative expenses
increased
$92.7 million
to
$1,496.0 million
for the
nine months ended September 30, 2017
from
$1,403.3 million
for the same period in
2016
. As a percentage of net revenues, selling, general and administrative expenses
increased
to
41.4%
for the
nine months ended September 30, 2017
, compared to
39.9%
for the same period in
2016
. Within in selling, general and administrative expense:
|
•
|
Marketing costs
increased
$38.5 million
to
$408.3 million
for the
nine months ended September 30, 2017
from
$369.8 million
for the same period in
2016
. This
increase
was primarily due to the timing of marketing expenses related to investments in our collegiate and professional athlete sponsorships and increased marketing in connection with the growth of our international business, partially offset by decreased marketing spend in our North America direct-to-consumer business. As a percentage of net revenues, marketing costs
increased
to
11.3%
for the
nine months ended September 30, 2017
from
10.5%
for the same period in
2016
.
|
|
•
|
Other costs
increased
$54.2 million
to
$1,087.7 million
for the
nine months ended September 30, 2017
from
$1,033.5 million
for the same period in
2016
. This
increase
was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, which was partially offset by the reversal of incentive compensation accruals. Other costs for the
nine months ended September 30, 2016
included $24.5 million of expense related to the bankruptcy and liquidation of one of our wholesale customers. As a percentage of net revenues, other costs
increased
to
30.1%
for the
nine months ended September 30, 2017
, from
29.4%
for the same period in
2016
.
|
Income from operations
decreased
$188.7 million
to
$64.9 million
for the
nine months ended September 30, 2017
from
$253.6 million
for the same period in
2016
, and as a percentage of net revenues
decreased
to
1.8%
for the
nine months ended September 30, 2017
from
7.2%
for the same period in
2016
. Income from operations for the
nine months ended September 30, 2017
was negatively impacted by
$88.1 million
of restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net
increased
$6.7 million
to
$25.2 million
for the
nine months ended September 30, 2017
from
$18.5 million
for the same period in
2016
. This
increase
was primarily due to interest on the $600 million in Senior Notes issued in June of 2016 and an increase in borrowing on our revolving credit facility.
Other expense, net
increased
$0.4 million
to
$1.4 million
for the
nine months ended September 30, 2017
from
$1.0 million
for the same period in
2016
.
21
Provision for income taxes
decreased
$81.6 million
to a benefit of
$1.3 million
during the
nine months ended September 30, 2017
from
$80.3 million
of expense during the same period in
2016
. For the
nine months ended September 30, 2017
, our effective tax rate was
(3.5)%
compared to
34.3%
for the same period in
2016
. The effective tax rate for the
nine months ended September 30, 2017
was lower than the effective tax rate for the
nine months ended September 30, 2016
, primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges (see Note
3
to our Consolidated Financial Statements) and the recording of certain valuation allowances.
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 expenses within North America have not been allocated to our other segments. Intersegment revenue is generated by Connected Fitness which runs advertising campaigns for other segments. Due to the individual materiality of our Asia-Pacific segment, we have separately presented our Asia-Pacific, EMEA and Latin America segments, and will no longer combine these segments for presentation purposes. Net revenues and operating income by segment presented for prior periods have been conformed to the current presentation.
Three Months Ended
September 30, 2017
Compared to Three Months Ended
September 30, 2016
Net revenues
by segment are summarized below:
|
|
Three Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
1,077,088
|
|
$
|
1,225,188
|
|
$
|
(148,100
|
)
|
(12.1
|
)%
|
|||
|
EMEA
|
127,932
|
|
105,099
|
|
22,833
|
|
21.7
|
%
|
||||||
|
Asia-Pacific
|
130,320
|
|
85,810
|
|
44,510
|
|
51.9
|
%
|
||||||
|
Latin America
|
46,887
|
|
35,295
|
|
11,592
|
|
32.8
|
%
|
||||||
|
Connected Fitness
|
23,388
|
|
20,181
|
|
3,207
|
|
15.9
|
%
|
||||||
|
Total net revenues
|
$
|
1,405,615
|
|
$
|
1,471,573
|
|
$
|
(65,958
|
)
|
(4.5
|
)%
|
|||
The
decrease
in total net revenues was driven by the following:
|
•
|
Net revenues in our North America operating segment
decreased
$148.1 million
to
$1,077.1 million
for the
three months ended September 30, 2017
from
$1,225.2 million
for the same period in
2016
primarily due to lower sales in our wholesale channel driven by lower demand and operational challenges.
