UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________
Form 10-K
______________________________________________
(Mark One)
|
| | | | |
þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172020
or
|
| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-33202
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
| Maryland | | 52-1990078 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1020 Hull Street Baltimore, Maryland 21230 | | (410) 454-6428 |
| (Address of principal executive offices) (Zip Code) | | (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | |
| Class A Common Stock | UAA | New York Stock Exchange |
| Class C Common Stock | UA | New York Stock Exchange |
| (Title of each class) | (Trading Symbols) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesþNo ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨Noþ
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. Yesþ 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 (§229.405 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.files). Yes þ No ¨
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 or Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”company,”and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☑ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | |
Large accelerated filerþ
| | Accelerated filer ¨
|
Non-accelerated filer ¨(Do not check if a smaller reporting company)
| Smaller reporting company¨
|
| | Emerging growth company¨ | ☐ |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes¨☐ Noþ
As of June 30, 2017,2020, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the registrant’s Class A Common Stock and Class C Common Stock held by non-affiliates was $4,001,622,620$1,827,569,777 and $3,838,231,258,$2,007,651,870, respectively.
As of January 31, 2018,2021, there were 185,279,913188,619,343 shares of Class A Common Stock, 34,450,000 shares of Class B Convertible Common Stock and 222,442,673231,983,924 shares of Class C Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Under Armour, Inc.’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 201813, 2021 are incorporated by reference in Part III of this Form 10-K.
UNDER ARMOUR, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
| | | | | | | | | | | |
| | | |
| | | |
| Item 1. | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Item 1A. | | | |
| Item 1B. | | | |
| Item 2 | | | |
| Item 3 | | | |
| Item 4 | | | |
| | | |
| | | |
Item 1. | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Item 1A. | | | |
Item 1B. | | | |
Item 2 | | | |
Item 3 | | | |
| | | |
Item 4 | | | |
| | | |
| | | |
| Item 5 | | | |
| Item 6 | | | |
| Item 7 | | | |
| Item 7A. | | | |
| Item 8 | | | |
| Item 9 | | | |
| Item 9A. | | | |
Item 9B.9B | | Other Information | | |
| | | |
| | | |
| Item 10. | | | |
| Item 11 | | | |
| Item 12 | | | |
| Item 13. | | | |
| Item 14. | | | |
| | | |
| | | |
| Item 15. | | | |
| Item 16 | | Form 10-K Summary | N/A |
| |
| |
PART I
Forward-Looking Statements
Some of the statements contained in this Form 10-K constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the impact of the COVID-19 pandemic on our business and results of operations, our plans to reduce our operating expenses, anticipated charges and restructuring costs, projected savings related to our restructuring plans and the timing thereof, the development and introduction of new products, the implementation of our marketing and branding strategies, and the future benefits and opportunities from 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-K 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 “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:
•the impact of the COVID-19 pandemic on our industry and our business, financial condition and results of operations;
•changes in general economic or market conditions that could affect overall consumer spending or our industry;
•increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;
•fluctuations in the costs of raw materials and commodities we use in our products and our supply chain;
•changes to the financial health of our customers;
•our ability to successfully execute our long-term strategies;
•our ability to effectively drive operational efficiency in our business and successfully execute any restructuring plans and realize their expected benefits;
•our ability to effectively develop and launch new, innovative and updated products;
•our ability to accurately forecast consumer shopping preferences and consumer demand for our products and manage our inventory in response to changing demands;
•loss of key customers, suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
•our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
•our ability to manage the increasingly complex operations of our global business;
•our ability to successfully manage or realize expected results from significant transactions and investments;
•our ability to effectively market and maintain a positive brand image;
•the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology;
•any disruptions, delays or deficiencies in the design, implementation or application of our global operating and financial reporting information technology system;
•our ability to attract key talent and retain the services of our senior management and key employees;
•our ability to access capital and financing required to manage our business on terms acceptable to us;
•our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
•risks related to foreign currency exchange rate fluctuations;
•our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
•risks related to data security or privacy breaches; and
•our potential exposure to litigation and other proceedings.
The forward-looking statements contained in this Form 10-K reflect our views and assumptions only as of the date of this Form 10-K. 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.
Throughout this Annual Report on Form 10-K: (i) the term "Fiscal 2021" means our fiscal year beginning on January 1, 2021 and ending December 31, 2021; (ii) the term “Fiscal 2020” means our fiscal year beginning on January 1, 2020 and ended December 31,2020; (iii) the term “Fiscal 2019” means our fiscal year beginning on January 1, 2019 and ended December 31, 2019; and (iv) the term “Fiscal 2018” means our fiscal year beginning on January 1, 2018 and ended December 31, 2018. Our Consolidated Financial Statements are presented in U.S. dollars. As used in this report, the terms “we,” “our,” “us,” “Under Armour” and the “Company” refer to Under Armour, Inc. and its subsidiaries unless the context indicates otherwise.
General
Our principal business activities are the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The brand’s performance apparel and footwear are engineered in many designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
OurWe generate net revenues are generated primarily from the wholesale salessale of our products globally to national, regional, independent and specialty retailerswholesalers and distributors. We also generate net revenue from the sale of our products through our direct to consumerdirect-to-consumer sales channel, which includes our brand and factory house stores and websites, frome-commerce websites. In addition, we generate net revenues through product licensing and fromas well as digital platform licensing andfitness subscriptions and digital advertising throughon our Connected Fitness business.applications. A large majority of our products are sold in North America; however we believe that our products appeal to athletes and consumers with active lifestyles around the globe. Internationally, our net revenues are generated from a mix of wholesale sales to retailers and distributors and sales through our direct to consumer sales channels, and license revenue from sales by our third party licensees.
We plan to continue to grow our business over the long term through increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution, growth in our direct to consumerdirect-to-consumer sales channel and expansion in international markets. Our digital strategy is focused on supporting these long term objectives, emphasizing connectingthe connection and engagingengagement with our consumers through multiple digital touch points, including through our Connected Fitness business.points.
We were incorporated as a Maryland corporation in 1996. As used in this report, the terms “we,” “our,” “us,” “Under Armour” and the “Company” refer to Under Armour, Inc. and its subsidiaries unless the context indicates otherwise. We have registered trademarks around the globe, including UNDER ARMOUR®ARMOUR®, HEATGEAR®HEATGEAR®, COLDGEAR®COLDGEAR®, ALLSEASONGEAR®UA HOVR™ and the Under Armour UA Logo, and we have applied to register many other trademarks. This Annual Report on Form 10-K also contains additional trademarks and tradenames of our Company and our subsidiaries. All trademarks and tradenames appearing in this Annual Report on Form 10-K are the property of their respective holders.
Products
Our product offerings consist of apparel, footwear and accessories for men, women and youth. We market our products at multiple price levels and provide consumers with products that we believe are a superior alternative to traditional athletic products. In 2017,Fiscal 2020, sales of apparel, footwear and accessories represented 66%64%, 21% and 9% of net revenues, respectively. Licensing arrangements primarily for the sale of our products, and revenue from our Connected Fitness business represented the remaining 4%6% of net revenues. In December 2020, we completed the sale of our MyFitnessPal platform, which represented the largest business within our Connected Fitness segment, as well as discontinued our Endomondo platform. We continue to offer digital fitness subscriptions through our MapMyFitness platform, which includes MapMyRun and MapMyRide. Refer to Note 1619 to the Consolidated Financial Statements for net revenues by product.
Apparel
Our apparel is offered in a variety of styles and fits intended to enhance comfort and mobility, regulate body temperature and improve performance regardless of weather conditions. Our apparel is engineered to replace traditional non-performance fabrics in the world of athletics and fitness with performance alternatives designed and merchandised along gearlines.with a variety of innovative techniques and product styles. Our three gearlines are marketed to tell a very simple story about our highly technical products and extend primarily across the sporting goods, outdoor and active lifestyleuse markets. We market our apparel for consumers to choose HEATGEAR®provide a benefit you never knew you needed, but can't imagine living without, including HEATGEAR® to wear
when it is hot, COLDGEAR®COLDGEAR® to wear when it is cold, and ALLSEASONGEAR® between the extremes. Within each gearlineor our RUSH™ or RECOVER™ designed to increase blood flow. Our apparel comes in three primary fit types: compression (tight fit), fitted (athletic fit) and loose (relaxed).
HEATGEAR®HEATGEAR® is designed to be worn in warm to hot temperatures under equipment or as a single layer. While a sweat-soaked traditional non-performance T-shirt can weigh two to three pounds, HEATGEAR®HEATGEAR® is engineered with a microfiber blend designed to wick moisture from the body which helps the body stay cool, dry and light. We offer HEATGEAR®HEATGEAR® in a variety of tops and bottoms in a broad array of colors and styles for wear in the gym or outside in warm weather.
COLDGEAR®COLDGEAR® is designed to wick moisture from the body while circulating body heat from hot spots to help maintain core body temperature. Our COLDGEAR®COLDGEAR® apparel provides both dryness and warmth in a single light layer
that can be worn beneath a jersey, uniform, protective gear or ski-vest, and our COLDGEAR®COLDGEAR® outerwear products protect the athlete, as well as the coach and the fan from the outside in. Our COLDGEAR®COLDGEAR® products generally sell at higher prices than our other gearlines.
ALLSEASONGEAR® is designed to be worn in between extreme temperatures and uses technical fabrics to keep the wearer cool and dry in warmer temperatures while preventing a chill in cooler temperatures.product styles.
Footwear
Our footwear offerings includeFootwear primarily includes products for running, basketball, cleated sports, slides, and performance training, and outdoor footwear.outdoor. Our footwear is light, breathable and built with performance attributes for athletes. Our footwear is designed with innovativeunder-foot cushioning technologies including UA HOVR™, Anafoam™UA Micro G®, UA Clutch Fit®Flow™, and Charged Cushioning®Cushioning®, which provide stabilization, directional cushioning and moisture management engineered to maximize the athlete’s comfort and control.a specific sport with advanced outsole construction.
Accessories
Accessories primarily includes the sale of athletic performance gloves, bags, headwear and headwear.sports masks. Our accessories include HEATGEAR® and COLDGEAR® technologies and are designed with advanced fabrications to provide the same level of performance as our other products.
Connected Fitness
We offer digital fitness subscriptions, along with digital advertising through our MapMyFitness platform, and until December 2020 through our MyFitnessPal and Endomondo applications.platforms. As noted above, in December 2020 we sold our MyFitnessPal platform and discontinued our Endomondo platform. Our MapMyFitness platform includes applications, such as MapMyRun and MapMyRide.
License
We have agreements with our licensees to develop certain Under Armour apparel, accessories and equipment. OurIn order to maintain consistent quality and performance, our product, marketing, sales and salesquality assurance teams are involved in substantially all steps of the design and go to market process in order to maintain brand and compliance standards and consistency. During 2017,2020, our licensees offered collegiate National Football League ("NFL), Major League Baseball ("MLB"), and National Basketball Association (“NBA”) apparel and accessories, baby and kids’youth apparel, team uniforms, socks, water bottles, eyewear phone and golf accessories and other specific hard goods equipment that feature performance advantages and functionality similar to our other product offerings.
Marketing and Promotion
We currently focus on marketing and selling our products to consumers primarily for use in athletics, fitness, and training outdoor activities, and as part ofwith an active lifestyle.emphasis on connecting with our target consumer - the focused performer. We seek to drive consumer demand by building brand equity and awareness that our products deliver advantages to help athletes perform better.
Sports Marketing
Our marketing and promotion strategy begins with providing and selling our products to high-performing athletes and teams onat the high school, collegiate and professional levels. We execute this strategy through outfitting agreements, professional, club, and collegiate sponsorships,sponsorship, individual athlete and influencer agreements and by providing and selling our products directly to team equipment managersteams and to individual athletes. We also seek to sponsor and host consumer events to drive awareness and brand authenticity from a grassroots level by hosting combines, camps and clinics for young athletes in many sports at regional sites across the country.sports. As a result, our products are seen on the field giving them exposure toand on the court, and by various consumer audiences through the internet, television, magazines and live at sporting events. This exposure to consumers helps us establish on-field authenticity as consumers can see our products being worn by high-performing athletes.
We are the official outfitter of athletic teams in several high-profile collegiate conferences.conferences as well as multiple
professional sport organizations supporting the athletes on and off the field. We are an official supplier of footwear and gloves to the NFL. We are the Official Performance Footwear Supplier of MLB and a partner with the NBA which allows us to market our NBA athletes in game uniforms in connection with our basketball footwear. We are the official headwear and performance apparel provider for the NFL Scouting Combine and the official partner and title sponsor of the NBA Draft Combine, in each case with the right to sell licensed combine training apparel and headwear. In 2016, we entered into an agreement to be the Official On-Field Uniform Supplier, Official Authentic Performance Apparel Partner, and Official Connected Fitness Partner of MLB, now beginning with the 2019 season, which will allow us to provide on-field uniforms, apparel, and accessories to all thirty MLB clubs on an exclusive basis, and, together with our manufacturing partner sell a broad range of MLB licensed merchandise. Internationally, we
sponsor and sell our products to several European and Latin American soccer and rugbyinternational sports teams, which helps to drive brand awareness in various countries and regions around the world.
Media
We feature our products in a variety of national digital, broadcast, and print media outlets. We also utilize social and mobile media to engage consumers and promote connectivity with our brand and our products and plan to increasewhile engaging with our use of social media promotion in the future.consumer throughout their performance journey. For example, in 2017,the first quarter of Fiscal 2020 we launched our first entirely digital marketinga new brand campaign, for our "Unlike Any" women's campaign,“The Only Way Is Through”, which includedwas introduced during a variety of content on variousPerformance Summit with over 180 social media influencers and was re-activated through brand authentic moments across the calendar year. Additionally, during the initial wave of the COVID-19 pandemic, we transitioned our campaign from “The Only Way is Through” to "Through This Together" that provided consumers with at home workout solutions across various digital platforms.
Retail Presentation
The primary componentgoal of our retail marketing strategy is to increase brand floor space dedicated to our products within our major retail accounts. The design and funding of Under Armour point of sale displays and concept shops within our major retail accounts has been a key initiative for securing prime floor space, educating the consumer and creating an exciting environment for the consumer to experience our brand. Under Armour point of sale displays and concept shops enhance our brand’s presentation within our major retail accounts with a shop-in-shop approach, using dedicated floor space exclusively for our products, including flooring, lighting, walls, displays and images.
Sales and Distribution
The majority of our sales are generated through wholesale channels, which include national and regional sporting goods chains, independent and specialty retailers, department store chains, mono-branded Under Armour retail stores in certain international markets, institutional athletic departments and leagues and teams. In addition,various countries where we do not have direct sales operations, we sell our products to independent distributors in various countries whereor we generally do not have direct sales operations and through licensees.engage licensees to sell our products.
We also sell our products directly to consumers through our own network of brand and factory house stores in our North America, Europe, the Middle East and Africa (“EMEA”), Latin America and Asia-Pacific operating segments, and through e-commerce websites globally. Factory house store products are specifically designed for sale in our factory house stores and serve an important role in our overall inventory management by allowing us to sell a significant portion of excess, discontinued and out-of-season products, while maintaining the pricing integrity of our brand in our other distribution channels. Through our brand house stores, consumers experience the premium full expression of our brand first-hand and havewhile having broader access to our performance products. In 2017,Fiscal 2020, sales through our wholesale, direct to consumer,direct-to-consumer, licensing and Connected Fitness channels represented 61%53%, 35%41%, 2% and 2%3% of net revenues, respectively.
We believe the trend toward performance products is global and plan to continue to introduce our products and simple merchandising story to athletes throughout the world. We plan to continue to grow our business over the long term in part through continued expansion in new and established international markets. We are introducing our performance apparel, footwearproducts and accessoriesservices outside of North America in a manner consistent with our past brand-building strategy, including selling our products directly to teams and individual athletes in these markets, thereby providing us with product exposure to broad audiences of potential consumers.
Our primary business operates in four geographic segments: (1) North America, comprising the United States and Canada, (2) EMEA,Europe, the Middle East and Africa ("EMEA"), (3) Asia-Pacific, and (4) Latin America. Each of these geographic segments operate predominantly in one industry: the design, development, marketing and distribution of branded performance apparel, footwear and accessories. We also operate our Connected Fitness business as a separate segment. TheEffective January 1, 2021, following table presentsthe sale of MyFitnessPal and the winding down of the Endomondo platform in December 2020, revenues for the remaining MapMyFitness business will be included in Corporate Other, and Connected Fitness will no longer be a separate reportable segment. Refer to Note 19 to the Consolidated Financial Statements for net revenues by segment.
Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, for each of the years ending December 31, 2017, 2016including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and 2015:other corporate support functions; costs related to our global assets and global marketing, costs related to our headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (In thousands) | Net Revenues | | % of Net Revenues | | Net Revenues | | % of Net Revenues | | Net Revenues | | % of Net Revenues |
| North America | $ | 3,802,406 |
| | 76.5 | % | | $ | 4,005,314 |
| | 83.0 | % | | $ | 3,455,737 |
| | 87.2 | % |
| EMEA | 469,997 |
| | 9.4 |
| | 330,584 |
| | 6.9 |
| | 203,109 |
| | 5.1 |
|
| Asia-Pacific | 433,647 |
| | 8.7 |
| | 268,607 |
| | 5.6 |
| | 144,877 |
| | 3.7 |
|
| Latin America | 181,324 |
| | 3.6 |
| | 141,793 |
| | 2.9 |
| | 106,175 |
| | 2.7 |
|
| Connected Fitness | 89,179 |
| | 1.8 |
| | 80,447 |
| | 1.6 |
| | 53,415 |
| | 1.3 |
|
| Intersegment Eliminations | — |
| | — |
| | (1,410 | ) | | — |
| | — |
| | — |
|
| Total net revenues | $ | 4,976,553 |
| | 100.0 | % | | $ | 4,825,335 |
| | 100.0 | % | | $ | 3,963,313 |
| | 100.0 | % |
North America
Our North America segment accounted for approximately 76.5%66% of our net revenues for 2017. Fiscal 2020. Approximately 31% of our net revenues were generated from our international segments in Fiscal 2020. Approximately 3% of our net revenues were generated from our Connected Fitness segment in Fiscal 2020.No customer accounted for more than 10% of our net revenues in Fiscal 2020. Refer to Note 19 to the Consolidated Financial Statements for net revenues by segment.
North America
We sell our branded apparel, footwear and accessories in North America through our wholesale and direct to consumerdirect-to-consumer channels. Net revenues generated from the sales of our products in the United States were $3.6 billion, $3.8$2.7 billion and $3.3$3.4 billion for the years ended December 31, 2017, 2016Fiscal 2020 and 20152019, respectively. See Note 16 to the Consolidated Financial Statements. No customers accounted for more than 10% of our net revenues in 2017.
Our direct to consumerdirect-to-consumer sales are generated through our brand and factory house stores and internet websites.e-commerce website. As of December 31, 2017,2020, we had 162176 factory house stores in North America primarily located in outlet centers throughout the United States.States and Canada. As of December 31, 2017,2020, we had 1918 brand house stores in North America.America throughout the United States and Canada. Consumers can purchase our products directly from our e-commerce website, www.underarmour.com.
In addition, we earn licensing revenue in North America based on our licensees’ sale of collegiate and league apparel and accessories, as well as sales of other licensed products. In order to maintain consistent quality and performance, we pre-approve all products manufactured and sold by our licensees, and our quality assurance team strives to ensure that the products meet the same quality and compliance standards as the products that we sell directly.
We distribute the majority of our products sold to our North American wholesale customers and our brandown retail stores and factory house storese-commerce businesses from distribution facilities we lease and operate in California, Maryland and Tennessee. In addition, we distribute our products in North America through third-party logistics providers with primary locations in Canada, New Jersey and Florida. In some instances, we arrange to have products shipped from the factories that manufacture our products directly to customer-designated facilities.
International
Approximately 21.7% of our net revenues were generated from our international segments in 2017. We plan to continue to grow our business over the long term in part through expansion in international markets.
EMEA
We sell our apparel, footwear and accessories primarily through wholesale customers, website operations, independent distributors, e-commerce websites, and a limited number ofbrand and factory house stores we operate in certain European countries.within Europe. We also sell our branded products to various sports clubs and teams in Europe. We generally distribute our products to our retail customers and e-commerce consumers in Europe through a third-party logistics provider.provider in the Netherlands as well as a bonded warehouse in the United Kingdom. We sell our apparel, footwear and accessories through independent distributors in the Middle East, Africa and Africa. In 2017 we began selling our products to wholesale customers in Russia.
Asia-Pacific
We sell our apparel, footwear and accessories products in China, South Korea, Australia and AustraliaIndia through stores operated by our distribution and wholesale partners, along with website operationse-commerce websites and brand and factory house stores we operate. In March 2020, we completed the acquisition of our Southeast Asia distribution partner, and now have direct sales operations in Singapore, Malaysia and Thailand. We also sell our products to distributors in New Zealand, Taiwan, Hong Kong and other countries in Southeast Asia where we do not have direct sales operations. We distribute our products in Asia-Pacific primarily through a third-party logistics providerproviders based out ofin Hong Kong.Kong, China, South Korea, Australia and India.
We have a license agreement with Dome Corporation, which produces, markets and sells our branded apparel, footwear and accessories in Japan. Our branded products are sold in Japan to large sporting goods retailers, independent specialty stores and professional sports teams, and through licensee-owned retail stores. We hold a cost-based minorityan equity method investment in Dome.
Latin America
We sell our products through wholesale customers in Mexico, Chile, BrazilArgentina and ArgentinaColombia. We also sell though e-commerce websites, our own brand houses and factory houses in both Mexico and Chile, while we sell through wholesale customers, website operationspartner stores in Argentina and brandColombia. During the fourth quarter of Fiscal 2020, we determined to change to a distributor model in Chile and factory house stores.have executed an asset sale agreement. We expect to close this sale in early Fiscal 2021. In these countries we operate through third-party distribution facilities. Incertain other Latin AmericanAmerica countries we distribute our products through independent distributors which are sourced primarily through our international distribution hubshub in Hong Kong, JordanPanama. We have license and Panama.distribution agreements with third parties that sells our products in Brazil and other markets within the region.
Connected Fitness
In 2013,Thoughout Fiscal 2020, we began offeringoffered digital fitness subscriptions, and licenses, along with digital advertising through our MapMyFitness, platform. In 2015, we acquired theMyFitnessPal and Endomondo platforms. Our MapMyFitness platform includes applications, such as MapMyRun and MyFitnessPal platforms to create our Connected Fitness business. Approximately 1.8% of our net revenues were generated from our Connected Fitness business in 2017.MapMyRide. We plan to engage and grow this community by developing innovative services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live.
Seasonality
Historically, As noted above, in December 2020, we have recognized a majoritycompleted the sale of our net revenuesMyFitnessPal platform, which represented the largest business within our Connected Fitness segment and a significant portion ofdiscontinued 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. We generally expect inventory, accounts payable and certain accrued expenses to be higher in the second and third quarters in preparation for the fall selling season.Endomondo platform.
Product Design and Development
Our products are developed in collaboration with our product development teams and manufactured with technical fabrications produced by third parties and developed in collaboration with our product development teams.parties. This approachapproach enables us to select and create superior, technically advanced fabrics, producedmaterials, curated to our specifications, while focusing our product development efforts on design, fit, climatestyle, performance and product end use.fit.
WeWith a mission to make athletes better, we seek to regularly upgrade and improve our products with the latest in innovative technology while broadening our product offerings. Our goal, to deliver superior performance in all our products, provides ourproducts. Our developers and licensees with a clear, overarching direction for the brand and helps themproactively identify new opportunities to create and improve performance products that meet the changingevolving needs of athletes.our consumer. We design products with “visible technology,”consumer-valued technologies, utilizing color, texture and fabrication to enhance our customers’consumers perception and understanding of product use and benefits.
Our product development team works closely with our sports marketing and sales teams as well as professional and collegiate athletes to identify product trends and determine market needs. For example, these teams worked closely to identify the opportunity and market for our COLDGEAR® Infrared product, which is a ceramic print technology on the inside of our garments that provides athletes with lightweight warmth, and Speedform®UA HOVR™, a proprietary 3-dimensional molding technology for footwear which delivers superior fitunderfoot cushioning wrapped in a mesh web, equipped with a MapMyRun powered sensor designed to deliver energy return and feel. In 2017 we also opened our newest center for footwear performance innovation located in Portland, Oregon, bringing together footwear design and development teams into a centralized location.real-time coaching.
Sourcing, Manufacturing and Quality Assurance
Many of the specialty fabrics and other raw materials used in our apparel products are technically advanced products developed by third parties and may be available, in the short term, from a limited number of sources. The fabric and other raw materials usedused to manufacture our apparel products are sourced by our contracted manufacturers from a limited number of suppliers pre-approved by us.us. In 2017,Fiscal 2020, approximately 53%39% of the fabric used in our apparel products came from five suppliers.5suppliers. These fabric suppliers have primary locations in Taiwan, China, Malaysia, and Mexico.Vietnam. The fabrics used by our suppliers and manufacturers are primarily synthetic fabrics and involve raw materials, including petroleum based products that may be subject to price fluctuations and shortages. We also use cotton in some of our apparel products as a blended fabric and also in our CHARGED COTTON® line.. Cotton is a commodity that is subject to price fluctuations and supply shortages. Additionally, our footwear uses raw materials that are sourced from a diverse base of third party suppliers. This includes chemicals and petroleum-based components such as rubber that are also subject to price fluctuations and supply shortages.
Substantially all of our products are manufactured by unaffiliated manufacturers. In 2017,Fiscal 2020, our apparel and accessories products were manufacturedmanufactured by 3950 primary contract manufacturers, operating in 17 countries,18 countries, with approximately 61%approximately 68% of our apparel and accessories products manufactured in Vietnam, Jordan, Vietnam, ChinaMalaysia and Malaysia.China. Of our 3950 primary contract manufacturers, 10 produced approximately 57% of of our apparel and accessories products. In 2017,Fiscal 2020, our footwear products were manufactured by seven primarysix primary contract manufacturers, operating primarily in Vietnam, ChinaIndonesia and Indonesia. Of our seven primaryChina. These six primary contract manufacturers five produced approximately 83% substantially all of ourour footwear products.