|
|
•
|
Net revenues in our EMEA operating segment
increased
$22.8 million
to
$127.9 million
for the
three months ended September 30, 2017
from
$105.1 million
for the same period in
2016
primarily due to unit sales growth to wholesale partners in the United Kingdom and Germany.
|
|
•
|
Net revenues in our Asia-Pacific operating segment
increased
$44.5 million
to
$130.3 million
for the
three months ended September 30, 2017
from
$85.8 million
for the same period in
2016
primarily due to store growth in China and South Korea.
|
|
•
|
Net revenues in our Latin America operating segment
increased
$11.6 million
to
$46.9 million
for the
three months ended September 30, 2017
from
$35.3 million
for the same period in
2016
primarily due to unit sales growth in our wholesale and direct-to-consumer channels in Brazil and Mexico.
|
|
•
|
Net revenues in our Connected Fitness operating segment
increased
$3.2 million
to
$23.4 million
from
$20.2 million
for the same period in
2016
primarily driven by an increase in partnership revenue.
|
Operating income (loss)
by segment is summarized below:
|
|
Three Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
65,827
|
|
$
|
182,840
|
|
$
|
(117,013
|
)
|
(64.0
|
)%
|
|||
|
EMEA
|
16,977
|
|
8,383
|
|
8,594
|
|
102.5
|
%
|
||||||
|
Asia-Pacific
|
34,173
|
|
27,151
|
|
7,022
|
|
25.9
|
%
|
||||||
|
Latin America
|
(10,223
|
)
|
(10,550
|
)
|
327
|
|
3.1
|
%
|
||||||
|
Connected Fitness
|
(44,574
|
)
|
(8,514
|
)
|
(36,060
|
)
|
(423.5
|
)%
|
||||||
|
Total operating income
|
$
|
62,180
|
|
$
|
199,310
|
|
$
|
(137,130
|
)
|
(68.8
|
)%
|
|||
The
decrease
in total operating income was driven by the following:
22
|
•
|
Operating income in our North America operating segment
decreased
$117.0 million
to
$65.8 million
operating income for the
three months ended September 30, 2017
from
$182.8 million
for the same period in
2016
primarily due to the decreases in net sales and gross margin discussed above in the Consolidated Results of Operations and $31.0 million in restructuring and impairment charges.
|
|
•
|
Operating income in our EMEA operating segment
increased
$8.6 million
to
$17.0 million
for the
three months ended September 30, 2017
from
$8.4 million
for the same period in
2016
primarily due the sales growth discussed above.
|
|
•
|
Operating income in our Asia-Pacific operating segment
increased
$7.0 million
to
$34.2 million
for the
three months ended September 30, 2017
from
$27.2 million
for the same period in
2016
primarily due to the sales growth discussed above. This increase was offset by investments in our direct to consumer business and entry into new territories.
|
|
•
|
Operating loss in our Latin America operating segment
decreased
$0.3 million
to
$10.2 million
for the
three months ended September 30, 2017
from
$10.6 million
for the same period in
2016
primarily due to the sales growth discussed above, partially offset by $6.0 million in restructuring and impairment charges
|
|
•
|
Operating loss in our Connected Fitness segment
increased
$36.1 million
to
$44.6 million
for the
three months ended September 30, 2017
from
$8.5 million
for the same period in
2016
primarily due to $47.8 million in restructuring and impairment charges.
|
Nine Months Ended
September 30, 2017
Compared to
Nine Months Ended
September 30, 2016
Net revenues
by segment are summarized below:
|
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
2,778,165
|
|
$
|
2,932,915
|
|
$
|
(154,750
|
)
|
(5.3
|
)%
|
|||
|
EMEA
|
334,683
|
|
237,559
|
|
97,124
|
|
40.9
|
%
|
||||||
|
Asia-Pacific
|
309,712
|
|
188,985
|
|
120,727
|
|
63.9
|
%
|
||||||
|
Latin America
|
123,342
|
|
99,170
|
|
24,172
|
|
24.4
|
%
|
||||||
|
Connected Fitness
|
65,290
|
|
62,179
|
|
3,111
|
|
5.0
|
%
|
||||||
|
Intersegment eliminations
|
—
|
|
(750
|
)
|
750
|
|
100.0
|
%
|
||||||
|
Total net revenues
|
$
|
3,611,192
|
|
$
|
3,520,058
|
|
$
|
91,134
|
|
2.6
|
%
|
|||
The
increase
in total net revenues was driven by the following:
|
•
|
Net revenues in our North America operating segment
decreased
$154.8 million
to
$2,778.2 million
for the
nine months ended September 30, 2017
from
$2,932.9 million
for the same period in
2016
primarily due to lower sales in our wholesale channel driven by lower demand and operational challenges.
|
|
•
|
Net revenues in our EMEA operating segment
increased
$97.1 million
to
$334.7 million
for the
nine months ended September 30, 2017
from
$237.6 million
for the same period in
2016
primarily due to unit sales growth to wholesale partners in the United Kingdom and Germany.
|
|
•
|
Net revenues in our Asia-Pacific operating segment
increased
$120.7 million
to
$309.7 million
for the
nine months ended September 30, 2017
from
$189.0 million
for the same period in
2016
primarily due to store growth in China and South Korea.
|
|
•
|
Net revenues in our Latin America operating segment
increased
$24.2 million
to
$123.3 million
for the
nine months ended September 30, 2017
from
$99.2 million
for the same period in
2016
primarily due to unit sales growth to wholesale partners and through our direct to consumer channels in Mexico, Chile, and Brazil.
|
|
•
|
Net revenues in our Connected Fitness operating segment
increased
$3.1 million
to
$65.3 million
for the
nine months ended September 30, 2017
from
$62.2 million
for the same period in
2016
primarily driven by a increases in paid subscribers and an increase in advertising and partnership revenues partially offset by a decrease in hardware sales.
|
23
Operating income (loss)
by segment is summarized below:
|
|
Nine Months Ended September 30,
|
|||||||||||||
|
(In thousands)
|
2017
|
2016
|
$ Change
|
% Change
|
||||||||||
|
North America
|
$
|
64,124
|
|
$
|
251,084
|
|
$
|
(186,960
|
)
|
(74.5
|
)%
|
|||
|
EMEA
|
13,990
|
|
8,348
|
|
5,642
|
|
67.6
|
%
|
||||||
|
Asia-Pacific
|
69,050
|
|
54,399
|
|
14,651
|
|
26.9
|
%
|
||||||
|
Latin America
|
(26,175
|
)
|
(27,751
|
)
|
1,576
|
|
5.7
|
%
|
||||||
|
Connected Fitness
|
(56,058
|
)
|
(32,509
|
)
|
(23,549
|
)
|
(72.4
|
)%
|
||||||
|
Total operating income
|
$
|
64,931
|
|
$
|
253,571
|
|
$
|
(188,640
|
)
|
(74.4
|
)%
|
|||
The
decrease
in total operating income was driven by the following:
|
•
|
Operating income in our North America operating segment
decreased
$187.0 million
to
$64.1 million
for the
nine months ended September 30, 2017
from
$251.1 million
for the same period in
2016
primarily due to the decreases in net sales and gross margin discussed above in the Consolidated Results of Operations and $33.6 million in restructuring and impairment charges. Operating income in our North America operating segment for the nine months ended September 30, 2016 was negatively impacted by $24.5 million of expense related to the liquidation of one of our wholesale customers.
|
|
•
|
Operating income in our EMEA operating segment
increased
$5.6 million
to
$14.0 million
for the
nine months ended September 30, 2017
from
$8.3 million
for the same period in
2016
primarily due sales growth discussed above, which was partially offset by costs related to a distributor termination.
|
|
•
|
Operating income in our Asia-Pacific operating segment
increased
$14.7 million
to
$69.1 million
for the
nine months ended September 30, 2017
from
$54.4 million
for the same period in
2016
primarily due to the sales growth discussed above. This increase was offset by investments in our direct to consumer business and entry into new territories.
|
|
•
|
Operating loss in our Latin America operating segment
decreased
$1.6 million
to
$26.2 million
for the
nine months ended September 30, 2017
from
$27.8 million
for the same period in
2016
primarily due to the sales growth discussed above partially offset by $6.5 million in restructuring and impairment charges.
|
|
•
|
Operating loss in our Connected Fitness segment
increased
$23.5 million
to
$56.1 million
for the
nine months ended September 30, 2017
from
$32.5 million
for the same period in
2016
primarily due to $47.8 million in restructuring and impairment charges.
|
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.