All manufacturers across all product divisions are evaluated for quality systems, social compliance and financial strength by our internal teams prior to being selected and on an ongoing basis. Where appropriate, we strive to qualify multiple manufacturers for particular product types and fabrications. We also seek out vendors that can perform multiple manufacturing stages, such as procuring raw materials and providing finished products, which helps us to control our cost of goods sold. We enter into a variety of agreements with our contract manufacturers, including non-disclosure and confidentiality agreements, and we require that all of our manufacturers adhere to a code of conduct regarding quality of manufacturing, and working conditions and other social concerns. We do not, however, have any long term agreements requiring us to utilize any manufacturer, and no manufacturer is required to produce our products infor the long term. We have subsidiaries strategically located near our key partners to support our manufacturing, quality assurance and sourcing efforts for our products. We also manufacture a limited number of products, primarily for high-
profilehigh-profile athletes and teams, on-premises in our quick turn, Special Make-Up Shop located at one of our facilities in Maryland.
Inventory Management
Inventory management is important to the financial condition and operating results of our business. We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. 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, including our new global operating and financial reporting information
technology system, 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.
Our practice, and the general practice in the apparel, footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities.
Intellectual Property
We believe we own the material trademarks used in connection with the marketing, distribution and sale of our products, both domestically and internationally, where our products are currently sold or manufactured. Our major trademarks include the UA Logo and UNDER ARMOUR®ARMOUR®, both of which are registered in the United States, Canada, Mexico, the European Union, Japan, China and numerous other countries. We also own trademark registrations for other trademarks including, among others, UA®UA®, ARMOUR®ARMOUR®, HEATGEAR®HEATGEAR®, COLDGEAR®, ALLSEASONGEAR®COLDGEAR®, PROTECT THIS HOUSE®HOUSE®, I WILL®WILL®, and many trademarks that incorporate the term ARMOUR such as ARMOURSTORM®, ARMOUR®ARMOUR® FLEECE and ARMOUR BRA®BRA®. We also own applicationsregistrations to protect our connected fitness branding such as UNDER ARMOUR CONNECTED FITNESS™.MapMyFitness® and associated MapMy marks. We own domain names for our primary trademarks (most notably underarmour.com and ua.com) and hold copyright registrations for several commercials, as well as for certain artwork. We intend to continue to strategically register, both domestically and internationally, trademarks and copyrights we utilize today and those we develop in the future. We will continue to aggressively enforcepolice our trademarks and pursue those who infringe, both domestically and internationally.
We believe the distinctive trademarks we use in connection with our products are important in building our brand image and distinguishing our products from those of others. These trademarks are among our most valuable assets. In addition to our distinctive trademarks, we also place significant value on our trade dress, which is the overall image and appearance of our products, and we believe our trade dress helps to distinguish our products in the marketplace.
We traditionally have had limited patent protection on muchsome of the technology, materials and processes used in the manufacture of our products. In addition, patents are increasingly important with respect to our innovative products and new businesses and investments, particularly in our Connected Fitness business.investments. As we continue to expand and drive innovation in our products, we expect to seek patent protection on products, features and concepts we believe to be strategic and important to our business. We will continue to strategically file patent applications where we deem appropriate to protect our new products, innovations and designs.designs that align with our corporate strategy. We expect the number of applications to increase as our business grows and as we continue to expand our products and innovate.
Competition
The market for performance apparel, footwear and accessories is highly competitive and includes many new competitors as well as increased competition from established companies expanding their production and marketing of performance products. Our competitors include, among others, Nike, Adidas, Puma and lululemon athletica, some of which are large apparel and footwear companies with strong worldwide brand recognition and significantly greater resources than us. Many of the fabrics and technology used in manufacturing our products are not unique to us, and we own a limited number of fabric or process patents. Many of our competitors are large apparel and footwear companies with strong worldwide brand recognition and significantly greater resources than us, such as Nike and Adidas. We also compete with other manufacturers, including those specializing in performance apparel and footwear, and private label offerings of certain retailers, including some of our retail customers.
In addition, we must compete with others for purchasing decisions, as well as limited floor space at retailers. We believe we have been successful in this area because of the relationships we have developed and as a result of the strong sales of our products. However, if retailers earn higher margins from our competitors’ products, they may favor the display and sale of those products.
We believe we have been able to compete successfully because of our brand image and recognition, the performance and quality of our products and our selective distribution policies. We also believe our focused gearlineproduct style merchandising story differentiates us from our competition. In the future we expect to compete for consumer preferences and expect that we may face greater competition on pricing. This may favor larger competitors with lower production costs per unit that can spread the effect of price discounts across a larger array of products and across a larger customer base than ours. The purchasing decisions of consumers for our products often reflect
highly subjective preferences that can be influenced by many factors, including advertising, media, product sponsorships, product improvements and changing styles.
EmployeesHuman Capital Management
Under Armour is led by its purpose—We Empower Those Who Strive for More—and our teammates, who bring their different backgrounds, experiences and perspectives, are central to driving our long-term success as an organization and brand. Consistent with our purpose, we believe that our brand is stronger when our collective team is fully engaged and working together to support our athletes around the world. We also believe that having an engaged, diverse and committed workforce not only enhances our culture, it drives our business success, ultimately helping us to deliver the most innovative products that make athletes better. Our human capital management strategy is therefore focused on creating an inclusive workplace where our teammates can thrive by attracting, developing and retaining talent through a competitive total rewards program, numerous development opportunities and a diverse, inclusive and engaging work environment.
As of December 31, 2017,2020, we had approximately 15,800 employees,16,600 teammates worldwide, including approximately 9,90012,000 in our brand and factory house stores and approximately 1,5001,300 at our distribution facilities. Approximately 6,9007,000 of our employeesteammates were full-time. MostOf our approximately 9,600 part-time teammates, approximately 27% were seasonal teammates.
Diversity, Equity and Inclusion
Our commitment to diversity, equity and inclusion starts at the top with a highly skilled and diverse Board of Directors. Our Board of Directors has ongoing oversight of our employeeshuman capital management strategies and programs and regularly reviews our progress towards achieving our diversity, equity and inclusion goals.
We have set measurable goals for improving diversity amongst our team, including a commitment to increase the number of historically underrepresented teammates throughout the levels of leadership within our organization by 2023. These goals are locatedpublicly outlined on our corporate website, where we also publish our representation statistics annually. We are also committed to continuing to increase representation of women in the United States. Nonekey areas of our employeesbusiness particularly in leadership, commercial and technical roles globally. Our annual incentive plan for all teammates, including executives, incorporates performance measures in furtherance of our diversity, equity and inclusion goals.
As of December 31, 2020:
•the race and ethnicity of our teammate population in the United States, are currently covered by a collective bargaining agreementincluding teammates in our brand and there are no material collective bargaining agreements in effect in anyfactory house stores and our distribution facilities, was 51% White, 21% Hispanic or Latino, 17% Black or African American, 6% Asian and 5% other;
•the race and ethnicity of our international"director" level and above positions in the United States was 78% White, 7% Hispanic or Latino, 7% Black or African American, 6% Asian and 2% other; and
•53% of our global teammates were women, and women represented 37% of our “director” level and above positions.
In addition to building a more diverse team, we believe fostering an inclusive and ethical culture is key to our values and who we are as an organization. We believe open lines of communication are critical to fostering this environment. This starts with “tone at the top” and we emphasize the importance of our Code of Conduct and encourage our teammates to “speak-up” when they have concerns. We require unconscious bias training for all of our corporate teammates and our retail and distribution facility leadership, including training focused on promoting diversity during our new-hire interview process. In Fiscal 2020, we launched a company-wide virtual series to facilitate meaningful conversations on anti-racism and racial justice issues. For our senior leadership, we require mandatory training on cultural competency and building inclusive environments. We also invest in professional development specifically for our historically underrepresented and women teammates to improve retention and advancement. We currently have nine teammate-led Teammate Resource Groups, which amplify business initiatives, provide networking opportunities, support community outreach and promote cultural awareness. In addition, in Fiscal 2020 we established the Global T.E.A.M. (Teammate Equity and Accountability Movement) Council, our internal diversity, equity and inclusion council, comprising “director” level and above corporate teammates focused on fostering a diverse and inclusive work environment across our organization.
Total Rewards
Our total rewards strategy is focused on providing market competitive and internally equitable total rewards packages that allow us to attract, engage and retain a talented, diverse and inclusive workforce. In determining our
compensation practices, we focus on offering competitive pay that is based on market data with packages that appropriately reflect roles and geographic locations. We have had no labor-relatedbelieve in “pay for performance” and seek to design plans and programs to support a culture of high performance where we reward what is accomplished and how. We are also committed to achieving pay equity within all teammate populations, and with the assistance of third-party experts, conduct an annual review of pay equity and market comparison data. When we identify opportunities, we take prompt actions to close any gaps.
Our total rewards programs, which are outlined on the careers page of our corporate website, are aimed at the varying health, financial and home-life needs of our teammates. In the United States, where approximately 69% of our workforce is located, in addition to market-competitive pay and broad-based bonuses, our full-time teammates are eligible for healthcare benefits; health savings accounts; flexible spending accounts; retirement savings plan; paid time off; family, maternity and paternity leave; adoption assistance; child and adult care resources; flexible work stoppages,schedules; short and long term disability; life and accident insurance; tuition assistance; fitness benefits at on-site gyms or eligible fitness programs; commuter benefits; Under Armour merchandise discounts; and a Work-Life Assistance Program. We believe in promoting alignment between our teammates and stockholders. As such, these teammates are also eligible to participate in our Employee Stock Purchase Plan, and corporate teammates within our “director” level and above positions receive restricted stock unit awards as a key component of their total compensation package. Outside of the United States, we provide similarly competitive benefit packages to those of our U.S.-teammates but tailored to market-specific practices and needs.
We believe that giving back to the communities where we live and work is central to our culture. In addition to competitive time off benefits, our full-time teammates also receive 40 hours of additional paid time off each year for personal volunteer activities performed during working hours.
Talent Development and Engagement
Our purpose of empowering those who strive for more is embodied in our commitment to helping our teammates develop their skills, grow their careers and achieve their goals. We believe our relationsinvestment in these areas enhances our teammate engagement, improves the efficiency and productivity of our work and ultimately drives better results for our business. We prioritize and invest in a wide range of training and development opportunities for teammates at all levels, including through both online and instructor-led internal and external programs. All of our teammates have access to an online learning platform and knowledge database, Armour U, which offers an extensive, regularly updated library of seminars on a variety of topics. We also offer resources to support individual development planning, including emphasizing development opportunities as part of teammates’ annual goal setting process.
We invest in developing the leadership strength and capabilities of people-leaders at all levels, including through trainings focused on how to effectively manage, communicate with and drive the performance of teams. Through our employeessuccession planning efforts, we further focus on talent development for key roles within our organization.
We believe these efforts keep our teammates engaged and motivated to do their best work. We regularly collect feedback to better understand and improve our teammate experience and identify opportunities to continually strengthen our culture.
Health and Safety
In Fiscal 2020, the COVID-19 pandemic brought unprecedented challenges to our business, our communities, our athletes and our teammates. As we managed through these challenges, we prioritized the health, safety and overall well-being of our teammates. We implemented a new COVID-19 sick leave policy, which offers full-time and part-time teammates in the United States and Canada additional paid sick time if they are good.unable to work due to COVID-19 related circumstances, including experiencing COVID-19 related symptoms. At each of our office, retail store and distribution house locations, we follow applicable local, state and national government regulations, laws and recommended guidance. At our distribution houses, which have remained open, we have implemented government-recommended COVID-19 prevention measures, including reworking all job areas to reduce close contact, implementing daily health questioning, enhancing cleaning protocols, requiring face coverings and social distancing and adding physical distancing barriers and increased hand sanitizing stations. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - COVID-19,” in Fiscal 2020, primarily in the second and third quarters, we closed many of our brand and factory house retail stores due to the COVID-19 pandemic. As we have reopened certain of our retail stores, in addition to requiring daily teammate wellness assessments, we have implemented COVID-19 prevention measures at these locations similar to those described above. With respect to our corporate teammates, many of our corporate offices remain closed (including our global headquarters) or are open in a limited capacity and the majority of our corporate teammates have shifted
to working remotely. We offer resources for teammates working remotely, which are targeted at optimizing remote work environments and managing COVID-19 related challenges and address topics such as office ergonomics and mental and emotional health and well-being.
Available Information
We will make available free of charge on or through our website at www.underarmour.comhttps://about.underarmour.com/ our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as reasonably practicable after we electronically file these materials with the Securities and Exchange Commission. We also post on this website our key corporate governance documents, including our board committee charters, our corporate governance guidelines and our code of conduct and ethics.
Information About Our Executive Officers
Our executive officers are:
| | | | | | | | | | | | | | |
| Name | | Age | | Position |
| Kevin Plank | | 48 | | Executive Chairman and Brand Chief |
| Patrik Frisk | | 58 | | Chief Executive Officer and President |
| David Bergman | | 48 | | Chief Financial Officer |
| Colin Browne | | 57 | | Chief Operating Officer |
| Lisa Collier | | 55 | | Chief Product Officer |
| Alessandro de Pestel | | 55 | | Chief Marketing Officer |
| Stephanie Pugliese | | 50 | | President of the Americas |
| Tchernavia Rocker | | 47 | | Chief People and Administrative Officer |
| John Stanton | | 60 | | General Counsel and Corporate Secretary |
Kevin Plank has been Executive Chairman and Brand Chief since January 2020. Prior to that, he served as Chief Executive Officer and Chairman of the Board of Directors from 1996, when he founded our Company, to 2019, and President from 1996 to July 2008 and August 2010 to July 2017. Mr. Plank also serves on the Board of Directors of the National Football Foundation and College Hall of Fame, Inc., and is a member of the Board of Trustees of the University of Maryland College Park Foundation.
Patrik Frisk has been Chief Executive Officer and President and a member of our Board of Directors since January 2020. Prior to that, he served as President and Chief Operating Officer from July 2017 to December 2019. Prior to Under Armour, he was Chief Executive Officer of The ALDO Group, a global footwear and accessories company. Previous to that, he spent more than a decade with VF Corporation where he held numerous leadership positions including Coalition President of Outdoor Americas (The North Face® and Timberland®), President of the Timberland® brand, President of Outdoor & Action Sports (EMEA), and Vice President and General Manager of The North Face®. Before joining VF Corporation, Mr. Frisk ran his own retail business in Scandinavia and held senior positions with Peak Performance and W.L. Gore & Associates.
David Bergman has been Chief Financial Officer since November 2017. Mr. Bergman joined the Company in 2005 and has served in various Finance and Accounting leadership roles for the Company, including Corporate Controller from 2006 to October 2014, Vice President of Finance and Corporate Controller from November 2014 to January 2016, Senior Vice President, Corporate Finance from February 2016 to January 2017, and acting Chief Financial Officer from February 2017 to November 2017. Prior to joining the Company, Mr. Bergman worked as a C.P.A. within the audit and assurance practices at Ernst & Young LLP and Arthur Andersen LLP.
Colin Browne has been Chief Operating Officer since February 2020. Prior to that, he served as Chief Supply Chain Officer from July 2017 to January 2020 and President of Global Sourcing from September 2016 to June 2017. Prior to joining our Company, he served as Vice President and Managing Director for VF Corporation, leading its sourcing and product supply organization in Asia and Africa from November 2013 to August 2016 and as Vice President of Footwear Sourcing from November 2011 to October 2013. Prior thereto, Mr. Browne served as Executive Vice President of Footwear and Accessories for Li and Fung Group LTD from September 2010 to
November 2011 and Chief Executive Officer, Asia for Pentland Brands PLC from April 2006 to January 2010. Mr. Browne has over 25 years of experience leading sourcing efforts for large brands.
Lisa K. Collier has been Chief Product Officer since April 2020. Prior to joining our Company, Ms. Collier served as President, Chief Executive Officer and Chairman of NYDJ (Not Your Daughter’s Jeans) from June 2016 to January 2020. Prior thereto, Ms. Collier served as Executive Vice President and President of Global Dockers Brand of Levi Strauss & Company from July 2013 to May 2016 and as Chief Transformation Officer from October 2013 to January 2015. Ms. Collier also served as Senior Vice President of Product Development and Innovation across all brands from 2012 to 2013, Senior Vice President Global Dockers Merchandising, Licensing, Supply Chain from 2010 to 2012, as Managing Director and General Manager of Levi Strauss Australia and New Zealand from 2007 to 2011, and prior to that in various other leadership roles at Levi Strauss & Company. Ms. Collier served in various leadership roles at Sunrise Brands (formerly Tarrant Apparel Group) from 1999 to 2003. She also served in various merchandising positions at The Limited from 1987 to 1999 and started her career in retail and apparel at Hess’s Department Store.
Alessandro de Pestel has been Chief Marketing Officer since October 2018. Prior to joining our Company, he served as Executive Vice President of Global Marketing, Communications and Consumer Insights for Tommy Hilfiger Global from October 2014 to September 2018 and as Senior Vice President of Marketing and Communication from January 2007 to September 2014. Prior thereto, Mr. de Pestel served in various leadership roles in Marketing and Communications at brands such as Calvin Klein, Fila, Omega and Christian Dior from 1999 to 2006.
Stephanie Pugliese has been President of the Americas since June 2020. Prior to that she served as President of North America from September 2019 to May 2020. Prior to joining our Company, Ms. Pugliese served as Chief Executive Officer and President of Duluth Trading Company from February 2015 to August 2019, and as President from February 2012 to August 2019. Prior thereto, Ms. Pugliese served as President and Chief Operating Officer of Duluth Trading Company from February 2014 to February 2015, Senior Vice President and Chief Merchandising Officer from July 2010 to February 2012 and as Vice President of Product Development from November 2008 to July 2010. Ms. Pugliese also served in various leadership roles with Lands’ End, Inc. from 2005 to 2008 and at Ann Inc. from 2000 to 2003.
Tchernavia Rocker has been Chief People and Administrative Officer since June 2020. Prior to that she served as Chief People and Culture Officer from February 2019 to May 2020. Prior to joining our Company, she served more than 18 years in Human Resources leadership roles at Harley-Davidson, Inc., most recently as Vice President and Chief Human Resources Officer from June 2016 through January 2019, as General Manager, Human Resources from January 2012 through May 2016, and in various other Human Resources leadership positions since joining the company in 2000. Prior to that, she served in various HR and operations roles at Goodyear Dunlop North America Tire Inc.
John Stanton has been General Counsel since March 2013, and Corporate Secretary since February 2008. Prior thereto, he served as Vice President, Corporate Governance and Compliance from October 2007 to February 2013 and Deputy General Counsel from February 2006 to September 2007. Prior to joining our Company, he served in various legal roles at MBNA Corporation from 1993 to 2005, including as Senior Executive Vice President, Corporate Governance and Assistant Secretary. He began his legal career at the law firm Venable, LLP.
Forward-Looking Statements
Some of the statements contained in this Form 10-K and the documents incorporated herein by reference 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 impact of recent tax reform legislation on our results of operations, the development and introduction of new products and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-K and the documents incorporated herein by reference 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 “Risk Factors” 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 long-term strategies;
our ability to successfully execute any restructuring plans and realize expected benefits;
our ability to effectively drive operational efficiency in our business;
our ability to manage the increasingly complex operations of our 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 effectively develop and launch new, innovative and updated products;
our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands;
any disruptions, delays or deficiencies in the design, implementation or application of our new global operating and financial reporting information technology system;
increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;
fluctuations in the costs of our products;
loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner, 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;
our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
our ability to successfully manage or realize expected results from acquisitions and other significant investments or capital expenditures;
risks related to foreign currency exchange rate fluctuations;
our ability to effectively market and maintain a positive brand image;
the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology;
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 our senior management and key employees.
The forward-looking statements contained in this Form 10-K reflect our views and assumptions only as of the date of this Form 10-K. 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.
Our results of operations and financial condition could be adversely affected by numerous risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this Form 10-K. Should any of these risks actually materialize, our business, financial condition, results of operations and future prospects could be negatively impacted.
Economic and Industry Risks
The COVID-19 pandemic has caused significant disruption in our industry, which has and may continue to materially impact our business, financial condition and results of operations.
Our business has been and may continue to be materially impacted by the effects of the widespread outbreak of COVID-19, which was reported to have surfaced first in December 2019 and declared a global pandemic in March 2020. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and business restrictions, including mandatory closures, orders to “shelter-in-place” and restrictions on how businesses operate.
The COVID-19 pandemic materially negatively impacted our business and results of operations in Fiscal 2020, and the extent and duration of ongoing impacts remain uncertain. The pandemic resulted in temporary closures of our retail stores and the stores of our wholesale customers where our products are sold, reduced consumer traffic and consumer spending, temporary layoffs of certain employees in our North America retail stores and distribution centers and incremental operating expenses from adopting preventative health and safety measures in our stores and distribution centers. These negative impacts to our business may continue through Fiscal 2021 or later depending on the development of the virus and related responses. Related industries have been and may continue to be adversely affected, including distribution and logistics and manufacturing and textile production. Professional, collegiate and amateur sporting leagues, events and activities experienced postponements or cancellations. We are unable to predict with certainty the near and long-term impacts of the pandemic on consumer behavior. To the extent the impact of COVID-19 continues or worsens, consumer behavior may be altered for an extended period, which could impact our sales, cash generated from operations and liquidity and financial condition.
Additionally, the COVID-19 pandemic and resulting economic disruption has also led to significant volatility in the capital markets and adversely impacted our stock price. While we took measures throughout Fiscal 2020 to maintain our operations and preserve and enhance our access to liquidity, our cash generated from operations has been negatively impacted and future cash flows may be further impacted by the development of the pandemic. If we are unable to effectively manage our spending in response, our profitability may be negatively impacted. Further, currently many of our employees in our corporate offices are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. The disruption caused by the pandemic has also disrupted the operations of our business partners, including our customers, suppliers, and vendors, and the financial condition of certain of our partners has been significantly impacted. We cannot predict the impact the pandemic will continue to have on these partners and any material effect on these parties could negatively impact us.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed below, any of which could have a material effect on us. Though we continue to monitor the COVID-19 pandemic closely, the situation is changing rapidly, including a resurgence in many countries, and additional impacts may arise that we are not aware of currently.
During a downturn in the economy, consumer purchases of discretionary items are affected, which could materially harm our sales, profitability and financial condition.condition and our prospects for growth.
Many of our products may be considered discretionary items for consumers. Factors affecting the level of consumerMany factors impact discretionary spending, for such discretionary items includeincluding general economic conditions, unemployment, the availability of consumer credit and consumer confidence in future economic conditions. Uncertainty in global economic conditions continues, particularly in light of the impacts of COVID-19, and trends in consumer discretionary spending remain unpredictable. However,The United States and other countries have experienced a significant increase in unemployment and financial markets remain turbulent. Historically, consumer purchases of discretionary items tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty, which may lead to declines in sales and slow our long-term growth more than we anticipate. Aexpectations. Any near or long-term downturn in
the economies in markets in which we sell our products, particularly in North America,the United States, China or other key markets, may materially harm our sales, profitability and financial condition.
We derive a substantial portion of our sales from large wholesale customers. If the financial condition of our customers declines, our financial condition and results of operations could be adversely impacted.
In 2017, sales through our wholesale channel represented approximately 61% of our net revenues. We extend credit to our wholesale customers based on an assessment of a customer’s financial condition, generally without requiring collateral. We face increased risk of order reduction or cancellation when dealing with financially ailing customers or customers struggling with economic uncertainty. During weak economic conditions, customers may be more cautious with orders or may slow investments necessary to maintain a high quality in-store experience for consumers, which may result in lower sales of our products. In addition, a slowing economy in our key markets or a continued decline in consumer purchases of sporting goods generally could have an adverse effect on the financial health of our customers. From time to time certain of our customers have experienced financial difficulties. To the extent one or more of our customers experience significant financial difficulty, bankruptcy, insolvency or cease operations, this could have a material adverse effect on our sales, our ability to collect on receivables and our financial condition and results of operations.
A decline in sales to, or the loss of, one or more of our key customers could result in a material loss of net revenues and negatively impact our prospects for growth.
We generate a significant portion of our wholesale revenues from sales to our largest customers. We currently do not enter into long term sales contracts with our key customers, relying instead on our relationships with these customers and on our position in the marketplace. As a result, we face the risk that these key customers may not increase their business with us as we expect, or may significantly decrease their business with us or terminate their relationship with us. The failure to increase our sales to these customers as much as we anticipate would have a negative impact on our growth prospects and any decrease or loss of these key customers' business could result in a material decrease in our net revenues and net income. In addition, our customers continueas pandemic conditions improve and restrictions begin to experience ongoing industry consolidation, particularly in the sports specialty sector. As this consolidation continues, it increases the risk that if any one customer significantly reduces their purchases of our products,lift, we may beare unable to find sufficient alternative customers to continue to growpredict whether consumer preferences for discretionary items will shift and the level of consumer spending within our net revenues, or our net revenues may decline.
We may not successfully execute our long-term strategies, which may negatively impact our results of operations.
Our ability to execute on our long-term strategies depends, in part, on successfully executing on strategic growth initiatives in key areas, such as our international business, footwear and our global direct to consumer sales channel. Our growth in these areas depends on our ability to continue to successfully expand our global network of brand and factory house stores, grow our e-commerce and mobile application offerings throughout the world and continue to successfully increase our product offerings and market share in footwear. Our ability to continue to invest in these growth initiatives in the near-term mayindustry will be negatively impacted by the performancefor a period of time. If this were to occur, our North America business, which represented 77% of our total net revenues in 2017 but declined by 5% over 2016,sales and in particular the performance of our wholesale channel in North America. Our ability to execute on our long-term strategy also depends on our ability to successfully manage our cost structure and drive return on our investments. If we cannot effectively execute our long-termprospects for growth strategies while managing costs effectively, our business and results of operations could be negatively impacted.