We believe our cash and cash equivalents on hand, cash from operations, our ability to access the debt capital markets and borrowings available to us under our credit agreement and other financing instruments are adequate to
24
meet our liquidity needs and capital expenditure requirements for at least the next twelve months. As of
September 30, 2017
, we had
$1.0 billion
of remaining availability under our revolving credit facility. 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 on terms acceptable to us or at all.
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)
|
2017
|
2016
|
|||||
|
Net cash provided by (used in):
|
|||||||
|
Operating activities
|
$
|
(29,193
|
)
|
$
|
(36,033
|
)
|
|
|
Investing activities
|
(227,572
|
)
|
(316,042
|
)
|
|||
|
Financing activities
|
256,881
|
|
402,273
|
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
7,416
|
|
(96
|
)
|
|||
|
Net increase in cash and cash equivalents
|
$
|
7,532
|
|
$
|
50,102
|
|
|
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, impairment charges, stock-based compensation, excess tax benefits from stock-based compensation arrangements, deferred income taxes and changes in reserves and 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
$6.8 million
to
$29.2 million
for the
nine months ended September 30, 2017
from
$36.0 million
during the same period in
2016
. The
decrease
in cash
used in
operating activities was due to a
decrease
in net cash outflows from operating assets and liabilities of
$42.7 million
offset by an
decrease
in net income adjusted for non-cash items of
$35.9 million
. The
decrease
in cash outflows related to changes in operating assets and liabilities period over period was primarily driven by:
|
•
|
an
increase
in the change in accounts receivable of
$204.1 million
in the current period compared to the prior period, primarily due to the timing of cash collections from new customers; partially offset by
|
|
•
|
a
decrease
in income taxes payable and receivable of
$127.2 million
and a
decrease
in inventories of
$57.2 million
.
|
Investing Activities
Cash
used in
investing activities
decreased
$88.4 million
to
$227.6 million
for the
nine months ended September 30, 2017
from
$316.0 million
for the same period in
2016
, primarily due to lower capital expenditures.
Capital expenditures for the full year
2017
are expected to be approximately
$300.0 million
, comprised primarily of investments in our distribution centers and retail stores.
Financing Activities
Cash
provided by
financing activities
decreased
$145.4 million
to
$256.9 million
for the
nine months ended September 30, 2017
from
$402.3 million
for the same period in
2016
. This
decrease
was primarily due to lower borrowings on our revolving credit facility.
Capital Resources
Credit Facility
25
We are
party to a credit agreement that provides revolving credit commitments for up to
$1.25 billion
of borrowings, as well as term loan commitments, in each case maturing in
January 2021
. As of
September 30, 2017
, there was
$270.0 million
outstanding under the revolving credit facility and
$167.5 million
of term loan borrowings outstanding.
At
our
request and the lender's consent, revolving and or term loan borrowings may be increased by up to
$300.0 million
in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time
we seek
to incur such borrowings.
The borrowings under the revolving credit facility have maturities of less than one year. Up to
$50.0 million
of the facility may be used for the issuance of letters of credit. There were
$4.6 million
of letters of credit outstanding as of
September 30, 2017
.
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
("consolidated leverage ratio"). The method of calculating these ratios is set forth in
our
credit agreement and differs from how rating agencies or other companies may calculate similar measures. As of
September 30, 2017
, 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.
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) 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 weighted average interest rates under the outstanding term loans and revolving credit facility borrowings were
2.4%
and
2.2%
during the
nine months ended September 30, 2017
and
2016
, respectively. We pay
a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit.
As of
September 30, 2017
,
the commitment fee was
15.0
basis points.
3.250% Senior Notes
In June 2016,
we
issued
$600.0 million
aggregate principal amount of
3.250%
senior unsecured notes due
June 15, 2026
(the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes),
we
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole” amount applicable to such Notes as described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes),
we
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Notes contains covenants, including limitations that restrict
our
ability and the ability of certain of
our
subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and
our
ability to consolidate, merge or transfer all or substantially all of
our
properties or assets to another person, in each case subject to material exceptions described in the indenture.