We may not fully realize the expected benefits of any restructuring plans or other operating or cost-saving initiatives, which may negatively impact our profitability.
We have recently announced restructuring plans designed to more closely align our financial resources against the critical priorities of our business. These plans have included initiatives to improve operational efficiencies, and our 2017 restructuring plan included a reduction in our global workforce. We may not achieve our targeted operational improvements and efficiencies, which could adversely impact our results of operations and financial condition. In addition, implementing any restructuring plan presents 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, failure to maintain adequate controls and procedures while executing our restructuring plans, damage to our reputation and brand image and workforce attrition beyond planned reductions. If we fail to achieve targeted operating improvements and/or cost reductions, our profitability and results of operations could be negatively impacted and we may be required to implement additional restructuring-related activities, which may be dilutive to our earnings in the short term.
We must successfully manage the increasingly complex operations of our global business, or our business and results of operations may be negatively impacted.
We have expanded our business and operations rapidly since our inception and our net revenues have increased to $4,976.6 million in 2017 from $2,332.1 million in 2013. We must continue to successfully manage the operational difficulties associated with expanding our business to meet increased consumer demand throughout the world. We may experience difficulties in obtaining sufficient raw materials and manufacturing capacity to produce our products, as well as delays in production and shipments, as our products are subject to risks associated with overseas sourcing and manufacturing. We must also continually evaluate the need to expand critical functions in our business, including sales and marketing, product development and distribution functions, our management information systems and other processes and technology. To support these functions, we must hire, train and manage an increasing number of employees, and obtain more space to support our expanding workforce. We may not be successful in undertaking these types of initiatives cost effectively or at all, and could experience serious operating difficulties if we fail to do so. These growth efforts could also increase the strain on our existing resources. If we experience difficulties in supporting the growth of our business, we could experience an erosion of our brand image and a decrease in net revenues and net income.
If we are unable to anticipate consumer preferences, successfully develop and introduce new, innovative and updated products or engage our consumers, our net revenues and profitability may be negatively impacted.
Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. In addition, long lead times for certain of our products may make it hard for us to quickly respond to changes in consumer demands. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance or other sports products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes.
Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products. If we fail to introduce technical innovation in our products or design products in the categories and styles that consumers want, demand for our products could decline and our brand image could be negatively impacted. Our
failure to anticipate and respond timely to changing consumer preferences or to effectively introduce new products and enter into new product categories that are accepted by consumers could result in a decrease in net revenues and excess inventory levels, which could have a material adverse effect on our financial condition. In addition, if we experience problems with the quality of our products, our brand reputation may be negatively impacted and we may incur substantial expense to remedy the problems, which could negatively impact our results of operations.
In addition, consumer preferences regarding the shopping experience continue to rapidly evolve. If we or our wholesale customers do not provide consumers with an attractive in-store experience, or if we do not continue to provide an engaging and user-friendly digital commerce platform that attracts consumers, our brand image and results of operations could be negatively impacted.
Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. In addition, a significant portion of our net revenues are generated by at-once orders for immediate delivery to customers, particularly during the last two quarters of the year, which historically has been our peak season. If we fail to accurately forecast customer demand we may experience excess inventory levels or a shortage of product to deliver to our customers.
Factors that could affect our ability to accurately forecast demand for our products include:
an increase or decrease in consumer demand for our products;
our failure to accurately forecast consumer acceptance for our new products;
product introductions by competitors;
unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers;
the impact on consumer demand due to unseasonable weather conditions;
weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and
terrorism or acts of war, or the threat thereof, or political or labor instability or unrest which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials.
Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and have an adverse effect on gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships.
The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely impact our profitability or cause us not to achieve our expected financial results.
Sales of performance products may not continue to grow or may decline, which could negatively impact our sales and our ability to grow our business.
We believe continued growth in industry-wide sales of performance apparel, footwear and accessories will be largely dependent on consumers continuing to transition from traditional alternatives to performance products. If consumers are not convinced these products are a better choice than traditional alternatives, growth in the industry and our business could be adversely affected. In addition, because performance products are often more expensive than traditional alternatives, consumers who are convinced these products provide a better alternative may still not be convinced they are worth the extra cost. If industry-wide sales of performance products do not continue to grow or rather decline, our sales could be negatively impacted and we may not achieve our expected financial results. In addition, our ability to continue to grow our business in line with our expectations could be adversely impacted.
We operate in highly competitive markets and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our net revenues and gross profit.
The market for performance apparel, footwear and accessories is highly competitive and includes many new competitors as well as increased competition from established companies expanding their production and marketing of performance products. Because we own a limited number of fabric or process patents, our current and future competitors are able to manufacture and sell products with performance characteristics and fabrications similar to certain of our products. Many of our competitors are large apparel and footwear companies with strong worldwide brand recognition. Due to the fragmented nature of the industry, we also compete with other manufacturers, including those specializing in products similar to ours and private label offerings of certain retailers, including some of our retail customers. Many of our competitors have significant competitive advantages, including greater financial, distribution, marketing, digital and other resources, longer operating histories, better brand recognition among consumers, more experience in global markets, greater ability to invest in technology and the digital consumer experience and greater economies of scale. In addition, our competitors have long termlong-term relationships with our key retail customers that are potentially more important to those customers because of the significantly larger volume and product mix that our competitors sell to them. As a result, these competitors may be better equipped than we are to influence consumer preferences or otherwise increase their market share by:
by quickly adapting to changes in customer requirements or consumer preferences;
preferences, readily taking advantage of acquisition and other opportunities;
opportunities, discounting excess inventory that has been written down or written off;
off, devoting resources to the marketing and sale of their products, including significant advertising, media placement, partnerships and product endorsement;
endorsement, adopting aggressive pricing policies;policies and
engaging in lengthy and costly intellectual property and other disputes.
In addition, while one of our growth strategies has been to increase floor space for our products in retail stores and generallyin certain markets expand our distribution to other retailers, retailers have limited resources and floor space, and we must compete with others to develop relationships with them. Increased competition by existing and future competitors could result in reductions in floor space in retail locations, reductions in sales or reductions in the prices of our products, and if retailers have better sell through or earn greater margins from our competitors’ products, they may favor the display and sale of those products. Our inability to compete successfully against our competitors and maintain our gross margin could have a negative effect on our brand image and a material adverse effect on our business, financial condition and results of operations.
Our profitability may decline or our growth may be negatively impacted as a result of increasing pressure on pricing.
Our industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. These factors may cause us to reduce our prices to retailers and consumers or engage in more promotional activity than we anticipate, which could negatively impact our margins and cause our profitability to decline if we are unable to offset price reductions with comparable reductions in our operating costs. ThisFor example, in response to the COVID-19 pandemic’s impact on our industry, we and many of our competitors have engaged in, and may continue to engage in, additional promotional activities focused around e-commerce sales in managing excess inventory levels. Ongoing and sustained promotional activities could negatively impact our brand image. On the other hand, if we are unwilling to engage in promotional activity on a scale similar to that of our competitors, for instance, to protect our premium brand positioning, and unable to simultaneously offset declining promotional activity with increased sales at premium price points, our ability to achieve short-term growth targets may be negatively impacted, which could have a material adverse effect on our results of operations and financial condition. In addition, ongoing and sustained promotional activities could negatively impact our brand image.
Fluctuations in the cost of raw materials and commodities we use in our products and our supply chain could negatively affect our operating results.
The fabrics used by our suppliers and manufacturers are made of raw materials including petroleum-based products and cotton. Significant price fluctuations or shortages in petroleum or other raw materials can materially adversely affect our cost of goods sold. In addition, certain of our manufacturers are subject to government regulations related to wage rates, and therefore the labor costs to produce our products may fluctuate. The cost of
transporting our products for distribution and sale is also subject to fluctuation due in large part to the price of oil. Because most of our products are manufactured abroad, our products must be transported by third parties over large geographical distances and an increase in the price of oil can significantly increase costs. Manufacturing delays or unexpected transportation delays can also cause us to rely more heavily on airfreight to achieve timely delivery to our customers, which significantly increases freight costs. Any of these fluctuations may increase our cost of products and have an adverse effect on our profit margins, results of operations and financial condition.
Our financial results and ability to grow our business may be negatively impacted by global events beyond our control.
We operate retail, distribution and warehousing facilities and offices around the world and substantially all of our manufacturers are located outside of the United States. We are subject to numerous risks and events beyond our control which could negatively impact consumer spending or the operations of us or our customers or business partners, and therefore our results of operations, including political or labor unrest, military conflict, terrorism, public health crises, disease epidemics or pandemics (such as COVID-19), natural disasters, extreme weather conditions and economic instability resulting in the disruption of trade from foreign countries; the imposition of new laws and regulations, including those relating to labor conditions, minimum wage, quality and safety standards and disease epidemics or other public health concerns, as well as rules and regulations regarding climate change; uncertainties and the ongoing effect of the United Kingdom’s withdrawal from the European Union; changes in trade policy or actions of foreign or U.S. governmental authorities impacting trade and foreign investment, particularly during periods of heightened tension between U.S. and foreign governments, including the imposition of new import limitations, duties, tariffs, anti-dumping penalties, trade restrictions or restrictions on the transfer of funds; and changes in local economic conditions in countries where our stores, customers, manufacturers and suppliers are located.
These risks could hamper our ability to sell products, negatively affect the ability of our manufacturers to produce or deliver our products or procure materials and increase our cost of doing business generally, any of which could have an adverse effect on our results of operations, profitability, cash flows and financial condition. In the event that one or more of these factors make it undesirable or impractical for us to conduct business in a particular country, our business could be adversely affected.
Business and Operational Risks
We derive a substantial portion of our sales from large wholesale customers. If the financial condition of our customers declines, our financial condition and results of operations could be adversely impacted.
In Fiscal 2020, sales through our wholesale channel represented approximately 53% of our net revenues. We extend credit to our wholesale customers based on an assessment of a customer’s financial condition, generally without requiring collateral or getting customer insurance against non-collection. We face increased risk of order reduction or cancellation when dealing with financially ailing customers or customers struggling with economic uncertainty. As a result of the COVID-19 pandemic, many of our wholesale customers throughout the world have had to temporarily close their stores or operate their stores under significant restrictions and continue to experience reduced consumer traffic and purchasing, which has resulted in lower sales and cancellations of orders of our products. The financial impact of continued temporary store closures and operating restrictions on many of our wholesale customers remains uncertain. However, if our wholesale customers continue to experience significant disruptions, this could result in further reductions or cancellations of orders or late or extended payment terms to us, which could negatively impact our results of operations. In addition, during weak economic conditions, customers may be more cautious with orders or may slow investments necessary to maintain a high quality in-store experience for consumers, which may result in lower sales of our products. Furthermore, a slowing economy in our key markets or a continued decline in consumer purchases of sporting goods generally could have an adverse effect on the financial health of our company.
From time to time certain of our customers have experienced financial difficulties. To the extent one or more of our customers experience significant financial difficulty, bankruptcy, insolvency or cease operations, this could have a material adverse effect on our sales, our ability to collect on receivables and our financial condition and results of operations.
We may not successfully execute our long-term strategies, which may negatively impact our results of operations.
Our ability to execute on our long-term strategies depends, in part, on successfully executing on strategic growth initiatives in key areas, such as our international business, footwear and our global direct-to-consumer sales channel. Our growth in these areas depends on our ability to continue to successfully grow our e-commerce and mobile application offerings and digital experiences throughout the world, expand our global network of brand and factory house stores and continue to successfully increase our product offerings and market share in footwear. Our ability to invest in these growth initiatives on the timeline and at the scale we expect will be negatively impacted if we continue to experience significant market disruption due to COVID-19 or other significant events, particularly if our North America business, which represented 66% of our total net revenues in Fiscal 2020, does not grow sufficiently. In addition, as we expand our global network of brand and factory house stores, if we are unable to operate our stores profitably, our financial results could be impacted, or we could be required to recognize impairment charges. For example, during Fiscal 2020, we recognized impairment charges related to a number of our retail stores as individual store profitability was significantly impacted by the effects of COVID-19. Our long-term strategy also depends on our ability to successfully drive expansion of our gross margins, manage our cost structure and drive return on our investments. If we cannot effectively execute our long-term growth strategies while managing costs effectively, our business could be negatively impacted and we may not achieve our expected results of operations.
We may not fully realize the expected benefits of our restructuring plans or other operating or cost-saving initiatives, which may negatively impact our profitability.
Since 2017, we have executed three separate restructuring plans designed to more closely align our financial resources against the critical priorities of our business and rebalance our cost base to further improve future profitability and cash flow generation. We have also implemented several changes to our operating model. We may not achieve the operational improvements and efficiencies that we targeted in our restructuring plans and operating model changes, which could adversely impact our results of operations and financial condition. Implementing any restructuring plan or operating model change presents significant potential risks including, among others, higher than anticipated implementation costs, management distraction from ongoing business activities, failure to maintain adequate controls and procedures while executing our restructuring plans and operating model changes, damage to our reputation and brand image and workforce attrition beyond planned reductions. If we fail to achieve targeted operating improvements and/or cost reductions, our profitability and results of operations could be negatively impacted, which may be dilutive to our earnings in the short term.
If we are unable to anticipate consumer preferences, successfully develop and introduce new, innovative and updated products or engage our consumers, or if consumer preferences shift away from performance products, our sales, net revenues and profitability may be negatively impacted.
Our success depends on our ability to identify and originate product trends and anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that shift rapidly and cannot be predicted with certainty. Accordingly, our new products may not receive consumer acceptance. In addition, long lead times for certain of our products may make it hard for us to respond quickly to changes in consumer demands. Our ability to adequately react to and address consumer preferences depends in part upon our continued ability to develop and introduce innovative, high-quality products. Moreover, if consumers are not convinced performance apparel, footwear and accessories are a better choice than, and worth the additional cost over, traditional alternatives, sales of performance products may not grow or decline and growth in the industry and our business could be adversely affected. In addition, consumers are increasingly focused on the environmental and social policies of brands, including the sustainability of the products sold. From time to time, we may also introduce limited run or specialized products that may increase our sales in the near term, but that may fail to maintain sustained consumer demand. If we are unable to effectively anticipate and respond to consumer preferences as a result of any of these factors, our brand image could be negatively impacted, and our sales, net revenues and profitability may be negatively impacted.
Consumer shopping preferences and shifts in distribution channels continue to evolve and could negatively impact our results of operations or our future growth.
Consumer preferences regarding the shopping experience continue to rapidly evolve. We sell our products through a variety of channels, including through wholesale customers and distribution partners, as well as our own direct-to-consumer business consisting of our brand and factory house stores and e-commerce platforms. If we or our wholesale customers do not provide consumers with an attractive in-store experience, our brand image and
results of operations could be negatively impacted. In addition, as part of our strategy to grow our e-commerce revenue, we are investing significantly in enhancing our platform capabilities and implementing systems to drive higher engagement with our consumers, which has become particularly important in light of increased online shopping due to COVID-19. If we do not successfully execute this strategy or continue to provide an engaging, reliable and user-friendly digital commerce platform that attracts consumers, our brand image, and results of operations as well as our opportunities for future growth could be negatively impacted. In addition, we cannot predict whether and how the COVID-19 pandemic will impact consumer shopping preferences in the long term and how quickly and effectively we will adapt to those preferences.
A decline in sales to, or the loss of, one or more of our key customers could result in a material loss of net revenues and negatively impact our prospects for growth.
We generate a significant portion of our wholesale revenues from sales to our largest customers. We currently do not enter into long-term sales contracts with our key customers, relying instead on our relationships with these customers and on our position in the marketplace. As a result, we face the risk that these key customers may not increase their business with us as we expect, or may significantly decrease their business with us or terminate their relationship with us. The failure to increase or maintain our sales to these customers as much as we anticipate would have a negative impact on our growth prospects and any decrease or loss of these key customers' business could result in a material decrease in our net revenues and net income or loss. For example, during Fiscal 2020 certain of our wholesale customers delayed purchases of our products or cancelled previously placed orders in response to pandemic-related store closures. These risks have materially increased and may persist as the COVID-19 pandemic continues. In addition, our customers continue to experience ongoing industry consolidation, particularly in the sports specialty sector. As this consolidation continues, it increases the risk that if any one customer significantly reduces their purchases of our products, we may be unable to find sufficient alternative customers to continue to grow our net revenues, or our net revenues may decline materially. In addition, we may from time to time exit relationships with certain wholesale customers to further drive our premium brand position. This may negatively impact our net revenues if we are unable to replace those sales with additional sales to our other customers.
We must successfully manage the increasingly complex operations of our global business, including continued expansion in certain markets where we have limited brand recognition, or our business and results of operations may be negatively impacted.
A significant element of our growth strategy depends on our continued expansion outside of North America, and we have limited brand recognition and operating experience in certain regions. We must continue to successfully manage the operational difficulties associated with expanding our business to meet increased consumer demand throughout the world. We have limited experience with regulatory requirements and market practices in certain regions outside of North America, and may face difficulties expanding into and successfully operating in those markets, including differences in regulatory environments, labor and market practices, and difficulties in keeping abreast of market, business and technical developments and consumers’ tastes and preferences. We must also continually evaluate the need to expand critical functions in our business, including sales and marketing, product development and distribution functions, our management information systems and other processes and technology. We may not manage these efforts cost-effectively or these efforts could increase the strain on our existing resources. If we experience difficulties in supporting the growth of our business, we could experience an erosion of our brand image or operational challenges leading to a decrease in net revenues and results from operations.
Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. In addition, a significant portion of our net revenues may be generated by at-once orders for immediate delivery to customers, particularly during the last two quarters of the year, which historically has been our peak season. If we fail to accurately forecast customer demand we may experience excess inventory levels or a shortage of product to deliver to our customers. Excess inventory may result in inventory write-downs or write-offs or sales at discounted prices or in less preferred distribution channels, negatively impacting gross margin. On the other hand, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, resulting in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships.
Factors that could affect our ability to accurately forecast demand for our products include: changing consumer demand for our products; product introductions by competitors; unanticipated changes in general market or economic conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers; the impact on consumer demand due to unseasonable weather conditions; and terrorism or acts of war, or the threat thereof, political or labor instability or unrest or public health concerns and disease epidemics, such as the current COVID-19 pandemic.
The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely impact our profitability or cause us not to achieve our expected financial results. These risks have materially increased and may persist with the market disruption caused by COVID-19 and the expected high levels of inventory across our industry.
We rely on third-party suppliers and manufacturers to provide raw materials for and to produce our products, and we have limited control over these suppliers and manufacturers and may not be able to obtain quality products on a timely basis or in sufficient quantity.
Many of the materials used in our products are technically advanced products developed by third parties and may be available, in the short-term, from a very limited number of sources. Substantially all of our products are
manufactured by unaffiliated manufacturers, and, in 2017,Fiscal 2020, 10 manufacturers produced approximately 57% of our apparel and accessories products, and five6 produced approximately 83%substantially all of our footwear products. We have no long termlong-term contracts with our suppliers or manufacturing sources, and we compete with other companies for fabrics, raw materials, production and import quota capacity.
A number of factors may require us to seek alternative or additional suppliers, which we may not be able to do in a timely or cost-effective manner. We may experience a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition,Moreover, our unaffiliated manufacturerssuppliers may not be able to fill our orders in a timely manner. Ifmanner depending on market conditions or increased demand for product. In addition, in Fiscal 2020 certain of our manufacturers experienced significant financial and operational disruption due to COVID-19. We have historically provided supply chain finance support to certain of our supply chain partners, and the financial markets supporting supply chain finance programs experienced disruption in 2020, resulting in a temporary disruption to our program and challenging the cash flow and liquidity of our partners. While we worked with our partners through the disruption and have re-established a supply chain finance program, if one or more of our suppliers were to experience significant increased demand,financial difficulty, bankruptcy, insolvency or cease operations, we may be required to seek alternative suppliers. In addition, if we lose or need to replace an existing manufacturer or supplier as a result of adverse economic conditions or other reasons, additional supplies of fabrics or raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers or manufacturers may not be able to allocate sufficient capacity to us in order to meet our requirements. In addition, evenEven if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers on our methods, products and quality control standards. Any delays, interruption or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower net revenues and net income (or higher net loss) both in the short and long term.
We have occasionally received, and may in the future continue to receive, shipments of product that fail to conform to our quality control standards. In that event, unlessIf we are ableunable to obtain replacement products in a timely manner, we risk the loss of net revenues resulting from the inability to sell those products and related increased administrative and shipping costs. In addition, because we do not control our manufacturers, products that fail to meet our standards or other unauthorized products could end up in the marketplace without our knowledge, which could harm our brand and our reputation in the marketplace.
Labor or other disruptions at ports or our suppliers or manufacturers may adversely affect our business.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the free flow of goods through open and operational ports worldwide and on a consistent basis from our suppliers and manufacturers. Labor disputes and disruptions at various ports or at our suppliers or manufacturers could create significant risks for our business, particularly if these disputes result in work slowdowns, decreased operations, lockouts, strikes or other disruptions during our peak importing or manufacturing seasons,seasons. For example, COVID-19 has resulted in delays and disruptions at ports due to workforce decreases, shipping backlogs and
capacity constraints and other disruptions. This has resulted in slower than planned deliveries of inventory and delayed sales to customers. If we experience significant delays or disruption in receiving and distributing our products, this could have an adverse effect on our business, potentially resulting in canceled orders by customers, unanticipated inventory accumulation or shortages, increased expense (including air freight) to deliver our products and reduced net revenues and net income.income or higher net loss.
Our limited operating experience and limited brand recognition in new markets may limit our expansion strategy and cause our business and growth to suffer.
Our future growth depends in part on our expansion efforts outside of North America. During the year ended December 31, 2017, 77% of our net revenues were earned in our North America segment. We have limited experience with regulatory environments and market practices in certain regions outside of North America, and may face difficulties in expanding to and successfully operating in those markets. International expansion may place increased demands on our operational, managerial and administrative resources and may be more costly than we expect. In addition, in connection with expansion efforts outside of North America, we may face cultural and linguistic differences, differences in regulatory environments, labor practices and market practices and difficulties in keeping abreast of market, business and technical developments and customers’ tastes and preferences. We may also encounter difficulty expanding into new markets because of more limited brand recognition leading to delayed acceptance of our products. Failure to develop new markets outside of North America will limit our opportunities for growth.
The operations of many of our manufacturers are subject to additional risks that are beyond our control and that could harm our business.
In 2017, our products were manufactured by 39 primary manufacturers, operating in 17 countries, with 10 manufacturers accounting for approximately 57% of our apparel and accessories products, and five produced approximately 83% of our footwear products. Approximately 61% of our apparel and accessories products were manufactured in Jordan, Vietnam, China and Malaysia. As a result of our international manufacturing, we are subject to risks associated with doing business abroad, including:
political or labor unrest, terrorism and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
currency exchange fluctuations;
the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, trade restrictions and restrictions on the transfer of funds, as well as rules and regulations regarding climate change;
reduced protection for intellectual property rights in some countries;
disruptions or delays in shipments; and
changes in local economic conditions in countries where our manufacturers and suppliers are located.
These risks could negatively affect the ability of our manufacturers to produce or deliver our products or procure materials, hamper our ability to sell products in international markets and increase our cost of doing business generally. In the event that one or more of these factors make it undesirable or impractical for us to conduct business in a particular country, our business could be adversely affected.
In addition, many of our imported products are subject to duties, tariffs or other import limitations that affect the cost and quantity of various types of goods imported into the United States and other markets. Any country in which our products are produced or sold may eliminate, adjust or impose new import limitations, duties, anti-dumping penalties or other charges or restrictions, any of which could have an adverse effect on our results of operations, cash flows and financial condition.
If we fail to successfully manage or realize expected results from acquisitions and other significant transactions or investments, or if we are required to recognize an impairment of our goodwill, it may have a materialan adverse effect on our results of operations and financial position.
From time to time, we may engage in acquisition opportunities we believe are complementary to our business and brand. Integrating acquisitionsacquired businesses can also require significant efforts and resources, which could divert management attention from more profitable business operations. FailingFrom time to time we have also disposed of certain assets where we did not think our activities aligned to our operating model. If we fail to successfully integrate acquired entities and businesses or to produce results consistenteffectively manage dispositions, we may not realize the financial benefits or other synergies we anticipated. In addition, in connection with financial models usedour acquisitions, we may record goodwill or other indefinite-lived intangible assets. We have recognized goodwill impairment charges in the analysis ofpast, including in Fiscal 2020 with respect to our acquisitions could potentially result in anLatin America reporting unit, and our Canada reporting unit, within our North America operating segment. Additional goodwill impairment of goodwill and intangible assets, whichcharges could have a materialan adverse effect on our results of operations and financial position. Additionally, from time to time, we may invest in business infrastructure, new businesses and expansion of existing businesses, such as the expansion of our network of brand and factory house stores and our distribution facilities, implementing our global operating and financial reporting information technology system, supporting our digital strategy (including our e-commerce platform), or supporting our corporate infrastructure (including our global and regional headquarters). These investments require substantial cash investments and management attention, and infrastructure investments may also divert funds from other potential business opportunities. We believe cost effective investments are essential to business growth and profitability. The failure of any significant investment to provide the returns or synergies we expect could adversely affect our financial results.
The value of our brand and sales of our products could be diminished if we are associated with negative publicity.
Our business could be adversely impacted if negative publicity regarding our brand, our company or our business partners diminishes the appeal of our brand to consumers. For example, while we require our suppliers, manufacturers and licensees of our products to operate their businesses in compliance with applicable laws and regulations as well as the social and other standards and policies we impose on them, including our code of conduct, we do not control the conduct of these third parties. A violation, or alleged violation of our policies, labor laws or other laws could interrupt or otherwise disrupt our sourcing or damage our brand image. Negative publicity regarding production methods, alleged practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our reputation and sales and force us to locate alternative suppliers, manufacturers or licensees. The risk that our business partners may not act in accordance with our expectations may be exacerbated in markets where our direct sales, supply chain or logistics operations are not as widespread. In addition, we have sponsorship contracts with a variety of athletes, teams and leagues, and many athletes and teams use our products. Negative publicity regarding these partners could negatively impact our brand image and result in diminished loyalty to our brand, regardless of whether such claims are accurate. Furthermore, social media can potentially accelerate and increase the scope of negative publicity. This could diminish the value of our proprietary rights or harm our reputation or have a negative effect on our sales and results of operations.
The costs and return on our investments for our sports marketing sponsorships may become more challenging and this could impact the value of our brand image.
A key element of our marketing strategy has been to create a link in the consumer market between our products and professional and collegiate athletes. We have developed licensing agreements to be the official supplier of performance apparel and footwear to a variety of sports teams and leagues at the collegiate and professional level and sponsorship agreements with athletes. However, as competition in the performance apparel and footwear industry has increased, the costs associated with athlete sponsorships and official supplier licensing agreements, including the costs of obtaining and retaining these sponsorships and agreements, have varied and at times increased greatly. If we are unable to maintain our current association with professional and collegiate athletes, teams and leagues, or to do so at a reasonable cost, we could lose the on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. In addition, because professional and collegiate athletics and other sporting events have been largely cancelled or delayed in connection with the COVID-19 pandemic and future plans for these remain uncertain, we may not realize
the expected benefits of these relationships. As a result, our brand image, net revenues, expenses and profitability could be materially adversely affected.
If we encounter problems with our distribution system, our ability to deliver our products to the market could be adversely affected.
We rely on a limited number of distribution facilities for our product distribution. Our distribution facilities utilize computer controlled and automated equipment, which means the operations are complicated and may be subject to a number of risks related to security or computer viruses or malware, the proper operation of software and hardware, power interruptions or other system failures. In addition, because many of our products are distributed from a limited number of locations, our operations could also be interrupted by severe weather conditions, floods, fires or other natural disasters in these locations, as well as labor or other operational difficulties or interruptions, including public health crises or disease epidemics. For example, the current COVID-19 pandemic may impede our ability to operate our distribution facilities at full capacity and may similarly impact our third-party logistics providers. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could be caused by significant disruptions in our distribution facilities or from all types of events causing such disruptions. Significant disruptions could lead to loss of customers or an erosion of our brand image. In addition, our distribution capacity is dependent on the timely performance of services by third parties. This includes the shipping of product to and from our distribution facilities, as well as partnering with third-party distribution facilities in certain regions where we do not maintain our own facilities. From time to time, certain of our partners have experienced disruptions to their operations, including cyber-related disruptions. If we or our partners encounter such problems, our results of operations, as well as our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected.
We rely significantly on information technology and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
Our business and global operations rely on information technology. Our ability to effectively manage and maintain our inventory and internal reports, and to ship products to customers and invoice them on a timely basis depends significantly on our enterprise resource planning, warehouse management, and other information systems. We also heavily rely on information systems to process financial and accounting information for financial reporting purposes. Any of these information systems could fail or experience a service interruption for a number of reasons, including computer viruses or malware, programming errors, hacking or other unlawful activities, disasters or our failure to properly maintain system redundancy or protect, repair, maintain or upgrade our systems, and, although we maintain business continuity plans, there can be no assurance that our business continuity plans, or those of our vendors, will effectively resolve the issues in a timely manner or adequately protect us from the adverse effects that could be caused by significant disruptions in our information systems. The failure of our information systems to operate effectively or to integrate with other systems, or a breach in security of these systems could cause delays in product fulfillment and reduced efficiency of our operations, which could negatively impact our financial results. If we experience any significant disruption to our financial information systems that we are unable to mitigate, our ability to timely report our financial results could be impacted, which could negatively impact our stock price. We also communicate electronically throughout the world with our employees and with third parties, such as customers, suppliers, vendors and consumers. A service interruption or shutdown could have a material adverse impact on our operating activities. Remediation and repair of any failure, problem or breach of our key information systems could require significant capital investments.
In addition, we interact with many of our consumers through our e-commerce website and our mobile applications, and these systems face similar risk of interruption or cyberattack. Consumers increasingly utilize these services to purchase our products and to engage with our digital community. If we are unable to continue to provide consumers a user-friendly experience and evolve our platform to satisfy consumer preferences, the growth of our e-commerce business and our net revenues may be negatively impacted. The performance of our digital business is dependent on reliable performance of its products, applications and services and the underlying technical infrastructure, which incorporate complex software. If this software contains errors, bugs or other vulnerabilities which impede or halt service, this could result in damage to our reputation and brand, loss of users or loss of revenue.
We are implementing a global operating and information system, which involves risks and uncertainties that could adversely affect our business.
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 third and final phase of this implementation became operational in April 2020. Implementation of new information systems, particularly across global operations, involves risks and uncertainties. Any disruptions, delays, or deficiencies in the design, implementation or application of these systems could result in increased costs, disruptions in our ability to effectively source, sell or ship our products, delays in the collection of payment from our customers or adversely affect our ability to timely report our financial results, each of which could materially adversely affect our business, results of operations, and financial condition.
Our future success is substantially dependent on the continued service of our senior management and other key employees, and our continued ability to attract and retain highly talented new team members.
Our future success is substantially dependent on the continued service of our senior management, particularly Kevin A. Plank, our founder, Executive Chairman and Brand Chief, Patrik Frisk, our Chief Executive Officer and President, other top executives and key employees who have substantial experience and expertise in our business, including product creation, innovation, sales, marketing, operational and other support personnel. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and achieve our business goals and could result in harm to key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs.
In addition, to profitably grow our business and manage our operations, we will need to continue to attract, retain and motivate highly talented management and other employees with a range of skills, backgrounds and experiences. Competition for employees in our industry is intense and we may experience difficulty in attracting the personnel necessary to support the growth of our business. If we are unable to attract, assimilate and retain management and other employees with the necessary skills, we may not be able to grow or successfully operate our business and achieve our long-term objectives. In addition, we have invested significant time and resources in building, maintaining and evolving our company culture and our values, which we believe to be critical to our future success. Failure to maintain and continue to evolve our culture could negatively affect our ability to attract, retain and motivate our employees and to achieve our long-term objectives.
Financial Risks
Our credit agreement contains financial covenants, and both our credit agreement and debt securities contain other restrictions on our actions, which could limit our operational flexibility or otherwise adversely affect our financial condition.
We have, from time to time, financed our liquidity needs in part from borrowings made under our credit facility and the issuance of debt securities. Our debt securitiesSenior Notes limit our ability to, subject to certain significant exceptions, incur secured debt and engage in sale leaseback transactions. Our amended credit agreement contains negative covenants that, subject to significant exceptions limit our ability, among other things to incur additional indebtedness, make restricted payments, sell or dispose of assets, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. In addition, during specified periods, we must maintain a certain leverage ratio and interest coverage ratio as defined in the amended credit agreement. In February 2018,Our ability to continue to borrow amounts under our amended credit agreement is limited by continued compliance with these financial covenants, and in the past we have amended our credit agreement to increaseprovide certain relief from and revisions to our permitted leverage ratiofinancial covenants for specified future periods and provide us with sufficient access to liquidity during those periods. During certain quarters, in 2018.our amended credit agreement requires us to maintain a specified amount of minimum liquidity. If our cash flows and capital resources are insufficient to maintain this liquidity level, we may need to take further actions to reduce our expenditures, and potentially seek alternative sources of liquidity, including but not limited to accessing the capital markets, sale leaseback transactions or other sales of assets, or other alternative financing measures. Failure to comply with these operating or financial covenants could result from, among other things, changes in our results of operations or general economic conditions. These covenants may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under the amended credit agreement or our debt securitiesSenior Notes could result in a default. default, which could negatively impact our access to liquidity.
In addition, the amended credit agreement includes a cross default provision whereby an event of default under certain other debt obligations (including our debt securities) will be considered an event of default under the amended credit agreement. If an event of default occurs, the commitments of the lenders under the amended credit agreement may be terminated and the maturity of amounts owed may be accelerated. Our debt securities include a cross acceleration provision which provides that the acceleration of certain other debt obligations (including our credit agreement) will be considered an event of default under our debt securities and, subject to certain time and notice periods, give bondholders the right to accelerate our debt securities.
We may need to raise additional capital required to manage and grow our business, and we may not be able to raise capital on terms acceptable to us or at all.
Growing
Managing and operatinggrowing our business will require significant cash outlays and capital expenditures and commitments. We have utilized cash on hand and cash generated from operations, accessed our credit facility and issued debt securities as sources of liquidity. IfDuring the first and second quarter of Fiscal 2020, our cash generated from operations was negatively impacted due to widespread temporary store closures as a result of the COVID-19 pandemic. In response, we amended our credit agreement to provide certain relief from and revisions to our financial covenants for specified future periods and provide us with sufficient access to liquidity during those periods. In May 2020, we issued $500 million of Convertible Senior Notes and utilized the net proceeds to repay amounts outstanding under our revolving credit facility, thereby increasing our borrowing capacity under that facility. We also took a number of actions to preserve existing capital, including managing payments to vendors, allowing extended payment terms to certain customers, reducing capital expenditures and managing inventory levels. As of December 31, 2020, our cash and cash equivalents totaled $1.5 billion. However, if in future periods our cash on hand, and cash generated from operations and availability under our credit agreement are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financing, to fund our operations and future growth. Our ability to access the credit and capital markets in the future as a source of liquidity, and the borrowing costs associated with such financing, are dependent upon market conditions and our credit rating and
outlook. Our credit ratings have been downgraded previously,in the past, and we cannot assure that we will be able to maintain our current ratings, which could increase our cost of borrowing in the future. In addition, equity financing may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current price per share of our common stock. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans based on available funding, if any, which would harm our ability to grow our business.
In addition, the U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. Our credit agreement permits us to borrow based on an adjusted LIBOR rate, plus an applicable margin. While the credit agreement provides for a mechanism for determining an alternative interest rate following this phase out, uncertainty regarding alternative rates may make borrowing under our credit agreement or refinancing our other indebtedness more expensive or difficult to achieve on terms we consider favorable.
Our operating results are subject to seasonal and quarterly variations in our net revenues and income from operations, which could adversely affect the price of our publicly traded common stock.
We have experienced, and expect to continue to experience, seasonal and quarterly variations in our net revenues and income or loss from operations. These variations are primarily related to increased sales volumethe mix of our products sold during the fall selling season, including our higher price cold weather products, along with a larger proportion of higher margin direct to consumerdirect-to-consumer sales. Our quarterly results may also vary based on the timing of customer orders. The majority of our net revenues wereare historically generated during the last two quarters in each of 2017, 2016 and 2015, respectively.
the calendar year. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of marketing expenses and changes in our product mix. Variations in weather conditions may also have an adverse effect on our quarterly results of operations. For example, warmer than normal weather conditions throughout the fall or winter may reduce sales of our COLDGEAR® line, leaving us with excess inventory and operating results below our expectations.
As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. Any seasonal or quarterly fluctuations that we report in the future may not match the expectations of market analysts and investors. This could cause the price of our publicly traded stock to fluctuate significantly.
Our results of operations are affected by the performance of our equity investments, over which we do not exercise control.
We maintain certain minority investments, and may in the future invest in additional minority investments, which we account for under the equity method, and are required to recognize our allocable share of its net income or loss in our consolidated financial statements. Our results of operations are affected by the performance of these businesses, over which we do not exercise control, and our net income or loss has been negatively impacted by losses realized by our Japanese licensee’s business. We are also required to regularly review our investments for impairment, and an impairment charge may result from the occurrence of adverse events or management decisions that impact the fair value or estimated future cash flows to be generated from our investments. During Fiscal 2020, we further impaired our investment in our Japanese licensee and recognized a $7.1 million charge as a result, and there is currently no carrying value associated with this investment. In addition, to the extent our Japanese licensee
continues to experience challenges in the performance of its business, we may not continue to realize the licensing revenues from our Japanese licensee in line with its past results, which could negatively impact our net revenues and results of operations. Furthermore, based on its financial performance, our ability to recover our investment in the long term may be limited.
Our financial results could be adversely impacted by currency exchange rate fluctuations.
We generated approximately 27%31% of our consolidated net revenues outside the United States. As our international business grows, our results of operations could be adversely impacted by changes in foreign currency exchange rates. Revenues and certain expenses in markets outside of the United States are recognized in local foreign currencies, and we are exposed to potential gains or losses from the translation of those amounts into U.S. dollars for consolidation into our financial statements. Similarly, we are exposed to gains and losses resulting from currency exchange rate fluctuations on transactions generated by our foreign subsidiaries in currencies other than their local currencies. In addition, the business of our independent manufacturers may also be disrupted by currency exchange rate fluctuations by making their purchases of raw materials more expensive and more difficult to finance. As a result, foreign currency exchange rate fluctuations may adversely impact our results of operations.
The value of our brand and sales of our products could be diminished if we are associated with negative publicity.
Our business could be negatively impacted if publicity diminishes the appeal of our brand to consumers. For example, while we require our suppliers, manufacturers and licensees of our products to operate their businesses in compliance with applicable laws and regulations as well as the social and other standards and policies we impose on them, including our code of conduct, we do not control their practices. A violation, or alleged violation of our policies, labor laws or other laws could interrupt or otherwise disrupt our sourcing or damage our brand image. Negative publicity regarding production methods, alleged practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our reputation and sales and force us to locate alternative suppliers, manufacturers or licensees.
In addition, we have sponsorship contracts withpreviously designated cash flow hedges against certain forecasted transactions. If we determine that such a variety of athletestransaction is no longer probable to occur in the time period we expected, we are required to de-designated the hedging relationship and feature those athletesimmediately recognize the derivative instrument gain or loss in our advertisingearnings. The ongoing impacts of COVID-19 have caused and marketing efforts,may continue to cause uncertainty in forecasted cash flows, which has resulted and many athletes and teams use our products, including those teams or leagues for which we are an official supplier. Actions taken by athletes, teams or leagues associated with our products could harm the reputations of those athletes, teams or leagues. These and other types of negative publicity, especially through social media which potentially accelerates and increases the scope of negative publicity, could negatively impact our brand image andmay continue to result in diminished loyalty to our brand. This could have a negative effect on our salesthe de-designation of certain hedged transactions.
Legal, Regulatory and results of operations.Compliance Risks
Sponsorships and designations as an official supplier may become more expensive and this could impact the value of our brand image.
A key element of our marketing strategy has been to create a link in the consumer market between our products and professional and collegiate athletes. We have developed licensing agreements to be the official supplier of performance apparel and footwear to a variety of sports teams and leagues at the collegiate and professional level and sponsorship agreements with athletes. However, as competition in the performance apparel and footwear industry has increased, the costs associated with athlete sponsorships and official supplier licensing agreements have increased, including the costs associated with obtaining and retaining these sponsorships and agreements. If we are unable to maintain our current association with professional and collegiate athletes, teams and leagues, or to do so at a reasonable cost, we could lose the on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brand image, net revenues, expenses and profitability could be materially adversely affected.
Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.
The labeling, distribution, importation, marketing and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the U.S.,United States, as well as by various other federal, state, provincial, local and international regulatory authorities in the locations in which our products are distributed or sold. If we fail to comply with thosethese regulations, we could become subject to significant penalties or claims or be required to recall products, which could negatively impact our results of operations and disrupt our ability to conduct our business, as well as damage our brand image with consumers. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant unanticipated compliance costs or discontinuation of product sales and may impair the marketing of our products, resulting in significant loss of net revenues.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations.operations, as well as U.S. sanctions laws. Although we have policies and procedures to address compliance with the FCPA and similar laws and sanctions requirements, there can be no assurance that all of our employees, contractors, agents and other partners will not take actions in violations of our policies.policies or that our procedures will effectively mitigate against such risks. Any such violation could subject us to sanctions or other penalties that could negatively affect our reputation, business and operating results.
If we encounter problems with our distribution system, our ability to deliver our products to the market could be adversely affected.
We rely on a limited number of distribution facilities for our product distribution. Our distribution facilities utilize computer controlled and automated equipment, which means the operations are complicated and may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. In addition, because many of our products are distributed from a limited number of locations, our operations could also be interrupted by severe weather conditions, floods, fires or other natural disasters in these locations, as well as labor or other operational difficulties or interruptions. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could be caused by significant disruptions in our distribution facilities, such as the long term loss of customers or an erosion of our brand image. In addition, our distribution capacity is dependent on the timely performance of services by third parties, including the shipping of product to and from our distribution facilities. If we encounter problems with our distribution facilities, our results of operations, as well as our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected.
We rely significantly on information technology and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
Our business relies on information technology. Our ability to effectively manage and maintain our inventory and internal reports, and to ship products to customers and invoice them on a timely basis depends significantly on our enterprise resource planning, warehouse management, and other information systems. We also heavily rely on information systems to process financial and accounting information for financial reporting purposes. Any of these information systems could fail or experience a service interruption for a number of reasons, including computer viruses, programming errors, hacking or other unlawful activities, disasters or our failure to properly maintain system redundancy or protect, repair, maintain or upgrade our systems. The failure of our information systems to operate effectively or to integrate with other systems, or a breach in security of these systems could cause delays in product fulfillment and reduced efficiency of our operations, which could negatively impact our financial results. If we experienced any
significant disruption to our financial information systems that we are unable to mitigate, our ability to timely report our financial results could be impacted, which could negatively impact our stock price. We also communicate electronically throughout the world with our employees and with third parties, such as customers, suppliers, vendors and consumers. A service interruption or shutdown could have a materially adverse impact on our operating activities. Remediation and repair of any failure, problem or breach of our key information systems could require significant capital investments.
In addition, we interact with many of our consumers through both our e-commerce website and our mobile applications, and these systems face similar risk of interruption or attack. Consumers increasingly utilize these services to purchase our products and to engage with our Connected Fitness community. If we are unable to continue to provide consumers a user-friendly experience and evolve our platform to satisfy consumer preferences, the growth of our e-commerce business and our net revenues may be negatively impacted. The performance of our Connected Fitness business is dependent on reliable performance of its products, applications and services and the underlying technical infrastructure, which incorporate complex software. If this software contains errors, bugs or other vulnerabilities which impede or halt service, this could result in damage to our reputation and brand, loss of users or loss of revenue.
Data security or privacy breaches could damage our reputation, cause us to incur additional expense, expose us to litigation and adversely affect our business and results of operations.
We collect sensitive and proprietary business information as well as personally identifiable information in connection with digital marketing, digital commerce, our in-store payment processing systems and our digital business (including our Connected Fitness business.business). In particular, in our Connected Fitnessdigital business we collect and store a variety of information regarding our users, and allow users to share their personal information with each other and with third parties. We also rely on third parties for the operation of certain of our e-commerce websites, and do not control these service providers. Hackers and data thieves are increasingly sophisticated and operate large scale and complex automated attacks. Any breach of our data security or that of our service providers or cyber fraud incident could result in an unauthorized release or transfer of customer, consumer, vendor, user or employee information, or the loss of money, valuable business data or cause a disruption in our business. These events could give rise to unwanted media attention, damage our reputation, damage our customer, consumer or user relationships and result in lost sales, fines or lawsuits. We may also be required to expend significant capital and other resources to protect against or respond to or alleviate problems caused by a security breach, which could negatively impact our results of operations. Like other companies in our industry, we have in the past experienced, and we expect to continue to experience, cyberattacks, including phishing, cyber fraud incidents and other attempts
to breach, or gain unauthorized access to, our systems. These attempted attacks have increased as COVID-19 has progressed and many employees continue to work from home. To date, these attacks have not had a material impact on our operations, but there can be no assurance that they will not have an impact in the future.
We must also comply with increasingly complex and evolving regulatory standards throughout the world enacted to protect personal information and other data. Compliance with existing, proposed and forthcoming laws and regulations can be costly and could negatively impact our profitability. For example, the European Union adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018, and California passed the California Consumer Privacy Act (“CCPA”), which became effective in January 2020. These laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. In addition, an inabilitydata privacy laws and regulations continue to maintain complianceevolve. For example, in 2016, the European Union and the United States agreed to a framework for data transferred from the European Union to the United States, called the Privacy Shield. However, in July 2020 the Privacy Shield was invalidated by the Court of Justice of the European Union (“CJEU”) and the alternative basis upon which companies can continue to transfer data remains subject to continued regulatory and judicial scrutiny. As requirements continue to evolve, it may be costly for us to adjust our operations to comply with new requirements. Failure to comply with these regulatory standards could result in a violation of data privacy laws and regulations and subject us to litigationlegal proceedings against us by governmental entities or other regulatory proceedings. This could negatively impact our profitability, result inothers, imposition of fines by governmental authorities, negative publicity and damage to our brand image, or cause the size of our Connected Fitness community to decline.
We are in the process of implementing a new operating and information system, which involves risks and uncertainties that could adversely affect our business.
We are in the process of implementing a global operating and financial reporting information technology system as part of a multi-year plan to integrate and upgrade our systems and processes, which began in 2015 and will continue in phases over the next several years. The first phase of this implementation became operational during 2017 in our North America, EMEA and Connected Fitness operations, and we are in the process of developing an implementation strategy and roll-out plan for our Asia-Pacific and Latin American regions. Implementation of new information systems involves risks and uncertainties. Any disruptions, delays, or deficiencies in the design, implementation or application of these systems could result in increased costs, disruptions in our ability to effectively source, sell or ship our products, delays in the collection of payment from our customers or adversely affect our ability to timely report our financial results, all of which could materially adversely affecthave a negative impact on our business, results of operations, and financial condition.profitability.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate could be adversely affected in the future by a number of factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations or their interpretations and application, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of non-U.S. earnings for which we have not previously provided for applicable foreign withholding tax,taxes, certain U.S. state income taxes, or foreign exchange rate impacts. ManyWe are unable to predict what impact future tax reform efforts may have on our results of operations, including as a result of any changes enacted during the new U.S. presidential administration.
Additionally, we engage in multiple types of intercompany transactions, and our allocation of profits and losses among us and our subsidiaries through our intercompany transfer pricing arrangements are subject to review by the Internal Revenue Service and foreign tax authorities. Although we believe we have clearly reflected the economics of these transactions and the proper documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our tax provision. Moreover, the Organization for Economic Co-operation and Development and many of the countries in which we do business have or are expectedcontinue to adoptevaluate changes to tax laws as resultwhich could significantly impact the allocation of the Base Erosionprofits and Profit Shifting finallosses among us and our subsidiaries and impact our mix of earnings in countries with differing statutory rates.
proposals from the Organization for Economic Co-operation and Development and specific country anti-avoidance initiatives. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant judgment.
The United States enacted the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017, which had a significant impact
Failure to protect our provision for income taxes as of December 31, 2017. The Tax Act includes a number of changes to existing U.S. tax laws that impact us, including the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The Tax Act also provides for a one-time transition tax on indefinitely reinvested foreign earnings and the acceleration of depreciation for certain assets, as well as prospective changes beginning in 2018, including the elimination of certain domestic deductions and credits, capitalization of research and development expenditures, and limitations on the deductibility of executive compensation and interest. The Tax Act transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation.
The Tax Act requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the Tax Act, review all information, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded, which could have a material adverse effect on our business, results of operations or financial condition.
Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns.
From time to time, we may invest in business infrastructure, new businesses, and expansion of existing businesses, such as the ongoing expansion of our network of brand and factory house stores and our distribution facilities, the expansion of our corporate headquarters, investments to implement our global operating and financial reporting information technology system, or investments to support our digital strategy. These investments require substantial cash investments and management attention. We believe cost effective investments are essential to business growth and profitability. The failure of any significant investment to provide the returns or synergies we expect could adversely affect our financial results. Infrastructure investments may also divert funds from other potential business opportunities.
Our future success is substantially dependent on the continued service of our senior management and other key employees.
Our future success is substantially dependent on the continued service of our senior management and other key employees, particularly Kevin A. Plank, our founder, Chairman and Chief Executive Officer. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and achieve our business goals.
We also may be unable to retain existing management, product creation, innovation, sales, marketing, operational and other support personnel that are critical to our success, which could result in harm to key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs.
If we are unable to attract and retain new team members, including senior management, we may not be able to achieve our business objectives.
Our growth has largely been the result of significant contributions by our current senior management, product design teams and other key employees. However, to be successful in continuing to profitably grow our business and manage our operations, we will need to continue to attract, retain and motivate highly talented management and other employees with a range of skills and experience. Competition for employees in our industry is intense and we have experienced difficulty from time to time in attracting the personnel necessary to support the growth of our business, and we may experience similar difficulties in the future. If we are unable to attract, assimilate and retain management and other employees with the necessary skills, we may not be able to grow or successfully operate our business and achieve our long term objectives.
A number of our fabrics and manufacturing technology are not patented and can be imitated by our competitors.
The intellectual property rights, in the technology, fabrics and processes used to manufactureor our products are generally owned or controlled by our suppliers and are generally not unique to us. Our ability to obtain patent protection for our products is limited and we currently own a limited number of fabric or process patents. As a result, our current and future competitors are able to manufacture and sell products with performance characteristics and fabrications similar to certain of our products. Because many of our competitors have significantly greater financial, distribution, marketing and other resources than we do, they may be able to manufacture and sell products based on certain of our fabrics and manufacturing technology at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenues and profitability could be materially adversely affected.
Our intellectual property rights could potentially conflict with the rights of others, could damage our brand, weaken our competitive position and we may be prevented from selling or providing somenegatively impact our results of our products.operations.