Other Long Term Debt
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
our
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, 2017
,
December 31, 2016
and
September 30, 2016
,
the outstanding balance on the loan was
$40.5 million
,
$42.0 million
and
$42.5 million
, respectively.
The weighted average interest rate on the loan was
2.7%
and
2.5%
for the three and
nine months ended September 30, 2017
, respectively.
Interest expense, net was
$9.6 million
and
$8.2 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$25.2 million
and
$18.5 million
for the
nine months ended September 30, 2017
, and
2016
, respectively.
Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities
.
26
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
Other than the borrowings and repayments disclosed above in the "Capital Resources" section and changes which occur in the normal course of business, there were no significant changes to the contractual obligations reported in our
2016
Form 10-K as updated in our Form 10-Q for the quarter ended
September 30, 2017
.
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
2016
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
2016
Form 10-K. There were no significant changes to our critical accounting policies during the
nine months ended September 30, 2017
.
Recently Issued Accounting Standards
Refer to Note
2
to the notes to our financial statements included in this Form 10-Q for our assessment of recently issued accounting standards.
27
There have been no significant changes to our market risk since
December 31, 2016
. For a discussion of our exposure to market risk, refer to our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Evaluation of Disclosure Controls and Procedures
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 defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. 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.
Changes in Internal Controls
In 2015, we began the process of implementing a global operating and financial reporting information technology system, SAP Fashion Management Solution ("FMS"), as part of a multi-year plan to integrate and upgrade our systems and processes. The first phase of this implementation became operational on July 5, 2017, in our North America, EMEA, and Connected Fitness operations. We believe the implementation of the systems and related changes to internal controls will enhance our internal controls over financial reporting. We also believe the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change and will continue to evaluate the operating effectiveness of related key controls during subsequent periods.
We are currently in the process of developing an implementation strategy and roll-out plan for FMS in our Asia-Pacific and Latin America operations over the next several years.
As the phased implementation of this system occurs, we will experience certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. While we expect FMS to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolve. For a discussion of risks related to the implementation of new systems, see Item 1A - "Risk Factors - Risks Related to Our Business - Risks and uncertainties associated with the implementation of information systems may negatively impact our business" in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
There have been no other changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the most recent fiscal quarter that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.
28
From time to time, we are involved in litigation and other proceedings, including matters related to commercial and intellectual property, as well as trade, regulatory and other claims related to our business. See Note
5
to our Consolidated Financial Statements for information on certain legal proceedings, which is incorporated by reference herein.
In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider 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, 2016. The Company is supplementing those risk factors by adding the Risk Factor set forth below.
Our restructuring plan may not be successful, or we may not fully realize the expected benefits of our restructuring plan or other operating or cost-saving initiatives.
During the third quarter of 2017, we announced a restructuring plan designed to more closely align our financial resources against the critical priorities of our business. This plan included a reduction in our global workforce, as well as other initiatives to improve operational efficiencies. Restructuring plans present significant potential risks that may impair our ability to achieve anticipated operating improvements and/or cost reductions. These risks include, among others, higher than anticipated costs in implementing our restructuring plans, management distraction from ongoing business activities, damage to our reputation and brand image and workforce attrition beyond planned reductions. If we are unable to successfully implement and manage our restructuring plans, we may not achieve our targeted operational improvements and efficiencies, including planned cost reductions. This could adversely impact our operating results and financial condition, and our future results of operations. In addition, if we fail to achieve targeted operating improvements and/or cost reductions, we may be required to implement additional restructuring-related activities, which may be dilutive to our earnings in the short term.
|
Exhibit
No.
|
|
|
Section 302 Chief Executive Officer Certification
|
|
|
Section 302 Chief Financial Officer Certification
|
|
|
Section 906 Chief Executive Officer Certification
|
|
|
Section 906 Chief Financial Officer Certification
|
|
|
101.INS
|
XBRL Instance Document
|
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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29
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.
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UNDER ARMOUR, INC.
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By:
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/s/ D
AVID
E. B
ERGMAN
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David E. Bergman
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Chief Financial Officer
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Date:
November 8, 2017
30
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 1. Legal ProceedingsItem 1A. Risk FactorsItem 6. Exhibits