Our success depends in large part on our brand image. We believe our registered and common law trademarks have significant value and are important to identifying and differentiating our products from those of our competitors and creating and sustaining demand for our products. In addition, patents are increasingly important with respect to our innovative products and new businesses and investments, including our digital business. From time to time, we have received or brought claims relating to intellectual property rights of others, and we expect such claims will continue or increase, particularly as we expand our business and the number of products we offer. Any such claim, regardless of its merit, could be expensive and time consuming to defend or prosecute. Successful infringement claims against us could result in significant monetary liability or prevent us from selling or providing some of our products. In addition, resolution of claims may require us to redesign our products, license rights belonging to third parties or cease using those rights altogether. Any of these events could harm our business and have a material adverse effect on our results of operations and financial condition.
Our failure to protect our intellectual property rights could diminish the value of our brand, weaken our competitive position and reduce our net revenues.
We currently rely on a combination of copyright, trademark, and trade dress, laws, patent laws,and unfair competition laws, confidentiality procedures and licensing arrangements to establish and protect our intellectual property rights. The steps taken by us to protect our proprietary rights may not be adequate to prevent infringement of our trademarks and proprietary rights by others, including imitation of our products and misappropriation of our brand. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. If we fail to protect and maintain ourjurisdictions. In addition, intellectual property rights in the valuetechnology, fabrics and processes used to manufacture the majority of our brand could be diminishedproducts are generally owned or controlled by our suppliers and are generally not unique to us, and our competitive position may suffer.current and future competitors are able to manufacture and sell products with performance characteristics and fabrications similar to certain of our products.
From time to time, we discoverhave brought claims relating to intellectual property rights of others or have discovered unauthorized products in the marketplace that are either counterfeit reproductions of our products or unauthorized irregulars that do not meet our quality control standards. If we are unsuccessful in challenging a third party’s products on the basis of trademark infringement, continued sales of their products could adversely impactfail to protect, maintain and enforce our brand, result in the shift of consumer preferences away from our products and adversely affect our business.
We have licensed in the past, and expect to license in the future, certain of our proprietaryintellectual property rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that diminish the value of our proprietary rights or harmbrand could decrease and our reputation.competitive position may suffer. In
addition, from time to periodictime others may seek to enforce infringement claims litigation and investigations thatagainst us. Successful infringement claims against us could result in unexpected expensessignificant monetary liability or prevent us from selling or providing some of our products. The resolution of such claims may require us to redesign our products, license rights belonging to third parties or cease using those rights altogether. Any of these events could harm our business and have ana material adverse effect on our results of operations and financial condition.
We are the subject of a number of ongoing legal proceedings that have resulted in significant expense, and adverse developments in our ongoing proceedings and/or future legal proceedings could have a material adverse effect on our business, reputation, financial condition, and results of operations. or stock price.
Given the size and extent of our global operations, we
We are currently involved in a variety of litigation, arbitrationinvestigations and other legal proceedingsmatters and may be subject to additional investigations, arbitration proceedings, audits, regulatory inquiries and similar actions, including matters related to commercial disputes, intellectual property, employment, securities laws, disclosures, tax, accounting, class action and product liability, as well as trade, regulatory and other claims related to our business and our industry. Theseindustry, which we refer to collectively as legal proceedings. For example, we are subject to an ongoing securities class action proceeding regarding our prior disclosures (including regarding the use of "pull forward" sales and the investigations referred to below) and derivative complaints regarding related matters, include those contained inas well as past related party transactions, among other proceedings. Refer to Note 710 to our consolidated financial statements included in Part II, Item 8Consolidated Financial Statements of this Annual Report on Form 10-K. 10-K for additional information regarding these specific matters. In addition, as previously disclosed in November 2019, we have been responding to requests for documents and information from the U.S. Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”) beginning with submissions to the SEC in July 2017, and in July 2020 we and two members of our senior management received “Wells Notices” from the SEC relating to our disclosures covering the third quarter of 2015 through the period ending December 31, 2016, regarding the use of “pull forward” sales in connection with revenue during those quarters. In the course of cooperating with the SEC and DOJ requests, we have reviewed our disclosures and we continue to believe they were appropriate. However, we cannot predict the outcome of any particular proceeding, or whether ongoing investigations, including the SEC and DOJ investigations, will be resolved favorably or ultimately result in charges or material damages, fines or other penalties, enforcement actions, bars against serving as an officer or director, or practicing before the SEC, or civil or criminal proceedings against us or members of our senior management.
Legal proceedings in general, and securities and class action litigation and regulatory investigations in particular, can be expensive and disruptive. Any of ourOur insurance may not cover all claims that may be asserted against us, and we are unable to predict how long the legal proceedings could result in damages, fines or other penalties, divert financial and management resources and result in significant legal fees. We cannot predict theto which we are currently subject will continue. An unfavorable outcome of any particularlegal proceeding and the costs incurred in these matters can be substantial, regardless of the outcome. An unfavorable outcome may have an adverse impact on our business, financial condition and results of operations. In addition, anyoperations or our stock price. Any proceeding could negatively impact our reputation among our customers andor our shareholders. Furthermore, publicity surrounding ongoing legal proceedings, even if resolved favorably for us, could result in additional legal proceedings against us, as well as damage our brand image.
Risks Related to our Common Stock
Kevin Plank, our Executive Chairman and Brand Chief, controls the majority of the voting power of our common stock.
Our Class A common stock has one vote per share, our Class B common stock has 10 votes per share and our Class C common stock has no voting rights (except in limited circumstances). Our Executive Chairman and Brand Chief, Kevin A. Plank, beneficially owns all outstanding shares of Class B common stock. As a result, Mr. Plank has the majority voting control and is able to direct the election of all of the members of our Board of Directors and other matters we submit to a vote of our stockholders. Under certain circumstances, the Class B common stock automatically converts to Class A common stock, which would also result in the conversion of our Class C common stock into Class A common stock. As specified in our charter, these circumstances include when Mr. Plank beneficially owns less than 15.0% of the total number of shares of Class A and Class B common stock outstanding, if Mr. Plank were to resign as an Approved Executive Officer of the Company (or was otherwise terminated for cause) or if Mr. Plank sells more than a specified number of any class of our common stock within a one-year period. This concentration of voting control may have various effects including, but not limited to, delaying or preventing a change of control or allowing us to take action that the majority of our stockholders do not otherwise support. In addition, we utilize shares of our Class C common stock to fund employee equity incentive programs and may do so in connection with future stock-based acquisition transactions, which could prolong the duration of Mr. Plank’s voting control.
The trading prices for our Class A and Class C common stock may differ and fluctuate from time to time.time.
The trading prices of our Class A and Class C common stock may differ and fluctuate from time to time in response to various factors, some of which are beyond our control. These factors may include, among others, overall performance of the equity markets and the economy as a whole, variations in our quarterly results of operations or those of our competitors, our ability to meet our published guidance and securities analyst expectations, or recommendations by securities analysts. In addition, our non-voting Class C common stock has traded at a discount to our Class A common stock, and there can be no assurance that this will not continue.
Kevin Plank, our Chairman and Chief Executive Officer controls the majority of the voting power of our common stock.
Our Class A common stock has one vote per share, our Class B common stock has 10 votes per share and our Class C common stock has no voting rights (except in limited circumstances). Our Chairman and Chief Executive Officer, Kevin A. Plank, beneficially owns all outstanding shares of Class B common stock. As a result, Mr. Plank has the majority voting control and is able to direct the election of all of the members of our Board of Directors and other matters we submit to a vote of our stockholders. The Class B common stock automatically converts to Class A common stock when Mr. Plank beneficially owns less than 15.0% of the total number of shares of Class A and Class B common stock outstanding and in other limited circumstances. This concentration of voting control may have various effects including, but not limited to, delaying or preventing a change of control or allowing us to take action that the majority of our shareholders do not otherwise support. In addition, we utilize shares of our Class C common stock to fund employee equity incentive programs and may do so in connection with future stock-based acquisition transactions, which could prolong the duration of Mr. Plank’s voting control.
|
| | | | |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
The following includes a summary of the principal properties that we own or lease as of December 31, 2017.the end of Fiscal 2020.
Our principal executive and administrative offices are located at an office complex in Baltimore, Maryland, which includes 400 thousand square feetthe majority of office space thatwhich we own and 126 thousand square feet thata portion of which we are leasing. In 2016, we purchased buildingslease. For each of our Europe, Latin America and parcels of land, including approximately 58 acres of land and 130 thousand square feet of office space located close to our corporate office complex, to be utilized to expand our corporate headquarters to accommodate our future growth needs. For our EuropeanAsia Pacific headquarters, we lease an office in Amsterdam, the Netherlands, and we maintain an international management office in Panama. For our Greater China headquarters, we lease an office in Shanghai, China. Additionally, we lease space in Austin, Texas, Denver, Colorado, San Francisco, California and Copenhagen, Denmark for our Connected Fitness businesses.space.
We lease our primary distribution facilities, which are located in Glen Burnie,Sparrows Point, Maryland, Mount Juliet, Tennessee and Rialto, California. Our Glen BurnieCombined, these facilities include a total of 830 thousandrepresent approximately 3.5 million square feet of facility space. These leases expire at various dates, with options to renew various portions of the facilities through September 2021. Our Mount Juliet facility is a 1.0 million square foot facility, with options to renew theearliest lease term through December 2041. Our Rialto facility is a 1.2 million square foot facility with a lease termtermination date through May 2023. In 2016 we entered into a lease for a new 1.3 million square foot distribution facility being developed for us in Baltimore, Maryland, which we expect to utilize beginning in 2019. The lease for this property includes options to renew through 2053. We believe our distribution facilities and space available through our third-party logistics providers will be adequate to meet our short term needs.
In addition, as of December 31, 2017,2020, we leased 295439 brand and factory house stores located primarily in the United States, Brazil, Canada, China, Mexico, Korea, Chile, and MexicoCanada with lease endend dates in 20182021 through 2033.2035. We also lease additional office space for sales, quality assurance and sourcing, marketing, and administrative functions. We anticipate that we will be able to extend these leases that expire in the near future on satisfactory terms or relocate to other locations.
|
| | | | |
| ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we have been involved in litigation and other proceedings, including matters related to commercial disputes and intellectual property, as well as trade, regulatory and other claims related to our business. SeeRefer to Note 710 to our Consolidated Financial Statements for information on certain legal proceedings, which is incorporated by reference herein.
Executive Officers of the Registrant
Our executive officers are:
|
| | | | |
Name | | Age | | Position |
Kevin A. Plank | | 45 | | Chief Executive Officer and Chairman of the Board |
David E. Bergman | | 45 | | Chief Financial Officer |
Colin Browne | | 54 | | Chief Supply Chain Officer |
Kerry D. Chandler | | 53 | | Chief Human Resources Officer |
Kevin Eskridge | | 41 | | Chief Product Officer |
Paul Fipps | | 45 | | Chief Technology Officer |
Patrik Frisk | | 55 | | President and Chief Operating Officer |
Jason LaRose | | 44 | | President of North America |
Karl-Heinz Maurath | | 56 | | Chief Revenue Officer |
John Stanton | | 57 | | General Counsel and Corporate Secretary |
Kevin A. Plank has served as our Chief Executive Officer and Chairman of the Board of Directors since 1996. Mr. Plank also serves on the Board of Directors of the National Football Foundation and College Hall of Fame, Inc. and is a member of the Board of Trustees of the University of Maryland College Park Foundation.
David E. Bergman was appointedas the Chief Financial Officer in November 2017. Mr. Bergman joined the Company in 2005 and has served in various Finance and Accounting leadership roles for the Company, including Corporate Controller from early 2006 to October 2014, Vice President of Finance and Corporate Controller from November 2014 to January 2016, Senior Vice President, Corporate Finance from February 2016 to January 2017, and acting Chief Financial Officer from February 2017 to November 2017. Prior to joining the Company, Mr. Bergman worked as a C.P.A. within the audit and assurance practices at Ernst & Young LLP and Arthur Andersen LLP.
Colin Browne has been the Chief Supply Chain Officer since July 2017. Prior to that, he served as President of Global Sourcing from September 2016 to June 2017. Prior to joining our Company, he served as Vice President and Managing Director for VF Corporation, leading its sourcing and product supply organization in Asia and Africa from November 2013 to August 2016 and as Vice President of Footwear Sourcing from November 2011 to October 2013. Prior thereto, Mr. Browne served as Executive Vice President of Footwear and Accessories for Li and Fung Group LTD from September 2010 to November 2011 and Chief Executive Officer, Asia for Pentland Brands PLC from April 2006 to January 2010. Mr. Browne has over 25 years of experience leading sourcing efforts for large brands.
Kerry D. Chandler has been Chief Human Resources Officer since January 2015. Prior to joining our Company, she served as Global Head of Human Resources for Christie’s International from February 2014 to November 2014. Prior thereto, Ms. Chandler served as the Executive Vice President of Human Resources for the National Basketball Association from January 2011 to January 2014 and Senior Vice President of Human Resources from October 2007 to December 2010. Ms. Chandler also held executive positions in human resources for the Walt Disney Company, including Senior Vice President of Human Resources for ESPN. Prior to that, Ms. Chandler also held various senior management positions in Human Resources for IBM, and Motorola, Inc. and she began her career at the McDonnell Douglas Corporation.
Kevin Eskridge has been Chief Product Officer since May 2017, with oversight of the Company’s category management model, product, merchandising and design functions. Mr. Eskridge joined our Company in 2009 and has served in various leadership roles including Senior Director, Outdoor from September 2009 to September 2012, Vice President, China from October 2012 to April 2015, Senior Vice President, Global Merchandising from May 2015 to June 2016 and President, Sports Performance from July 2016 to April 2017. Prior to joining our Company, he served as Vice President, Merchandising of Armani Exchange from 2006 to 2009.
Paul Fipps has been Chief Technology Officer since July 2017. Prior to that, he served as Chief Information Officer from March 2015 and Executive Vice President of Global Operations from September 2016 to June 2017 and as Senior Vice President of Global Operations from January 2014 to February 2015.Prior to joining our Company, he served as Chief Information Officer and Corporate Vice President of Business Services at The Charmer Sunbelt Group (CSG), a leading distributor of fine wines, spirits, beer, bottled water and other beverages from May 2009 to December 2013,
as Vice President of Business Services from January 2007 to April 2009 and in other leadership positions for CSG from 1998 to 2007.
Patrik Frisk has been President and Chief Operating Officer since July 2017. Prior to joining our Company, he served as Chief Executive Officer for The ALDO Group from November 2014 to April 2017. Prior thereto, he spent 10 years with VF Corporation where he served as Coalition President of Outdoor Americas with responsibility for The North Face®, Timberland®, JanSport®, lucy® and SmartWool® brands from April 2014 to November 2014, President of Timberland from September 2011 to March 2014, President of Outdoor and Action Sports, EMEA with responsibility for The North Face®, Vans®, JanSport® and Reef® brands from August 2009 to August 2011 and other leadership positions from 2004 to 2009. Before VF Corporation, he ran his own retail business in Scandinavia and held senior positions with Peak Performance and W.L. Gore & Associates.
Jason LaRose has been President of North America since October 2016. Prior to that, he served as Senior Vice President of Digital Revenue from April 2015 to September 2016 and Senior Vice President of Global E-Commerce from October 2013 to March 2015. Prior to joining our Company, he served as Senior Vice President of E-Commerce for Express, Inc. from September 2011 to September 2013. Prior thereto, Mr. LaRose served as Vice President of Multi-Channel and International Business for Sears Holding Corporation from January 2007 to September 2011. Mr. LaRose also spent five years at McKinsey & Company where he was an Associate Principal in both the Retail and Consumer Goods practices.
Karl-Heinz (Charlie) Maurath has been Chief Revenue Officer since November 2015. Prior thereto he served as President of International from September 2012 to October 2015. Prior to joining our Company, he served for 22 years in various leadership positions with Adidas, including Senior Vice President, Adidas Group Latin America, from 2003 to 2012 with overall responsibility for Latin America including the Reebok and Taylor Made businesses and Vice President, Adidas Nordic, from 2000 to 2003 responsible for its business in the Nordic region and the Baltic states. Prior thereto, Mr. Maurath served in other management positions for Adidas, including Managing Director of its business in Sweden and Thailand and Area Manger of sales and marketing for its distributor and licensee businesses in Scandinavia and Latin America. Mr. Maurath, in his capacity a former director of a subsidiary of Adidas, is currently named as a defendant in a criminal tax investigation by regulatory authorities in Argentina related to certain tax matters of the Adidas subsidiary in 2006. In November 2013, the trial court ruled that there were currently no grounds upon which to indict Mr. Maurath, and in December 2016, the case was dismissed. The dismissal has been appealed. The Company believes this in no way impacts Mr. Maurath's integrity or ability to serve as an executive officer. On February 28, 2018, we announced Mr. Maurath plans to retire effective March 31, 2018.
John Stanton has been General Counsel since March 2013, and Corporate Secretary since February 2008. Prior thereto, he served as Vice President, Corporate Governance and Compliance from October 2007 to February 2013 and Deputy General Counsel from February 2006 to September 2007. Prior to joining our Company, he served in various legal roles at MBNA Corporation from 1993 to 2005, including as Senior Executive Vice President, Corporate Governance and Assistant Secretary. He began his legal career at the law firm Venable, LLP.
|
| | | | |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
|
| | | | |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Under Armour’s Class A Common Stock and Class C Common Stock are traded on the New York Stock Exchange (“NYSE”) under the symbols “UAA” and "UA", respectively. As of January 31, 2018,2021, there were 1,5241,765 record holders of our Class A Common Stock, 45 record holders of Class B Convertible Common Stock which are beneficially owned by our Chief Executive OfficerChairman and Chairman of the BoardBrand Chief, Kevin A. Plank, and 1,2081,170 record holders of our Class C Common Stock.
Our Class A Common Stock was listed on the NYSE under the symbol “UA” until December 6, 2016 and under the symbol "UAA" since December 7, 2016. The following table sets forth by quarter the high and low sale prices ofPrior to November 18, 2005, there was no public market for our Class A Common Stock on the NYSE during 2017 and 2016.
|
| | | | | | | | |
| | | High | | Low |
| 2017 | | | | |
| First Quarter (January 1 – March 31) | | $ | 31.06 |
| | $ | 18.40 |
|
| Second Quarter (April 1 – June 30) | | 23.46 |
| | 18.35 |
|
| Third Quarter (July 1 – September 30) | | 22.37 |
| | 15.92 |
|
| Fourth Quarter (October 1 – December 31) | | 17.61 |
| | 11.40 |
|
| 2016 | | | | |
| First Quarter (January 1 – March 31) | | $ | 43.42 |
| | $ | 31.62 |
|
| Second Quarter (April 1 – June 30) | | 47.95 |
| | 35.35 |
|
| Third Quarter (July 1 – September 30) | | 44.68 |
| | 37.23 |
|
| Fourth Quarter (October 1 – December 31) | | 39.20 |
| | 29.00 |
|
Stock. Our Class C Common Stock was listed on the NYSE under the symbol “UA.C” since its initial issuance on April 8, 2016 and until December 6, 2016 and under the symbol "UA" since December 7, 2016. The following table sets forth by quarter the high and low sale prices of our Class C Common Stock on the NYSE during 2017and 2016.
|
| | | | | | | | |
| | | High | | Low |
| 2017 | | | | |
| First Quarter (January 1 – March 31) | | $ | 27.64 |
| | $ | 17.05 |
|
| Second Quarter (April 1 – June 30) | | 21.81 |
| | 17.21 |
|
| Third Quarter (July 1 – September 30) | | 20.60 |
| | 14.80 |
|
| Fourth Quarter (October 1 – December 31) | | 16.02 |
| | 10.36 |
|
| 2016 | | |
| | |
|
| First Quarter (January 1 – March 31) | | — |
| | — |
|
| Second Quarter (April 1 – June 30) | | 46.20 |
| | 31.31 |
|
| Third Quarter (July 1 – September 30) | | 42.94 |
| | 33.16 |
|
| Fourth Quarter (October 1 – December 31) | | 34.29 |
| | 23.51 |
|
Stock Split
On March 16, 2016, the Board of Directors approved the issuance of the Company’s new Class C non-voting common stock, referred to as the Class C stock. The Class C stock was issued through a stock dividend on a one-for-one basis to all existing holders of the Company's Class A and Class B common stock. The shares of Class C stock were distributed on April 7, 2016, to stockholders of record of Class A and Class B common stock as of March 28, 2016. Stockholders' equity and all references to share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect this one-for-one stock dividend.
Dividends
No cash dividends were declared or paid during 2017Fiscal 2020 or 20162019 on any class of our common stock. We currently anticipate we will retain any future earnings for use in our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. In addition, we may be limited in our ability to pay dividends to our stockholders
under our credit facility. Refer to “Financial Position, Capital Resources and Liquidity” within Management’s Discussion and Analysis and Note 69 to the Consolidated Financial Statements for a further discussion of our credit facility.
Stock Compensation Plans
The following table contains certain information regarding our equity compensation plans.
| | | Plan Category | | Class of Common Stock | | Number of
securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a) | | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c) | Plan Category | | Class of Common Stock | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
| Equity compensation plans approved by security holders | | Class A | | 3,240,620 |
| | $ | 11.09 |
| | 10,593,082 |
| Equity compensation plans approved by security holders | | Class A | | 1,352,762 | | | $ | 34.89 | | | 12,794,691 | |
| Equity compensation plans approved by security holders | | Class C | | 11,270,848 |
| | $ | 13.86 |
| | 16,724,610 |
| Equity compensation plans approved by security holders | | Class C | | 10,621,929 | | | $ | 18.24 | | | 26,827,123 | |
| Equity compensation plans not approved by security holders | | Class A | | 2,079,385 |
| | $ | 4.66 |
| | — |
| Equity compensation plans not approved by security holders | | Class A | | 91,473 | | | $ | — | | | — | |
| Equity compensation plans not approved by security holders | | Class C | | 2,394,352 |
| | $ | 4.59 |
| | — |
| Equity compensation plans not approved by security holders | | Class C | | 92,119 | | | $ | — | | | — | |
The number of securities to be issued upon exercise of outstanding options, warrants and rights issued under equity compensation plans approved by security holders includes 3.31.4 million Class A and 5.010.7 million Class C options, restricted stock units and deferred stock units issued to employees, non-employees and directors of Under Armour; theseArmour. These restricted stock units and deferred stock units are not included in the weighted average exercise price calculation above. The number of securities remaining available for future issuance includes 7.910.1 million shares of our Class A Common Stock and 15.524.9 million shares of our Class C Common Stock under our SecondThird Amended and Restated 2005 Omnibus Long-Term Incentive Plan (“2005 Stock Plan”). The number of securities remaining available for future issuance under our Employee Stock Purchase Plan includes and 2.7 million of our Class A Common Stock and 1.22.0 million shares of our Class C Common Stock.Stock under our Employee Stock Purchase Plans. In addition to securities issued upon the exercise of stock options, warrants and rights, the 2005 Stock Plan authorizes the issuance of restricted and unrestricted shares of our Class A and C Common Stock and other equity awards. Refer to Note 1215 to the Consolidated Financial Statements for information required by this Item regarding the material features of each plan.
The number of securities issued upon exercise of outstanding options, warrants and rights issued under equity compensation plans not approved by security holders includes 1.92 million Class A and 1.93 million Class C fully vested and non-forfeitable warrants granted in 2006 to NFL Properties LLC as partial consideration for footwear promotional rights, and 159.491.5 thousand shares of our Class A Common Stock and 460.392.1 thousand shares of our Class C Common Stock issued in connection with the delivery of shares pursuant to deferred stock units granted to certain of our marketing partners. These deferred stock units are not included in the weighted average exercise price calculation above.
Refer to Note 12 to the Consolidated Financial Statements for a further discussion on the warrants. The deferred stock units are issued to certain of our marketing partners in connection with their entering into endorsement and other marketing services agreements
with us. The terms of each agreement set forth the number of deferred stock units to be granted and the delivery dates for the shares, which range fromover a 1 to 10 yearmulti-year period, depending on the contract. The deferred stock units are non-forfeitable.
Stock Performance Graph
The stock performance graph below compares cumulative total return on Under Armour, Inc. Class A Common Stock to the cumulative total return of the S&P 500 Index and S&P 500 Apparel, Accessories and Luxury Goods Index from December 31, 20122015 through December 31, 2017.2020. The graph assumes an initial investment of $100 in Under Armour and each index as of December 31, 20122015 and reinvestment of any dividends. The performance shown on the graph below is not intended to forecast or be indicative of possible future performance of our common stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
| Under Armour, Inc. | $ | 100.00 | | | $ | 69.76 | | | $ | 34.65 | | | $ | 42.43 | | | $ | 51.87 | | | $ | 41.23 | |
| S&P 500 | $ | 100.00 | | | $ | 111.96 | | | $ | 136.40 | | | $ | 130.42 | | | $ | 171.49 | | | $ | 203.04 | |
| S&P 500 Apparel, Accessories & Luxury Goods | $ | 100.00 | | | $ | 88.72 | | | $ | 106.86 | | | $ | 90.03 | | | $ | 110.94 | | | $ | 99.45 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
| Under Armour, Inc. | $ | 100.00 |
| | $ | 179.97 |
| | $ | 279.97 |
| | $ | 332.32 |
| | $ | 231.84 |
| | $ | 115.16 |
|
| S&P 500 | $ | 100.00 |
| | $ | 132.39 |
| | $ | 150.51 |
| | $ | 152.59 |
| | $ | 170.84 |
| | $ | 208.14 |
|
| S&P 500 Apparel, Accessories & Luxury Goods | $ | 100.00 |
| | $ | 124.93 |
| | $ | 126.16 |
| | $ | 96.17 |
| | $ | 85.31 |
| | $ | 102.77 |
|
|
| | | | |
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includedappearing elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statements of Operations and Balance Sheets data for each of the five fiscal years indicated below has been derived from our audited Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands, except per share amounts) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Net revenues | | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | 5,193,185 | | | $ | 4,989,244 | | | $ | 4,833,338 | |
| Cost of goods sold | | 2,314,572 | | | 2,796,599 | | | 2,852,714 | | | 2,737,830 | | | 2,584,724 | |
| Gross profit | | 2,160,095 | | | 2,470,533 | | | 2,340,471 | | | 2,251,414 | | | 2,248,614 | |
| Selling, general and administrative expenses | | 2,171,934 | | | 2,233,763 | | | 2,182,339 | | | 2,099,522 | | | 1,831,143 | |
| Restructuring and impairment charges | | 601,599 | | | — | | | 183,149 | | | 124,049 | | | — | |
| Income (loss) from operations | | (613,438) | | | 236,770 | | | (25,017) | | | 27,843 | | | 417,471 | |
| Interest expense, net | | (47,259) | | | (21,240) | | | (33,568) | | | (34,538) | | | (26,434) | |
| Other income (expense), net | | 168,153 | | | (5,688) | | | (9,203) | | | (3,614) | | | (2,755) | |
| Income (loss) before income taxes | | (492,544) | | | 209,842 | | | (67,788) | | | (10,309) | | | 388,282 | |
| Income tax expense (benefit) | | 49,387 | | | 70,024 | | | (20,552) | | | 37,951 | | | 131,303 | |
| Income (loss) from equity method investment | | (7,246) | | | (47,679) | | | 934 | | | — | | | — | |
| Net income (loss) | | (549,177) | | | 92,139 | | | (46,302) | | | (48,260) | | | 256,979 | |
| Adjustment payment to Class C capital stockholders | | — | | | — | | | — | | | — | | | 59,000 | |
| Net income (loss) available to all stockholders | | $ | (549,177) | | | $ | 92,139 | | | $ | (46,302) | | | $ | (48,260) | | | $ | 197,979 | |
| Net income available per common share | | | | | | | | | | |
| Basic net income (loss) per share of Class A and B common stock | | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | | | $ | (0.11) | | | $ | 0.45 | |
| Basic net income (loss) per share of Class C common stock | | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | | | $ | (0.11) | | | $ | 0.72 | |
| Diluted net income (loss) per share of Class A and B common stock | | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | | | $ | (0.11) | | | $ | 0.45 | |
| Diluted net income (loss) per share of Class C common stock | | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | | | $ | (0.11) | | | $ | 0.71 | |
| | | | | | | | | | |
| Weighted average common shares outstanding Class A and B common stock |
| Basic | | 222,927 | | | 222,532 | | | 221,001 | | | 219,254 | | | 217,707 | |
| Diluted | | 222,927 | | | 223,206 | | | 221,001 | | | 219,254 | | | 221,944 | |
| | | | | | | | | | |
| Weighted average common shares outstanding Class C common stock |
| Basic | | 231,162 | | | 228,431 | | | 224,814 | | | 221,475 | | | 218,623 | |
| Diluted | | 231,162 | | | 231,068 | | | 224,814 | | | 221,475 | | | 222,904 | |
| | | | | | | | | | |
| Dividends declared | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 59,000 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands, except per share amounts) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Net revenues | | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 3,963,313 |
| | $ | 3,084,370 |
| | $ | 2,332,051 |
|
| Cost of goods sold | | 2,737,830 |
| | 2,584,724 |
| | 2,057,766 |
| | 1,572,164 |
| | 1,195,381 |
|
| Gross profit | | 2,238,723 |
| | 2,240,611 |
| | 1,905,547 |
| | 1,512,206 |
| | 1,136,670 |
|
| Selling, general and administrative expenses | | 2,086,831 |
| | 1,823,140 |
| | 1,497,000 |
| | 1,158,251 |
| | 871,572 |
|
| Restructuring and impairment charges | | 124,049 |
| | — |
| | — |
| | — |
| | — |
|
| Income from operations | | 27,843 |
| | 417,471 |
| | 408,547 |
| | 353,955 |
| | 265,098 |
|
| Interest expense, net | | (34,538 | ) | | (26,434 | ) | | (14,628 | ) | | (5,335 | ) | | (2,933 | ) |
| Other expense, net | | (3,614 | ) | | (2,755 | ) | | (7,234 | ) | | (6,410 | ) | | (1,172 | ) |
| Income (loss) before income taxes | | (10,309 | ) | | 388,282 |
| | 386,685 |
| | 342,210 |
| | 260,993 |
|
| Provision for income taxes | | 37,951 |
| | 131,303 |
| | 154,112 |
| | 134,168 |
| | 98,663 |
|
| Net income (loss) | | (48,260 | ) | | 256,979 |
| | 232,573 |
| | 208,042 |
| | 162,330 |
|
| Adjustment payment to Class C | | — |
| | 59,000 |
| | — |
| | — |
| | — |
|
| Net income (loss) available to all stockholders | | $ | (48,260 | ) | | $ | 197,979 |
| | $ | 232,573 |
| | $ | 208,042 |
| | $ | 162,330 |
|
| Net income available per common share | | | | | | | | | | |
| Basic net income (loss) per share of Class A and B common stock | | $ | (0.11 | ) | | $ | 0.45 |
| | $ | 0.54 |
| | $ | 0.49 |
| | $ | 0.39 |
|
| Basic net income (loss) per share of Class C common stock | | $ | (0.11 | ) | | $ | 0.72 |
| | $ | 0.54 |
| | $ | 0.49 |
| | $ | 0.39 |
|
| Diluted net income (loss) per share of Class A and B common stock | | $ | (0.11 | ) | | $ | 0.45 |
| | $ | 0.53 |
| | $ | 0.47 |
| | $ | 0.38 |
|
| Diluted net income (loss) per share of Class C common stock | | $ | (0.11 | ) | | $ | 0.71 |
| | $ | 0.53 |
| | $ | 0.47 |
| | $ | 0.38 |
|
| | | | | | | | | | | |
| Weighted average common shares outstanding Class A and B common stock |
| Basic | | 219,254 |
| | 217,707 |
| | 215,498 |
| | 213,227 |
| | 210,696 |
|
| Diluted | | 219,254 |
| | 221,944 |
| | 220,868 |
| | 219,380 |
| | 215,958 |
|
| | | | | | | | | | | |
| Weighted average common shares outstanding Class C common stock |
| Basic | | 221,475 |
| | 218,623 |
| | 215,498 |
| | 213,227 |
| | 210,686 |
|
| Diluted | | 221,475 |
| | 222,904 |
| | 220,868 |
| | 219,380 |
| | 215,958 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| Dividends declared | | $ | — |
| | $ | 59,000 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| (In thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Cash and cash equivalents | | $ | 1,517,361 | | | $ | 788,072 | | | $ | 557,403 | | | $ | 312,483 | | | $ | 250,470 | |
| Working capital (1) | | $ | 1,809,699 | | | $ | 1,280,200 | | | $ | 1,277,651 | | | $ | 1,277,304 | | | $ | 1,279,337 | |
| Inventories | | $ | 895,974 | | | $ | 892,258 | | | $ | 1,019,496 | | | $ | 1,158,548 | | | $ | 917,491 | |
| Total assets (2) | | $ | 5,030,628 | | | $ | 4,843,531 | | | $ | 4,245,022 | | | $ | 4,006,367 | | | $ | 3,644,331 | |
| Total debt, including current maturities | | $ | 1,003,556 | | | $ | 592,687 | | | $ | 728,834 | | | $ | 917,046 | | | $ | 817,388 | |
| Total stockholders’ equity | | $ | 1,675,993 | | | $ | 2,150,087 | | | $ | 2,016,871 | | | $ | 2,018,642 | | | $ | 2,030,900 | |
(1) Working capital is defined as current assets minus current liabilities.
(2) As a result of the adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, the selected financial data for fiscal year 2019 reflects the recognition of lease assets and liabilities for operating leases with terms of more than twelve months. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting policies.
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| (In thousands) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Cash and cash equivalents | | $ | 312,483 |
| | $ | 250,470 |
| | $ | 129,852 |
| | $ | 593,175 |
| | $ | 347,489 |
|
| Working capital (1) | | 1,277,304 |
| | 1,279,337 |
| | 1,019,953 |
| | 1,127,772 |
| | 702,181 |
|
| Inventories | | 1,158,548 |
| | 917,491 |
| | 783,031 |
| | 536,714 |
| | 469,006 |
|
| Total assets | | 4,006,367 |
| | 3,644,331 |
| | 2,865,970 |
| | 2,092,428 |
| | 1,576,369 |
|
| Total debt, including current maturities | | 917,046 |
| | 817,388 |
| | 666,070 |
| | 281,546 |
| | 151,551 |
|
| Total stockholders’ equity | | $ | 2,018,642 |
| | $ | 2,030,900 |
| | $ | 1,668,222 |
| | $ | 1,350,300 |
| | $ | 1,053,354 |
|
30
| |
(1) | Working capital is defined as current assets minus current liabilities. |
|
| | | | |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information contained in this section should be read in conjunction with our Consolidated Financial Statements and related notes and the information contained elsewhere in this Form 10-K under the captions “Risk Factors,” “Selected Financial Data,” and “Business.”
This Annual Report on Form 10-K, including this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.S. Securities Act of 1933, as amended ("the Securities Act"), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements.
The following MD&A is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to our Consolidated Financial Statements under Part II, Item 8 of this Annual Report on Form 10-K. All dollar and percentage comparisons made herein refer to the year ended December 31, 2020 ("Fiscal 2020") compared with the year ended December 31, 2019 ("Fiscal 2019"), unless otherwise noted. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for Fiscal 2019, filed with the Securities Exchange Commission ("SEC") on February 26, 2020, for a comparative discussion of our Fiscal 2019 financial results as compared to year ended December 31, 2018 ("Fiscal 2018"). See "Forward-looking statements."
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 largestOur digital health and fitness community and our strategy is focused on engaging with these consumers and increasing awareness and sales of our products.
Our net revenues grew to $4,976.6 million in 2017 from $2,332.1 million in 2013. We believe that our growth in net revenues hashave been driven by a growing interest in performance products and the strength of the Under Armour brand in the marketplace. Our long-term growth strategy is focused on increased sales of our products through ongoing product innovation, investment in our distribution channels and international expansion. 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.
Fiscal 2020 Performance
Financial highlights for full year 2017Fiscal 2020 as compared to the prior year periodFiscal 2019 include:
•Net revenues decreased 15%.
•Wholesale revenues decreased 25% and direct-to-consumer revenues increased 3%.2%, driven by growth in our e-commerce business.
Wholesale•Apparel revenue decreased 3% and Direct-to-Consumer revenues increased17%. Footwear revenue declined 14%.
Apparel, footwear and and accessories revenue increased2%, 3% and 10%, respectively.
was relatively flat.•Revenue in our North America segment decreased 5%segment declined 19%. Revenue in our Asia-Pacific, EMEA and Latin America segments grew 61%decreased 1%, 42%4% and 28%16%, respectively, with 11% growth in our Connected Fitness segment.respectively.
•Gross margin increased 140 basis points.
•Selling, general and administrative expense increased 14%.
Gross marginexpense decreased 140 basis points.3%.
A large majority of our products are sold in North America; however, we believe our products appeal to athletes and consumers with active lifestyles around the globe. Internationally, our net revenues are generated primarily from a mix of wholesale sales to retailers sales toand distributors in our wholesale channel and sales through our direct to consumer sales channels in Europe, Latin America, and Asia-Pacific. In addition, a third party licensee sells our products in Japan.direct-to-consumer channels.
We believe there is an increasing recognition of the health benefits of an active lifestyle. We believe this trend provides us with an expanding consumer base for our products. We also believe there is a continuing shift in consumer demand from traditional non-performance products to performance products, which are intended to provide better performance by wicking perspiration away from the skin, helping to regulate body temperature and
enhancing comfort. We believe that these shifts in consumer preferences and lifestyles are not unique to the United States, but are occurring in a number of markets globally, thereby increasing our opportunities to introduce our performance products to new consumers. We plan to continue to grow our business over the long term through increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution, growth in our direct to consumerdirect-to-consumer sales channel and expansion in international markets.
Although we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage of these opportunities or negatively impact our financial results, including, among others, the risk of general economic or market conditions that could affect consumer spending and the financial health of our retail customers. For example, recent and ongoing developments regarding COVID-19 may negatively impact our results of operations. Additionally, we may not be able to successfully execute on our long-term strategies, or successfully manage the increasingly complex operations of our global business effectively. Although we have announcedimplemented restructuring plans in the past and may implement additional plans in the future, we may not fully realize the expected benefits of these plans or other operating or cost-saving initiatives. In addition, we may not consistently be able to anticipate consumer preferences and develop new and innovative products that meet changing preferences in a timely manner. Furthermore, our industry is very competitive, and competition pressures could cause us to reduce the prices of our products or otherwise affect our profitability. We also rely on third-party suppliers and manufacturers outside the U.S. to provide fabrics and to produce our products, and disruptions to our supply chain could harm our business. For a more complete discussion of the risks facing our business, refer to the “Risk Factors” section included in Item 1A.
COVID-19
Recent DevelopmentsIn March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”.
During the first quarter of Fiscal 2020, we took action to close substantially all of our brand and factory house stores based on regional conditions, a majority of which remained closed into the second quarter of Fiscal 2020. By the end of the third quarter of Fiscal 2020, substantially all of our brand and factory house stores were re-opened. As pandemic conditions worsened globally during the fourth quarter of Fiscal 2020, we again closed certain stores based on regional conditions, particularly in EMEA and Latin America. The following is a summary of our owned and operated store closures and their status throughout Fiscal 2020 and as of the end of January 2021:
•North America: Beginning in mid-March we closed all of our stores in the North America operating segment, which remained closed through the end of April. We began a progressive re-opening of our stores in May and more than 85% of our stores were open by the end of June. As of the end of September 2020, all of our stores were open and approximately 95% of our stores were open as of the end of January 2021.
•EMEA: Beginning in mid-March we closed all of our stores in the EMEA operating segment, of which, over 65% remained closed through the end of April. We continued the re-opening of our stores in May and more than 95% of the stores were open at the end of June. As of the end of September 2020, all of our stores were open, however, in the fourth quarter we had to close almost 60% of our stores based on regional conditions. As of the end of January 2021, only 25% of our stores were open.
•Asia-Pacific: Stores in China were closed from late-January through early-March, when a slowly progressive re-opening process started. Stores in the remainder of the Asia-Pacific operating segment were also closed from time to time based on local conditions. More than 80% of our stores were open by the end of April, and by the end of June 2020 more than 95% of the stores were open and continued to be open until the end of September 2020. As of the end of January 2021, approximately 90% of our stores were open.
•Latin America: Beginning in mid-March, we closed all of our stores in the Latin America operating segment, which remained closed in April and through the end of May. We began a progressive re-opening of stores in June, and more than 25% of our stores were open by the end of June, and by the end of September 2020 approximately 85% of our stores remained open. However, in the fourth quarter, we had to close certain stores based on regional conditions, and approximately 55% of our stores were open as of the end of January 2021.
The discussion above reflects the status of our owned and operated stores through the end of January 2021, however, depending on the progression of COVID-19, stores in certain regions may close from time to time.
Additionally, throughout this time, many of our wholesale customers also closed their stores or operated them at limited capacity. As this pandemic progressed, we estimated that, in mid-May, approximately 80% of
locations where our products are sold were closed. By the end of May and throughout June, our owned and partner doors and those of our wholesale customers began reopening, though they continued to operate at limited capacity and experienced significantly decreased traffic. By the end of June, we estimated that over 90% of our owned and partner doors had reopened, and most of our wholesale customers had also reopened their stores. However, in the fourth quarter our owned and partners doors began to close from time to time based on regional conditions. While store closures significantly impacted sales throughout Fiscal 2020, since the beginning of the second quarter, we experienced significant growth in our global e-commerce business. Although e-commerce sales represented a higher portion of our overall business in Fiscal 2020, sales in this channel have historically represented a small percentage of our total revenue. For example, in Fiscal 2020 sales through our direct-to-consumer channel represented 41% of net revenues, with our e-commerce business representing approximately 47% of the total direct-to-consumer business.
Our business operations and financial performance in Fiscal 2020 were materially impacted by the developments discussed above, including decreases in net revenue and decreases in overall profitability as compared to the prior year. These developments further required us to recognize certain long-lived asset and goodwill impairment charges, discussed in further detail below, and record valuation allowances on the majority of our deferred tax assets and recognize impairment on certain equity method investments.
In addition to the impacts on our sales outlined above, this pandemic has also impacted the operations of our distribution centers, our third-party logistics providers and our manufacturing and supplier partners, including through the closure or reduced capacity of facilities and operational changes to accommodate social distancing. Depending on the progression of COVID-19, we may experience further disruptions or increased operational and logistics costs throughout our supply chain which could negatively impact our ability to obtain inventory or service our customers.
As we navigated these unprecedented circumstances, we continued to focus on preserving our liquidity and managing our cash flows through certain preemptive actions designed to enhance our ability to meet our short-term liquidity needs, including amending our credit agreement to provide temporary relief from or revisions to certain of our financial covenants in the near-term, providing us with improved access to liquidity during this time period and completing a sale of $500 million of Convertible Senior Notes. Additional actions include, among others, reductions to our discretionary spending and changes to our investment strategies, negotiating payment terms with our vendors, including revised lease terms with landlords in the form of rent deferrals or rent waivers, reductions in compensation costs, including through temporary reductions in pay, layoffs and decreases in incentive compensation, and limiting certain marketing and capital expenditures. Further, in connection with global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, we recognized certain incentives totaling $9.0 million for Fiscal 2020. These incentives were recorded as a reduction of the associated costs which we incurred within selling, general and administrative expenses in the Consolidated Statements of Operations.
We do expect the pandemic to continue to have a material impact on our financial condition, results of operations and cash flows from operations into 2021 as compared to the end of 2020. Specifically, we experienced timing impacts from COVID-19, related to customer order flow and changes in supply chain timing, which resulted in more planned spring product deliveries shifting from the fourth quarter of 2020 to early 2021. Further, we could experience material impacts, in addition to those noted above, including, but not limited to, increased sales-related reserves, increased charges from allowance for doubtful accounts, charges from adjustments of the carrying amount of inventory, increased cost of product, costs to alter production plans, changes in the designation of our hedging instruments, volatility in our effective tax rate and impacts to cash flows from operations due to delays in cash receipts from customers. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on future developments outside of our control, including the duration and spread of the pandemic and related actions taken by federal, state and local government officials, and international governments to prevent disease spread and the pace of vaccination efforts. Given that the current circumstances are dynamic and highly uncertain, we cannot reasonably estimate the impact of future store closures and shopping behaviors, including the related impact on store traffic patterns, conversion or overall consumer demand. For a more complete discussion of the COVID-19 related risks facing our business, refer to the “Risk Factors” section included in Item 1A.
Segment Presentation and Marketing
Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and other corporate support functions; costs related to our global assets and global marketing, costs related to our headquarters; restructuring and impairment related charges; and certain foreign currency hedge gains and losses.
2020 Restructuring
On July 27, 2017,March 31, 2020, our Board of Directors approved a restructuring plan (the “ 2017("2020 restructuring plan”plan") designed to more closely alignrebalance our financial resources with the critical priorities of our business. After completion of the 2017 restructuring plan, we recognized approximately $100.4 million of pre-tax charges in connection with this plan. In additioncost base to these charges, we also recognized restructuring related goodwill impairment charges of approximately $28.7 million for our Connected Fitness business.
On February 9, 2018,further improve profitability and cash flow generation. We identified further opportunities and on September 2, 2020, our Board of Directors approved an additionala $75 million increase to the restructuring plan, (the "2018 restructuring plan") identifying further opportunities to optimize operations. In conjunction with the 2018resulting in an updated 2020 restructuring plan of approximately $110$550 million to $130$600 million of total estimated pre-tax restructuring and related charges.
The restructuring and related charges are expectedprimarily consist of up to be incurred during our 2018 fiscal year, including:approximately:
Up to $105.0•$219 million inof cash restructuring charges, consistingcomprised of up to: $55.0$61 million in facility and lease terminationstermination costs, $30 million in employee severance and $50.0benefit costs, and $128 million in contract termination and other restructuring charges;costs; and
Up to $25.0•$381 million inof non-cash charges comprised of approximately $10.0an impairment of $291 million of inventory related chargesto our New York City flagship store and approximately $15.0$90 million of intangibles and other asset related impairments.
We recorded $472.7 million and $183.1 million of restructuring and related impairment charges for Fiscal 2020 and Fiscal 2018, respectively. There were no restructuring charges incurred during Fiscal 2019. The United States enactedsummary of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. The new legislation contains several key tax provisions that affect us and,costs recorded during Fiscal 2020 as required, we have included reasonablewell as our current estimates of the income tax effectsamount expected to be incurred in connection with the 2020 restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Restructuring and related impairment charges recorded | | Estimated restructuring and related Impairment charges (1) |
| (In thousands) | | Year ended December 31, 2020 (A) | | Remaining to be incurred (B) | | Total (A+B) |
| Costs recorded in cost of goods sold: | | | | | | |
| Contract-based royalties | | $ | 11,608 | | | — | | | 11,608 | |
| Inventory write-offs | | 768 | | | 3,400 | | | 4,168 | |
| Total costs recorded in cost of goods sold | | 12,376 | | | 3,400 | | | 15,776 | |
| | | | | | |
| Costs recorded in restructuring and impairment charges: | | | | | | |
| Property and equipment impairment | | 29,280 | | | 8,098 | | | 37,378 | |
| Intangible asset impairment | | 4,351 | | | — | | | 4,351 | |
| Right-of-use asset impairment | | 293,495 | | | — | | | 293,495 | |
| Employee related costs | | 28,579 | | | 1,421 | | | 30,000 | |
| Contract exit costs (2) | | 79,008 | | | 89,992 | | | 169,000 | |
| Other asset write off | | 13,074 | | | 15,926 | | | 29,000 | |
| Other restructuring costs | | 12,564 | | | 8,436 | | | 21,000 | |
| Total costs recorded in restructuring and related impairment charges | | 460,351 | | | 123,873 | | | 584,224 | |
| Total restructuring and impairment charges | | $ | 472,727 | | | $ | 127,273 | | | $ | 600,000 | |
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be recorded by us in connection with the restructuring plan.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
All restructuring and related impairment charges are included in our Corporate Other non-operating segment, of which $397.6 million are North America related, $14.4 million are EMEA related, $14.9 million are Latin America related, $6.8 million are Asia-Pacific related and $4.6 million are Connected Fitness related for Fiscal 2020.
The lease term for our New York City flagship store commenced on March 1, 2020 and an operating lease right-of-use ("ROU") asset and corresponding operating lease liability of $344.8 million was recorded on our Consolidated Balance Sheet. In March 2020, as a part of the 2020 restructuring plan, we made the strategic decision to forgo the opening of our New York City flagship store and the property is actively being marketed for sublease. Accordingly, in the first quarter of 2020, we recognized a ROU asset impairment of $290.8 million, reducing the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-
approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent. Rent expense or sublease income related to this lease will be recorded within other income (expense) on the Consolidated Statements of Operations.
These charges require us to make certain judgements and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and revise our assumptions and estimates as appropriate as new or updated information becomes available.
Long-Lived Asset Impairment
As a result of the impacts of COVID-19, we determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis. We performed undiscounted cash flow analyses on our long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, we determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. We estimated the fair values of these long-lived assets based on their market rent assessments or discounted cash flows. We compared these estimated fair values to the net carrying values and recognized $89.7 million of long-lived asset impairment charges for Fiscal 2020. There were no long-lived asset impairment charges for Fiscal 2019 and Fiscal 2018. The long-lived impairment charge was recorded within restructuring and impairment charges on the Consolidated Statements of Operations and as a reduction to the related asset balances on the Consolidated Balance Sheets. The long-lived asset impairment charges are included within the Company's operating segments as follows: $47.6 million recorded in North America, $23.0 million recorded in Asia-Pacific, $13.3 million recorded in Latin America, and $5.8 million recorded in EMEA for Fiscal 2020.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: management's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, we recognized $290.8 million of long-lived asset impairment charges related to our New York City flagship store, which was recorded in connection with our 2020 restructuring plan for Fiscal 2020. Refer to the 2020 Restructuring section above for a further discussion of the restructuring and related impairment charges.
Goodwill Impairment
As a result of the impacts of COVID-19, we determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. In the first quarter of Fiscal 2020, we performed discounted cash flow analyses and determined that the estimated fair values of the Latin America reporting unit and the Canada reporting unit within the North America operating segment no longer exceeded its carrying value and resulted in an impairment of goodwill. We recognized goodwill impairment charges of $51.6 million for Fiscal 2020 for these reporting units. The goodwill impairment charge was recorded within restructuring and impairment charges on the Consolidated Statements of Operations and as a reduction to the goodwill balance on the Consolidated Balance Sheets. There were no triggering events or goodwill impairment charges recorded during the remainder of Fiscal 2020. The goodwill impairment charges are included with our operating segments as follows: $15.4 million recorded in North America and $36.2 million recorded in Latin America for Fiscal 2020.
The determination of our reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates used in the discounted cash flow analyses, which are based on Level 3 inputs, include: our weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting units business, long-term rate of growth and profitability of the reporting units business, working capital effects, and changes in tax lawmarket conditions, consumer trends or strategy.
Acquisitions and tax rateDispositions
On March 2, 2020, we acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of our products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, net of $8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with our results of operations beginning on March 2, 2020.
On October 28, 2020, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell our MyFitnessPal platform, and on December 18, 2020, the sale was completed. Pursuant to the Purchase Agreement, the aggregate sale price for the transaction was $345 million, of which $215 million was payable upon closing. We
received $198.7 million at closing after giving effect to $16 million of purchase price and other adjustments. The sale includes up to $130 million in earn-out payments, which are based on the achievement of certain revenue targets over a three-year period. The potential earn-out payments include up to $35 million payable in calendar year 2022, $45 million payable in calendar year 2023 and $50 million payable in calendar year 2024. We recognized a gain of approximately $179.3 million, which is included in Other income (expenses), net in our 2017 financial results. These changes include a one-time mandatory transition tax on indefinitely reinvested foreign earnings and a re-measuringConsolidated Statements of deferred tax assets, resulting in an increase to our provision for income taxes of $38.8 million. Since the Tax Act was passed late inOperations.
During the fourth quarter of 2017,Fiscal 2020, we consider the accounting for the transition tax, deferred tax re-measurements,determined to change to a distributor model in Chile and other items to be provisional as the charge may be adjusted due to changes in interpretations and assumptions we have made, guidance that may be issued, and actions we may take as a result of the tax legislation.executed an asset sale agreement. We expect to finalize our estimates within the one-year measurement period allowed by the SEC.close this sale in early Fiscal 2021.
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 ourfrom 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.
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.revenues.
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 outbound handling costs were $101.5$80.5 million, $89.9$81 million and $63.7$91.8 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, 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 which includescategory 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, incentivesThe marketing category consists primarily of sports and stock-based compensation relatedbrand marketing, media, and retail presentation. Sports and brand marketing includes professional, club, collegiate sponsorship, individual athlete and influencer agreements, and products provided directly to team equipment managers and to individual athletes. Media includes digital, broadcast and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our employees.in-store fixture programs. 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.
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:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Net revenues | | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | 5,193,185 | |
| Cost of goods sold | | 2,314,572 | | | 2,796,599 | | | 2,852,714 | |
| Gross profit | | 2,160,095 | | | 2,470,533 | | | 2,340,471 | |
| Selling, general and administrative expenses | | 2,171,934 | | | 2,233,763 | | | 2,182,339 | |
| Restructuring and impairment charges | | 601,599 | | | — | | | 183,149 | |
| Income (loss) from operations | | (613,438) | | | 236,770 | | | (25,017) | |
| Interest expense, net | | (47,259) | | | (21,240) | | | (33,568) | |
| Other income (expense), net | | 168,153 | | | (5,688) | | | (9,203) | |
| Income (loss) before income taxes | | (492,544) | | | 209,842 | | | (67,788) | |
| Income tax expense (benefit) | | 49,387 | | | 70,024 | | | (20,552) | |
| Income (loss) from equity method investment | | (7,246) | | | (47,679) | | | 934 | |
| Net income (loss) | | $ | (549,177) | | | $ | 92,139 | | | $ | (46,302) | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (As a percentage of net revenues) | | 2020 | | 2019 | | 2018 |
| Net revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | | 51.7 | | | 53.1 | | | 54.9 | |
| Gross profit | | 48.3 | | | 46.9 | | | 45.1 | |
| Selling, general and administrative expenses | | 48.5 | | | 42.4 | | | 42.0 | |
| Restructuring and impairment charges | | 13.4 | | | — | | | 3.5 | |
| Income (loss) from operations | | (13.7) | | | 4.5 | | | (0.4) | |
| Interest expense, net | | (1.1) | | | (0.4) | | | (0.7) | |
| Other income (expense), net | | 3.8 | | | (0.1) | | | (0.2) | |
| Income (loss) before income taxes | | (11.0) | | | 4.0 | | | (1.3) | |
| Income tax expense (benefit) | | 1.1 | | | 1.3 | | | (0.4) | |
| Income (loss) from equity method investment | | (0.2) | | | (0.9) | | | — | |
| Net income (loss) | | (12.3) | % | | 1.7 | % | | (0.9) | % |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Net revenues | | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 3,963,313 |
|
| Cost of goods sold | | 2,737,830 |
| | 2,584,724 |
| | 2,057,766 |
|
| Gross profit | | 2,238,723 |
| | 2,240,611 |
| | 1,905,547 |
|
| Selling, general and administrative expenses | | 2,086,831 |
| | 1,823,140 |
| | 1,497,000 |
|
| Restructuring and impairment charges | | 124,049 |
| | — |
| | — |
|
| Income from operations | | 27,843 |
| | 417,471 |
| | 408,547 |
|
| Interest expense, net | | (34,538 | ) | | (26,434 | ) | | (14,628 | ) |
| Other expense, net | | (3,614 | ) | | (2,755 | ) | | (7,234 | ) |
| Income (loss) before income taxes | | (10,309 | ) | | 388,282 |
| | 386,685 |
|
| Provision for income taxes | | 37,951 |
| | 131,303 |
| | 154,112 |
|
| Net income (loss) | | $ | (48,260 | ) | | $ | 256,979 |
| | $ | 232,573 |
|
| Adjustment payment to Class C capital stockholders | | $ | — |
| | $ | 59,000 |
| | $ | — |
|
| Net income (loss) available to all stockholders | | $ | (48,260 | ) | | $ | 197,979 |
| | $ | 232,573 |
|
|
| | | | | | | | | |
| | | Year Ended December 31, |
| (As a percentage of net revenues) | | 2017 | | 2016 | | 2015 |
| Net revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | | 55.0 |
| | 53.6 |
| | 51.9 |
|
| Gross profit | | 45.0 |
| | 46.4 |
| | 48.1 |
|
| Selling, general and administrative expenses | | 41.9 |
| | 37.8 |
| | 37.8 |
|
| Restructuring and impairment charges | | 2.5 |
| | — |
| | — |
|
| Income from operations | | 0.6 |
| | 8.6 |
| | 10.3 |
|
| Interest expense, net | | (0.7 | ) | | (0.5 | ) | | (0.4 | ) |
| Other expense, net | | (0.1 | ) | | (0.1 | ) | | (0.2 | ) |
| Income (loss) before income taxes | | (0.2 | ) | | 8.0 |
| | 9.7 |
|
| Provision for income taxes | | 0.8 |
| | 2.7 |
| | 3.8 |
|
| Net income (loss) | | (1.0 | ) | | 5.3 |
| | 5.9 |
|
| Adjustment payment to Class C capital stockholders | | — |
| | 1.2 |
| | — |
|
| Net income (loss) available to all stockholders | | (1.0 | )% | | 4.1 | % | | 5.9 | % |
Consolidated Results of Operations
Year Ended December 31, 20172020 Compared to Year Ended December 31, 20162019
Net revenues increased $151.2 decreased $792.5 million, or 3.1%15%, to $4,976.6$4,474.7 million in 2017Fiscal 2020 from $4,825.3$5,267.1 million in 2016.Fiscal 2019. Net revenues by product category are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2020 | | 2019 | | $ Change | | % Change | | 2018 | | $ Change | | % Change |
| Apparel | | $ | 2,882,562 | | | $ | 3,470,285 | | | $ | (587,723) | | | (16.9) | % | | $ | 3,464,120 | | | $ | 6,165 | | | 0.2 | % |
| Footwear | | 934,333 | | | 1,086,551 | | | (152,218) | | | (14.0) | | | 1,063,175 | | | 23,376 | | | 2.2 | |
| Accessories | | 414,082 | | | 416,354 | | | (2,272) | | | (0.5) | | | 422,496 | | | (6,142) | | | (1.5) | |
| Net Sales | | 4,230,977 | | | 4,973,190 | | | (742,213) | | | (14.9) | | | 4,949,791 | | | 23,399 | | | 0.5 | |
| License revenues | | 105,779 | | | 138,775 | | | (32,996) | | | (23.8) | | | 124,785 | | | 13,990 | | | 11.2 | |
| Connected Fitness | | 135,813 | | | 136,378 | | | (565) | | | (0.4) | | | 120,357 | | | 16,021 | | | 13.3 | |
| Corporate Other (1) | | 2,098 | | | 18,789 | | | (16,691) | | | (88.8) | | | (1,748) | | | 20,537 | | | 1,174.9 | |
| Total net revenues | | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | (792,465) | | | (15.0) | % | | $ | 5,193,185 | | | $ | 73,947 | | | 1.4 | % |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2017 | | 2016 | | $ Change | | % Change |
| Apparel | | $ | 3,287,121 |
| | $ | 3,229,142 |
| | $ | 57,979 |
| | 1.8 | % |
| Footwear | | 1,037,840 |
| | 1,010,693 |
| | 27,147 |
| | 2.7 |
|
| Accessories | | 445,838 |
| | 406,614 |
| | 39,224 |
| | 9.6 |
|
| Total net sales | | 4,770,799 |
| | 4,646,449 |
| | 124,350 |
| | 2.7 |
|
| License | | 116,575 |
| | 99,849 |
| | 16,726 |
| | 16.8 |
|
| Connected Fitness | | 89,179 |
| | 80,447 |
| | 8,732 |
| | 10.9 |
|
| Intersegment Eliminations | | — |
| | (1,410 | ) | | 1,410 |
| | (100.0 | ) |
| Total net revenues | | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 151,218 |
| | 3.1 | % |
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within our geographic operating segments, but managed through our central foreign exchange risk management program.
The increasedecrease in net sales was primarily driven primarily by:
Apparelby a unit sales decline in apparel, footwear and accessories across all categories due to decreased demand, primarily related to impacts of COVID-19 including cancellations of orders by wholesale customers, closures of brand and factory house stores and lower traffic upon store re-openings, and a unit sales decrease of off-price sales within our wholesale channel. The decrease was partially offset by growth in multiple categories led by men'sthe e-commerce business and women's training and golf; andsale of specialty products, such as sports masks, within our accessories category.
Accessories unit sales growth in multiple categories led by men's training; and
Footwear unit sales growth in multiple categories led by running.
Licenserevenuesincreased $16.7 decreased $33 million, or 16.8%23.8%, to $116.6$105.8 million in 2017Fiscal 2020 from $99.8$138.8 million in 2016. This increase in license revenues wasFiscal 2019 driven primarily by increased distribution oflower contractual royalty minimums, decreased revenue from our licensed productslicensing partners in North America .due to softer demand as a result of impacts of COVID-19. Further, Fiscal 2019 included one-time settlements with two of our North American partners.
Connected Fitnessrevenue increased $8.8 decreased $0.6 million, or 10.9%0.4%, to $89.2$135.8 million in 2017Fiscal 2020 from $80.4$136.4 million in 2016Fiscal 2019 primarily driven by increased subscribers on our fitness applicationsa decrease in advertising revenue and higher licensing revenue.one-time development fee from a partner in Fiscal 2019. Additionally, the decrease in revenue is due to the sale of the MyFitnessPal platform during the fourth quarter of Fiscal 2020.
Gross profit decreased $1.9 $310.4 million to $2,238.7$2,160.1 million in 2017Fiscal 2020 from $2,240.6$2,470.5 million in 2016.Fiscal 2019. Gross profit as a percentage of net revenues, or gross margin, decreasedincreased 140 basis points to 45.0%48.3% in 2017Fiscal 2020 compared to 46.4%46.9% in 2016. The decreaseFiscal 2019. This increase in gross margin percentage was primarily driven by the following:
•an approximate 190220 basis point decreaseincrease driven by channel mix, primarily due to inventory management efforts including higher promotionsa lower percentage of off-price sales within our wholesale channel which carry a lower gross margin, and increased air freight; and
an approximate 20 basis point decrease due to our international business representing a higher percentage of sales;direct-to-consumer sales, led by e-commerce; and
The above decreases were partially offset by:
•an approximate 5070 basis point increase driven by supply chain initiatives primarily related to product cost improvements.
The increase was partially offset by favorable product input costs; and
an approximate 130 basis point decrease driven by COVID-19 related pricing and discounting impacts primarily within the direct-to-consumer business, as well as 30 basis point increase driven primarily by favorable channel mix with increased sales in our direct-to-consumer channel.points due to restructuring related expenses.
With the exception of favorable product input costs and channel mix, we do not expect these trends to have a material impact on 2018.
Selling, general and administrative expenses increased $263.7decreased $61.8 million to $2,086.8$2,171.9 million in 2017Fiscal 2020 from $1,823.1$2,233.8 million in 2016.Fiscal 2019. As a percentage of net revenues, selling, general and administrative expenses increased to 41.9%48.5% in 2017Fiscal 2020 from 37.8%42.4% in 2016.Fiscal 2019. Selling, general and administrative expense was impacted by the following:
•Marketing costs increased $87.6decreased $28.5 million to $565.1$550.4 million in 2017Fiscal 2020 from $477.5$578.9 million in 2016.Fiscal 2019. This increasedecrease was primarily driven by reduced rights fees for sports marketing assets and reductions in marketing within our wholesale channel. These decreases were primarily due to impacts of COVID-19, including event cancellations and store closures. These decreases were partially offset by
increased brand marketing spend in connection with the growth of our international business and in connection with our collegiate and professional athlete sponsorships.direct-to-consumer marketing investments. As a percentage of net revenues, marketing costs increased to 11.4%12.3% in 2017Fiscal 2020 from 9.9%11.0% in 2016.Fiscal 2019.
•Other costs increased $176.1decreased $33.3 million to $1,521.7$1,621.6 million in 2017Fiscal 2020 from $1,345.6$1,654.9 million in 2016.Fiscal 2019. This increasedecrease was driven primarily driven by higher costs incurred for the continued expansionlower incentive compensation, decreased travel and entertainment, and lower depreciation mostly due to reductions in capital expenditures. The decreases in incentive compensation and travel and entertainment were primarily due to impacts of our direct to consumer distribution channel and international business. This increase wasCOVID-19. These decreases were partially offset by savings from our 2017 restructuring plan.higher legal expense, increased third party distribution costs to support e-commerce revenues, and an increase in allowance for doubtful account reserves due to negative developments regarding certain customer balances that represent a higher risk of credit default. As a percentage of net revenues, other costs increased to 30.6%36.2% in 2017Fiscal 2020 from 27.9%31.4% in 2016.Fiscal 2019.
Income from operationsdecreased $389.6Restructuring and impairment charges were $602 million or 93.3%, to $27.8 million in 2017 from $417.5 million in 2016. Income from operations as a percentagecomprised of net revenues decreased to 0.6% in 2017 from 8.6% in 2016. Income from operations for the year ended December 31, 2017 was negatively impacted by $124.0$461 million of restructuring and related impairment charges and $141 million of long-lived asset impairment charges for Fiscal 2020. There were no restructuring and impairment charges for Fiscal 2019.
Income (loss) from operations decreased $850.2 million, or 359.1%, to a loss of $613.4 million in connection withFiscal 2020 from income of $236.8 million in Fiscal 2019, primarily driven by the 2017 restructuring plan.and impairment charges and the decrease in net revenues discussed above.
Interest expense, netincreased $8.1 $26 million to $34.5$47.3 million in 2017Fiscal 2020 from $26.4$21.2 million in 2016.Fiscal 2019. This increase was primarily due to the amortization of the debt discount and interest expense associated with our Convertible Senior Notes and higher interest expense related to borrowing on theour revolving credit facility.
Other income (expense), net increaseincreased $173.8 million to an income of $99.7$168.2 million in total debt outstanding.
OtherFiscal 2020 from an expense net increased $0.9 million to $3.6of $5.7 million in 2017 from $2.8 million in 2016. This increase was due to lower net gains on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our derivative financial instruments as compared to the prior period.
Provision for income taxes decreased $93.3 million to $38.0 million in 2017 from $131.3 million in 2016. Our effective tax rate was (368.2)% in 2017 compared to 33.8% in 2016. Our effective tax rate for 2017 was lower than the effective tax rate for 2016 primarily due to the significant decrease in income before taxes, the impact of tax benefits recorded on losses in the United States, and reductions in our total liability for unrecognized tax benefits as a result of a lapse in the statute of limitations during the current period. These benefits were offset by the impact of the Tax Act, non-deductible goodwill impairment charges, and the recording of certain valuation allowances.
Our provision for income taxes in 2017 included $38.8 million of income tax expense as a result of the Tax Act, including a $13.9 million charge for our provisional estimate of the transition tax and $24.9 million for the provisional re-measurement of our deferred tax assets for the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net revenues increased $862.0 million, or 21.8%, to $4,825.3 million in 2016 from $3,963.3 million in 2015. Net revenues by product category are summarized below:
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2016 | | 2015 | | $ Change | | % Change |
| Apparel | | $ | 3,229,142 |
| | $ | 2,801,062 |
| | $ | 428,080 |
| | 15.3 | % |
| Footwear | | 1,010,693 |
| | 677,744 |
| | 332,949 |
| | 49.1 |
|
| Accessories | | 406,614 |
| | 346,885 |
| | 59,729 |
| | 17.2 |
|
| Total net sales | | 4,646,449 |
| | 3,825,691 |
| | 820,758 |
| | 21.5 |
|
| License revenues | | 99,849 |
| | 84,207 |
| | 15,642 |
| | 18.6 |
|
| Connected Fitness | | 80,447 |
| | 53,415 |
| | 27,032 |
| | 50.6 |
|
| Intersegment Eliminations | | (1,410 | ) | | — |
| | (1,410 | ) | | (100.0 | ) |
| Total net revenues | | $ | 4,825,335 |
| | $ | 3,963,313 |
| | $ | 862,022 |
| | 21.8 | % |
The increase in net sales was driven primarily by:
Apparel unit sales growth in multiple categories led by training, golf and basketball; and
Footwear unit sales growth, led by running and basketball.
License revenues increased $15.6 million, or 18.6%, to $99.8 million in 2016 from $84.2 million in 2015. This increase in license revenues was driven primarily by increased distribution of our licensed products in North America and Japan.
Connected Fitness revenue increased $27.0 million, or 50.6%, to $80.4 million in 2016 from $53.4 million in 2015 primarily driven by increased advertising and subscribers on our fitness applications.
Gross profit increased $335.1 million to $2,240.6 million in 2016 from $1,905.5 million in 2015. Gross profit as a percentage of net revenues, or gross margin, decreased 170 basis points to 46.4% in 2016 compared to 48.1% in 2015. The decrease��in gross margin percentage was primarily driven by the following:
approximate 120 basis point decrease due to increased liquidation and discounting;
approximate 70 basis point decrease driven by negative sales mix primarily driven by the continued strength of our accelerated footwear growth; and
approximate 40 basis point decrease due to strengthening of the U.S. dollar negatively impacting our gross margins within our business outside the United States.
The above decreases were partially offset by:
approximate 30 basis point increase driven primarily by favorable product input costs in our North America and international businesses; and
approximate 40 basis point increase driven primarily by lower air freight costs.
Selling, general and administrative expenses increased $326.1 million to $1,823.1 million in 2016 from $1,497.0 million in 2015. As a percentage of net revenues, selling, general and administrative expenses remained consistent at 37.8% in 2016 and in 2015. Selling, general and administrative expense was impacted by the following:
Marketing costs increased $59.7 million to $477.5 million in 2016 from $417.8 million in 2015.Fiscal 2019. This increase was primarily due to key North American retail marketing campaigns, our investments in sponsorshipsthe gain on sale of MyFitnessPal platform of $179.3 million and increased marketingforeign exchange gains, including a gain associated with the de-designation of certain derivative instruments as a result of the impacts of COVID-19. The increase was partially offset by the rent expense incurred in connection with the growth of our international business. This increase was offset by lower incentive compensationNew York City flagship store.
Income tax expense for marketing employees. As a percentage of net revenues, marketing costs(benefit) decreased to 9.9% in 2016 from 10.5% in 2015.
Other costs increased $266.4$20.6 million to $1,345.6$49.4 million in 2016Fiscal 2020 from $1,079.2$70.0 million in 2015. This increaseFiscal 2019. We recorded 2020 income tax expense on pretax losses, including the impact of recording valuation allowances for previously recognized deferred tax assets in the United States ("U.S.") and China, and current year U.S. pre-tax losses not able to be carried back, compared to 2019 income tax expense recorded on pre-tax income.
Loss from equity method investment was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, including increased investment for our factory house and brand house stores. Additionally, we incurred $17.0 million in expenses related to the liquidation of The Sports Authority, comprised of $15.2 million in bad debt expense and $1.8 million of in-store fixture impairment. This increase was offset by lower incentive compensation expense. As a percentage of net revenues, other costs increased to 27.9% in 2016 from 27.2% in 2015.
Income from operations increased $8.9 million, or 2.2%, to $417.5 million in 2016 from $408.5 million in 2015. Income from operations as a percentage of net revenues decreased to 8.6% in 2016 from 10.3% in 2015.
Interest expense, net increased $11.8 million to $26.4 million in 2016 from $14.6 million in 2015. This increase was primarily due to interest on the net increase of $284.2 million in total debt outstanding.
Other expense, net decreased $4.4 million to $2.8 million in 2016 from $7.2 million in 2015. Fiscal 2020 and $47.7 million in Fiscal 2019. This decrease was due to higher net gains on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our derivative financial instruments as comparedrelates to the prior period.impairment of our equity method investment in our Japanese licensee in Fiscal 2019.
Provision for income taxes decreased $22.8 million to $131.3 million in 2016 from $154.1 million in 2015. Our effective tax rate was 33.8% in 2016 compared to 39.9% in 2015. Our effective tax rate for 2016 was lower than the effective tax rate for 2015 primarily due to increased international profitability and a tax benefit related to our prior period acquisitions.
Segment Results of Operations
Our operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, including North America, EMEA, Asia-Pacific, and Latin America. Connected Fitness is also an operating segment.
We exclude certain corporate costs from our segment profitability measures. We report these costs within Corporate Other, which is designed to provide increased transparency and comparability of our operating segments performance. Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global information technology, global supply chain, innovation and other corporate support functions; costs related to our global assets and global marketing, costs related to our headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses. Effective January 1, 2021, following the sale of MyFitnessPal and the winding down of the Endomondo platform, revenues for the remaining MapMyFitness business will be included in Corporate Other. Refer to Note 19 to the Consolidated Financial Statements for net revenues by segment.
The net revenues and operating income (loss) associated with our segments are summarized in the following tables. Intersegment revenue is generated by Connected Fitness which runs advertising campaigns for other segments.
Year Ended December 31, 20172020 Compared to Year Ended December 31, 20162019
Net revenues by segment are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | | 2020 | | 2019 | | $ Change | | % Change |
| North America | | $ | 2,944,978 | | | $ | 3,658,353 | | | $ | (713,375) | | | (19.5) | % |
| EMEA | | 598,296 | | | 621,137 | | | (22,841) | | | (3.7) | |
| Asia-Pacific | | 628,657 | | | 636,343 | | | (7,686) | | | (1.2) | |
| Latin America | | 164,825 | | | 196,132 | | | (31,307) | | | (16.0) | |
| Connected Fitness | | 135,813 | | | 136,378 | | | (565) | | | (.4) | |
| Corporate Other (1) | | 2,098 | | | 18,789 | | | (16,691) | | | (88.8) | |
| Total net revenues | | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | (792,465) | | | (15.0) | % |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2017 | | 2016 | | $ Change | | % Change |
| North America | | $ | 3,802,406 |
| | $ | 4,005,314 |
| | $ | (202,908 | ) | | (5.1 | )% |
| EMEA | | 469,997 |
| | 330,584 |
| | 139,413 |
| | 42.2 |
|
| Asia-Pacific | | 433,647 |
| | 268,607 |
| | 165,040 |
| | 61.4 |
|
| Latin America | | 181,324 |
| | 141,793 |
| | 39,531 |
| | 27.9 |
|
| Connected Fitness | | 89,179 |
| | 80,447 |
| | 8,732 |
| | 10.9 |
|
| Intersegment Eliminations | | — |
| | (1,410 | ) | | 1,410 |
| | 100.0 |
|
| Total net revenues | | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 151,218 |
| | 3.1 | % |
The increasedecrease in total net revenues was driven by the following:
•Net revenues in our North America operating segment decreased $202.9$713.4 million to $3,802.4$2,945.0 million in Fiscal 2020 from $3,658.4 million in 2017 from $4,005.3 million in 2016Fiscal 2019. This decrease was primarily due to lowera decrease of unit sales within our wholesale and direct-to-consumer channels. Decreases in our wholesale channel drivenwere impacted by cancellations of orders by our wholesale customers due to COVID-19, and decreased unit sales to off-price customers. Decreases in our direct-to-consumer channel were impacted by closures of our brand and factory house stores and lower demand.traffic upon store re-openings, partially offset by increased unit sales through our e-commerce channel.
•Net revenues in our EMEA operating segment increased $139.4 decreased $22.8 million to $470.0$598.3 million in 2017Fiscal 2020 from $330.6$621.1 million in 2016Fiscal 2019 primarily due to cancellations of orders by wholesale customers due to closures of stores, as well as orders that shifted out of the fourth quarter into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow, and changes in supply chain timing. Decreases in our direct-to-consumer channel were impacted by closures of our brand and factory house stores and lower traffic upon store re-openings, partially offset by increased unit sales growth to wholesale partners in Germany and the United Kingdom andthrough our our first full year of sales in Russia.e-commerce channel.
•Net revenues in our Asia-Pacific operating segment increased $165.0decreased $7.7 million to $433.6$628.7 million in 2017Fiscal 2020 from $268.6$636.3 million in 2016Fiscal 2019 primarily due to growthcancellations of orders by wholesale customers due to closures of stores, impact of additional returns reserves and markdowns within our wholesale channel due to COVID-19, as well as orders that shifted out of the fourth quarter into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow, and changes in supply chain timing. This decrease was partially offset by increased unit sales within our direct-to-consumer channel.channel,
led by our e-commerce channel.
•Net revenues in our Latin America operating segment increased $39.5segment decreased $31.3 million to $181.3$164.8 million in Fiscal 2020 from $196.1 million in 2017 from $141.8 million in 2016Fiscal 2019. This decrease was primarily due to decreased unit sales growthwithin our wholesale and direct-to-consumer channels. Decreases in our wholesale channel were impacted by cancellations of orders by wholesale customers due to wholesale partnersclosures of stores as a result of COVID-19. Decreases in our direct-to-consumer channel were impacted by closures of our brand and factory house stores as a result of COVID-19, partially offset by increased unit sales through our direct to consumer channels in Mexico, Chile, and Brazil.e-commerce channel.
•Net revenues in our Connected Fitness operating segment increased $8.7 decreased $0.6 million to $89.2$135.8 million in Fiscal 2020 from $136.4 million in 2017 from $80.4 million in 2016Fiscal 2019 primarily driven by increased subscribers on our fitness applicationsa decrease in advertising revenue and higher licensing revenue.one-time development fee from a partner in Fiscal 2019. Additionally, the decrease in revenue is due to the sale of the MyFitnessPal platform during the fourth quarter of Fiscal 2020.
Operating income (loss) by segment is summarized below. The majority of corporate expenses within North America have not been allocated to our other segments.below: | | | | | Year Ended December 31, | | | Year Ended December 31, |
| (In thousands) | | 2017 | | 2016 | | $ Change | | % Change | (In thousands) | | 2020 | | 2019 | | $ Change | | % Change |
| North America | | $ | 20,179 |
| | $ | 408,424 |
| | $ | (388,245 | ) | | (95.1 | )% | North America | | $ | 474,584 | | | $ | 733,442 | | | $ | (258,858) | | | (35.3) | % |
| EMEA | | 17,976 |
| | 11,420 |
| | 6,556 |
| | 57.4 |
| EMEA | | 60,592 | | | 53,739 | | | 6,853 | | | 12.8 | |
| Asia-Pacific | | 82,039 |
| | 68,338 |
| | 13,701 |
| | 20.0 |
| Asia-Pacific | | 2 | | | 97,641 | | | (97,639) | | | (100.0) | |
| Latin America | | (37,085 | ) | | (33,891 | ) | | (3,194 | ) | | (9.4 | ) | Latin America | | (42,790) | | | (3,160) | | | (39,630) | | | (1254.1) | |
| Connected Fitness | | (55,266 | ) | | (36,820 | ) | | (18,446 | ) | | (50.1 | ) | Connected Fitness | | 17,063 | | | 17,140 | | | (77) | | | (.4) | |
| Total operating income | | $ | 27,843 |
| | $ | 417,471 |
| | $ | (389,628 | ) | | (93.3 | )% | |
| Corporate Other | | Corporate Other | | (1,122,889) | | | (662,032) | | | (460,857) | | | (69.6) | |
| Total operating income (loss) | | Total operating income (loss) | | $ | (613,438) | | | $ | 236,770 | | | $ | (850,208) | | | (359.1) | % |
The decrease in total operating income was driven by the following:
Operating income in our North America operating segment decreased $388.2 million to $20.2 million in 2017 from $408.4 million in 2016 primarily due to the decreases in net sales and gross margins discussed above and $63.2 million in restructuring and impairment charges.segments
Operating income in our EMEA operating segment increased $6.6 million to $18.0 million in 2017 from $11.4 million in 2016 primarily due to sales growth discussed above, which was partially offset by continued investment in operations.
Operating income in our Asia-Pacific operating segment increased $13.7 million to $82.0 million in 2017 from $68.3 million in 2016 primarily due to 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 increased $3.2 million to $37.1 million in 2017 from $33.9 million in 2016 primarily due to $11.5 million in restructuring and impairment charges. This increase in operating loss was offset by sales growth discussed above.
Operating loss in our Connected Fitness segment increased $18.4 million to $55.3 million in 2017 from $36.8 million in 2016 primarily due to $47.8 million in restructuring and impairment charges. This increase in operating loss was offset by sales growth discussed above and savings from our 2017 restructuring plan.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net revenues by segment are summarized below:
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2016 | | 2015 | | $ Change | | % Change |
| North America | | $ | 4,005,314 |
| | $ | 3,455,737 |
| | $ | 549,577 |
| | 15.9 | % |
| EMEA | | 330,584 |
| | 203,109 |
| | 127,475 |
| | 62.8 |
|
| Asia-Pacific | | 268,607 |
| | 144,877 |
| | 123,730 |
| | 85.4 |
|
| Latin America | | 141,793 |
| | 106,175 |
| | 35,618 |
| | 33.5 |
|
| Connected Fitness | | 80,447 |
| | 53,415 |
| | 27,032 |
| | 50.6 |
|
| Intersegment Eliminations | | (1,410 | ) | | — |
| | (1,410 | ) | | (100.0 | ) |
| Total net revenues | | $ | 4,825,335 |
| | $ | 3,963,313 |
| | $ | 862,022 |
| | 21.8 | % |
The increase in total net revenues was driven by the following:
Net revenues in our North America operating segment increased $549.6 million to $4,005.3 million in 2016 from $3,455.7 million in 2015 primarily due to the items discussed above in the Consolidated Results of Operations.
Net revenues in our EMEA operating segment increased $127.5 million to $330.6 million in 2016 from $203.1 million in 2015 primarily due to unit sales growth to wholesale partners in Germany and the United Kingdom.
Net revenues in our Asia-Pacific operating segment increased $123.7 million to $268.6 million in 2016 from $144.9 million in 2015 primarily due to our first e-commerce site in our direct to consumer channel and an increase in mono-branded partner stores which are included in our wholesale channel.
Net revenues in our Latin America operating segment increased $35.6 million to $141.8 million in 2016 from $106.2 million in 2015 primarily due an increase in company operated stores in our direct to consumer channel and partner doors in our wholesale channel.
Net revenues in our Connected Fitness operating segment increased $27.0 million to $80.4 million in 2016 from $53.4 million in 2015 primarily driven by increased advertising and subscribers on our fitness applications.
Operating income (loss) by segment is summarized below:
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2016 | | 2015 | | $ Change | | % Change |
| North America | | $ | 408,424 |
| | $ | 460,961 |
| | $ | (52,537 | ) | | (11.4 | )% |
| EMEA | | 11,420 |
| | 3,122 |
| | 8,298 |
| | 265.8 |
|
| Asia-Pacific | | 68,338 |
| | 36,358 |
| | 31,980 |
| | 88.0 |
|
| Latin America | | (33,891 | ) | | (30,593 | ) | | (3,298 | ) | | 10.8 |
|
| Connected Fitness | | (36,820 | ) | | (61,301 | ) | | 24,481 |
| | 39.9 |
|
| Total operating income | | $ | 417,471 |
| | $ | 408,547 |
| | $ | 8,924 |
| | 2.2 | % |
The increase in total operating income was driven by the following:
•Operating income in our North America operating segment decreased $52.5$258.9 million to $408.4$474.6 million in Fiscal 2020 from $733.4 million in 2016 from $461.0 million in 2015Fiscal 2019, primarily due todriven by decreases in gross marginnet revenues discussed above, an increase in the Consolidated Results of Operationsallowance for doubtful account reserves and $17.0 millionhigher selling costs in expenses related to the liquidation of The Sports Authority, comprised of $15.2 million in bad debt expense and $1.8 million of in-store fixture impairment. In addition, this decrease reflects the movement of $11.1 million in expenses resulting from a strategic shift in headcount supporting our global business from our Connected Fitness operating segment to North America. This decrease isconnection with increased e-commerce sales, partially offset by the increases in revenue discussed above in the Consolidated Results of Operations.gross margin benefits due to channel mix, lower incentive compensation, decreased wages due to store closures and decreased marketing related activities.
•Operating income in our EMEA operating segmentsegment increased $8.3$6.9 million to $11.4$60.6 million in 2016Fiscal 2020 from $3.1$53.7 million in 2015Fiscal 2019, primarily driven by gross margin benefits due to channel mix with higher unit sales through our e-commerce, as well as lower off-price sales, partially offset by higher selling, general and administrative expenses. The selling, general and marketing expense increased primarily due to increased distribution and selling costs related to increased e-commerce sales, growth discussed aboveas well as right of use asset impairment charges. These increases within selling, general and reductions in incentive compensation. This increase wasadministrative expenses were partially offset by investments in sportsreduced marketing spend and infrastructure for future growth.event sponsorship costs as a result of COVID-19.
•Operating income in our Asia-Pacific operating segment increased $31.9decreased $97.6 million to $68.3$2 thousand in Fiscal 2020 from $97.6 million in 2016 from $36.4 millionFiscal 2019, primarily driven by a decline in 2015 primarilyrevenue discussed above, as well as higher returns and promotional activity that negatively impacted gross margins. Additionally, selling, general and administrative expenses increased due to sales growth discussed aboveright of use asset impairments charges, higher compensation in part due to the Triple acquisition in March of 2020, as well as the Hong Kong office build-out and reductions in incentive compensation. This increase was offset by investments in our direct-to-consumer businessdistribution and entry into new territories.selling costs.
•Operating loss in our Latin America operating segmentsegment increased $3.3$39.6 million to $33.9$42.8 million in 2016 Fiscal 2020 from $30.6$3.2 million in 2015Fiscal 2019, primarily driven by decreases in net revenues discussed above, partially offset by gross margin benefits due to increased investmentschannel mix and decreased marketing related activities.
•Operating income in our Connected Fitness segment was flat in Fiscal 2020 compared to support growth in the region and the economic challenges in Brazil during the period. This increase in operating loss was offset by sales growth discussed above and reductions in incentive compensation.Fiscal 2019.
Non-operating segment
•Operating loss in our Connected FitnessCorporate Other non-operating segment decreased $24.5increased $460.9 million to $36.8$1,122.9 million in 2016Fiscal 2020 from $61.3$662.0 million in 2015Fiscal 2019, primarily driven by sales growth discussed above.$472.7 million of restructuring and impairment charges related to the 2020 restructuring plan, partially offset by lower incentive compensation.
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. We generally expect inventory, accounts payable and certain accrued expenses to be higher in the second and third quarters in preparation for the fall selling season.
The following table sets forth certain financial information for the periods indicated. The data is prepared on the same basis as the audited consolidated financial statements included elsewhere in this Form 10-K. All recurring, necessary adjustments are reflected in the data below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended (unaudited) |
| (In thousands) | | 3/31/2016 | | 6/30/2016 | | 9/30/2016 | | 12/31/2016 | | 3/31/2017 | | 6/30/2017 | | 9/30/2017 | | 12/31/2017 |
| Net revenues | | $ | 1,047,702 |
| | $ | 1,000,783 |
| | $ | 1,471,573 |
| | $ | 1,305,277 |
| | $ | 1,117,331 |
| | $ | 1,088,245 |
| | $ | 1,405,615 |
| | $ | 1,365,362 |
|
| Gross profit | | 480,636 |
| | 477,647 |
| | 698,624 |
| | 583,704 |
| | 505,423 |
| | 498,246 |
| | 645,350 |
| | 589,704 |
|
| Marketing SG&A expenses | | 122,483 |
| | 107,835 |
| | 139,517 |
| | 107,665 |
| | 128,336 |
| | 136,071 |
| | 143,919 |
| | 156,800 |
|
| Other SG&A expenses | | 323,270 |
| | 350,434 |
| | 359,797 |
| | 312,139 |
| | 369,552 |
| | 363,860 |
| | 354,254 |
| | 434,039 |
|
| Restructuring and impairment charges | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,100 |
| | 84,997 |
| | 35,952 |
|
| Income (loss) from operations | | $ | 34,883 |
|
| $ | 19,378 |
|
| $ | 199,310 |
|
| $ | 163,900 |
| | $ | 7,536 |
| | $ | (4,785 | ) | | $ | 62,180 |
| | $ | (37,088 | ) |
| (As a percentage of annual totals) | | | | | | | | | | | | | | | | |
| Net revenues | | 21.7 | % | | 20.7 | % | | 30.5 | % | | 27.1 | % | | 22.5 | % | | 21.9 | % | | 28.2 | % | | 27.4 | % |
| Gross profit | | 21.5 | % | | 21.3 | % | | 31.2 | % | | 26.1 | % | | 22.6 | % | | 22.3 | % | | 28.8 | % | | 26.3 | % |
| Marketing SG&A expenses | | 25.7 | % | | 22.6 | % | | 29.2 | % | | 22.5 | % | | 22.7 | % | | 24.1 | % | | 25.5 | % | | 27.7 | % |
| Other SG&A expenses | | 24.0 | % | | 26.0 | % | | 26.7 | % | | 23.2 | % | | 24.3 | % | | 23.9 | % | | 23.3 | % | | 28.5 | % |
Restructuring and impairment charges
| | — | % | | — | % | | — | % | | — | % | | — | % | | 2.5 | % | | 68.5 | % | | 29.0 | % |
| Income (loss) from operations | | 8.4 | % | | 4.6 | % | | 47.7 | % | | 39.3 | % | | 27.1 | % | | (17.2 | )% | | 223.3 | % | | (133.2 | )% |
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 and the issuance of debt securities.facilities. Our working capital requirements generally reflect the seasonality and growth in our business as we historically recognize the majority of our net revenues in the back halflast two quarters of the calendar year. Our capital investments have generally 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 new 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 including our new global operating and financial reporting information technology system, are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe will enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our factory house stores and other liquidation channels. In response to the COVID-19 pandemic, however, in Fiscal 2020 we reduced our inventory purchases and capital expenditures as we managed our liquidity and working capital through this period.
We believe our cash and cash equivalents on hand, cash from operations, our ability to reduce our expenditures as needed, borrowings available to us under our amended credit agreement, and other financing instruments and our ability to access the capital markets, and other financing alternatives are adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. AlthoughDuring the six months ended June 30, 2020, our cash generated from operations was negatively impacted due to widespread temporary store closures as a result of the COVID-19 pandemic. As of the start of the second quarter, we believehad borrowed $700 million under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve liquidity given the uncertainty in global markets resulting from the COVID-19 outbreak. In May 2020, we issued $500 million of convertible senior notes through a securities offering and utilized approximately $440 million of the net proceeds from the offering to repay amounts outstanding under our revolving credit facility. During the third quarter of Fiscal 2020, we repaid the remaining balance outstanding under our revolving credit facility and no amounts remained outstanding as of December 31, 2020. In Fiscal 2021, we will continue to monitor and assess impacts of the COVID-19 pandemic on our business.
have adequateBeginning with the third quarter of Fiscal 2020, we are required to maintain a specified amount of "minimum liquidity" under the terms of our revolving credit facility. Our credit agreement limits our ability to incur additional indebtedness. We currently expect to be able to comply with these requirements without pursuing additional sources of financing to support our liquidity over the next twelve months. However, if the COVID-19 pandemic persists or there are unexpected impacts to our business during this period and we need to raise or conserve additional cash to fund our operations or satisfy this requirement, we may consider additional alternatives similar to what we did in Fiscal 2020, including further reducing our expenditures, including reductions to our discretionary spending and changes to our investment strategies, negotiating payment terms with our customers and vendors, reductions in compensation costs, including through temporary reductions in pay and layoffs, and limiting certain marketing and capital expenditures. In addition, we may seek alternative sources of liquidity, overincluding but not limited to accessing the long term, an economic recessioncapital markets, sale leaseback transactions or a slow recovery could adversely affect our business and liquidity (refer to the “Risk Factors” section included in Item 1A). In addition,other sales of assets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to obtain additionalaccess the capital to grow our businessmarkets on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession or a slow recovery could adversely affect our business and liquidity.
AtRefer to our “Risk Factors - Financial Risks” section included in Part I, Item 1A of this Annual Report on Form 10-K for a further discussion of risks related to our indebtedness.
As discussed in the "Overview", as we navigate these unprecedented circumstances, we are focused on preserving our liquidity and managing our cash flows through certain preemptive actions designed to enhance our ability to meet our short-term liquidity needs. These actions include those noted above. In addition, from time to time we may take action to manage liquidity as of the end of a quarterly period, including our level of indebtedness or
cash on hand. For example, in Fiscal 2020 some of our customers delayed payments in connection with COVID-19 as they managed their own cash balances, and we also delayed payments as well. Furthermore, our revolving credit agreement includes leverage and minimum liquidity covenants that apply from time to time. We may repay indebtedness as of the end of a fiscal quarter and reborrow amounts immediately after or take other action to manage liquidity in connection with these requirements.
As of December 31, 2017, $158.72020, $383.1 million, or approximately 50.8%25.2%, of cash and cash equivalents was held by our foreign subsidiaries. Based on the capital and liquidity needs of our foreign operations, we intend to indefinitely reinvest these funds outside the United States. In addition, our United States operations do not require the repatriation of these funds to meet our currently projected liquidity needs. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States.
The Tax Act provided for a one-time transition tax on indefinitely reinvestedCompany will continue to permanently reinvest these earnings, as well as future earnings from our foreign earningssubsidiaries, to transition U.S.fund international taxation from a worldwide system to a modified territorial system. We recorded a provisional tax liability of $13.9 million relating to the one-time transition tax on our indefinitely reinvested foreign earnings.growth and operations. If we were to repatriate indefinitely reinvested foreign funds, we would not be subject to additional U.S. federal income tax, however, we would be required to accrue and pay any applicablecertain taxes upon repatriation, including foreign withholding taxtaxes and certain U.S. state income tax liabilitiestaxes and record foreign exchange rate impacts. Determination of the unrecorded deferred tax liability that would be incurred if such amounts were repatriated is not practicable.
Cash Flows
The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented:
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| (In thousands) | | 2017 | | 2016 | | 2015 | (In thousands) | | 2020 | | 2019 | | 2018 |
| Net cash provided by (used in): | | | | | | | Net cash provided by (used in): | |
| Operating activities | | $ | 234,063 |
| | $ | 364,368 |
| | $ | 14,541 |
| Operating activities | | $ | 212,864 | | | $ | 509,031 | | | $ | 628,230 | |
| Investing activities | | (282,987 | ) | | (381,139 | ) | | (847,475 | ) | Investing activities | | 66,345 | | | (147,113) | | | (202,904) | |
| Financing activities | | 106,759 |
| | 146,114 |
| | 381,433 |
| Financing activities | | 436,853 | | | (137,070) | | | (189,868) | |
| Effect of exchange rate changes on cash and cash equivalents | | 4,178 |
| | (8,725 | ) | | (11,822 | ) | Effect of exchange rate changes on cash and cash equivalents | | 16,445 | | | 5,100 | | | 12,467 | |
| Net increase (decrease) in cash and cash equivalents | | $ | 62,013 |
| | $ | 120,618 |
| | $ | (463,323 | ) | |
| Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | | $ | 732,507 | | | $ | 229,948 | | | $ | 247,925 | |
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, gain on sale of MyFitnessPal platform in Fiscal 2020, losses on disposals of property and equipment, stock-based compensation, 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.
CashCash flows provided by operating activities decreased $130.3$296.2 million to $234.1$212.9 million in 2017Fiscal 2020 from $364.4$509 million in 2016.Fiscal 2019. The decrease in cash from operating activities was primarily due to a decreasenet loss in Fiscal 2020 of $549.2 million compared to net income of $305.2 million.$92.1 million in Fiscal 2019. This decrease was partially offset by a smaller decrease in accounts receivable of $170.1 million.
Cash flows provided by operating activities increased $349.8 million to $364.4 million in 2016 from $14.6 million in 2015. The increase in cash from operating activities was due to increased net cash flowsinflows from operating assets and liabilities of $325.4 million, an increase in net income of $24.4 million year over year and an increase in adjustments to net income for non-cash items of $1.1 million year over year.$75.9 million. The increase in cash outflowsinflows related to changes in operating assets and liabilities period over period was primarily driven by the following:
•an increase in accounts payable and accrued expenses of $225.0$237.4 million in 2016Fiscal 2020 as compared to 2015, primarily dueFiscal 2019;
•an increase in cash provided by accounts receivable of $213.1 million in Fiscal 2020 as compared to the timingFiscal 2019;
•an increase in customer refund liabilities and Income taxes payable and receivable of inventory payments$45.1 million which was offset by a decrease of $5.7 million in prepaid expenses and other assets in Fiscal 2020 as well as significant increases in inventory in-transit in the current period,compared to Fiscal 2019; and
•a decrease in inventory investmentsother non-current assets of $130.5$279.7 million in 2016Fiscal 2020 as compared to 2015, primarily due to early deliveries of product to meet key seasonal floor set dates in the prior period, as well as strategic investments in auto-replenishment products in 2015; partially offset by
a larger increase in accounts receivable of $58.0 million in 2016 as compared to 2015, primarily due to the timing of shipments and a higher proportion of sales to our international customers with longer payment terms compared to the prior year.Fiscal 2019.
Investing Activities
Cash provided by investing activities increased $213.5 million to $66.3 million in Fiscal 2020 from cash used in investing activities decreased $98.2 million to $283.0of $147.1 million in 2017 from $381.1 million in 2016, primarily due lower capital expenditures in 2017.
Cash used in investing activities decreased $466.4 million to $381.1 million in 2016 from $847.5 million in 2015,Fiscal 2019 primarily due to proceeds from the impact of our Connected Fitness acquisitionssale of MyFitnessPal and Endomondo which occurred duringof $198.9 million in the firstfourth quarter of 2015.Fiscal 2020.
Total capital expenditures were $274.9in Fiscal 2020 decreased by $53.5 million $405.5to $92.3 million and $325.5compared to $145.8 million in 2017, 2016 and 2015, respectively. Capital expenditures for 2018 are expected to be approximately $225.0 million.Fiscal 2019.
Financing Activities
Cash provided by financing activities decreased $39.4increased $573.9 million to $106.8$436.9 million in Fiscal 2020 from cash used in financing activities of $137.1 million in 2017 from $146.1 million in 2016.Fiscal 2019. This decreaseincrease was primarily due to lower borrowing onthe issuance of $500 million of 1.50% convertible senior notes in Fiscal 2020.
Capital Resources
Credit Facility
On March 8, 2019, we entered into an amended and restated credit agreement by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the “credit agreement”). The credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances. In May 2020, we entered into an amendment to the credit agreement (the “amendment” and, the credit agreement as amended, the “amended credit agreement” or the “revolving credit facility”), pursuant to which the prior revolving credit commitments were reduced from $1.25 billion to $1.1 billion of borrowings. From time to time throughout Fiscal 2020, we borrowed funds under this facility as a precautionary measure in order to increase our cash position and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 pandemic. As of the end of Fiscal 2020 and Fiscal 2019, there were no amounts outstanding under the revolving credit facility.
Cash provided by financing activities decreased $235.3 million to $146.1 million in 2016 from $381.4 million in 2015. This decrease was primarily due to higher repayments on our revolving credit facility, partially offset byExcept during the issuance of senior notes in 2016.
Credit Facility
We are party to a credit agreement that provides revolving commitments for up to $1.25 billion of borrowings, as well as term loan commitments, in each case maturing in January 2021. As of December 31, 2017 the outstanding balance under the revolving credit facility was $125.0 million and $161.3 million of term loan borrowings remained outstanding.
Atcovenant suspension period (as defined below), at our request and the lender's consent, revolving and or term loan borrowingscommitments under the amended credit agreement may be increased by up to $300.0$300 million in aggregate, subject to certain conditions as set forth in the amended credit agreement, as amended.agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.
The borrowingsBorrowings 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 $4.5$4.3 million of letters of credit outstanding as of December 31, 2017.the end of Fiscal 2020 (Fiscal 2019: $5.0 million).
Our obligations under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of the Company, subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of the Company and the subsidiary guarantors, excluding real property, capital stock in and debt of our subsidiaries holding certain real property and other customary exceptions.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things, incur additional secured and unsecured indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries), undergo fundamental changes, andsell our assets outside the ordinary course of business, enter into transactions with affiliates. affiliates and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)).
We are also required to comply with specific consolidated leverage and interest coverage ratios during specified periods. Prior to the amendment, we were 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 1.001.0 (the “interest coverage covenant”), and arewe were not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("1.0 (the “leverage covenant”), as described in more detail in the credit agreement. The amended credit agreement provides for suspensions of and adjustments to the leverage covenant (including definitional changes impacting the calculation of the ratio) and the interest coverage covenant beginning with the quarter ended June 30, 2020, and ending on the date on which financial statements for the quarter ended June 30, 2022 are delivered to lenders under the amended credit agreement (the “covenant suspension period”) as summarized below and described in more detail in the amended credit agreement:
•For the fiscal quarter ended June 30, 2020, the interest coverage covenant was suspended and the leverage covenant required that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0.
•For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the interest coverage covenant and the leverage ratio"covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, we must instead maintain minimum liquidity of $550.0 million (the “liquidity covenant”) (with liquidity being the sum of certain cash and
cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement).
•For the fiscal quarter ending September 30, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and we must comply with the liquidity covenant.
•For the fiscal quarter ending December 31, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and we must comply with the liquidity covenant.
•Beginning on January 1, 2022, the liquidity covenant is terminated. For the fiscal quarter ending March 31, 2022, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the interest coverage covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
As of December 31, 2017,2020, we were in compliance with these ratios. In February 2018, we amended the credit agreement to amend the definition of consolidated EBITDA, and to provide that our trailing four-quarter consolidated leverage ratio may not exceed 3.75 to 1.00 for the four quarters ended June 30, 2018, and 4.00 to 1.00 for the four quarters ended September 30, 3018. Beginning with the four quarters ended December 31, 2018 and thereafter, the consolidated leverage ratio requirement will return to 3.25 to 1.00.applicable covenants.
In addition, the amended 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 amended credit agreement, will be considered an event of default under the amended credit agreement.
BorrowingsDuring the covenant suspension period, the applicable margin for loans is 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, borrowings under the amended 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”“pricing grid”) based on the consolidated leverage ratio and ranges between 1.00%1.25% to 1.25%1.75% for adjusted LIBOR loans and 0.00%0.25% to 0.25%0.75% for alternate base rate loans. The weighted average interest rate under the outstanding term loans and revolving credit facility borrowings was 2.2%2.3% and 1.6%3.6% during Fiscal 2020 and Fiscal 2019, respectively. During the years ended December 31, 2017 and 2016, respectively. Wecovenant suspension period, the commitment fee rate is 0.40% per annum. Otherwise, we pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of December 31, 2017,the end of Fiscal 2020, the commitment fee was 17.515 basis points. Since inception, we haveWe incurred and deferred $3.9$7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, we issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) were $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by us, of which we used approximately $47.9 million to pay the cost of the capped call transactions described below. We utilized $439.9 million to repay indebtedness outstanding under our revolving credit facility and pay related fees and expenses.
In connection with the issuance of the Convertible Senior Notes, we recorded an $11 million net deferred tax liability and a corresponding reduction in valuation allowance. As a result, there was no net impact to our deferred income taxes or additional paid in capital on the Consolidated Financial Statements.
The Convertible Senior Notes are not secured and are not guaranteed by any of our subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.
Prior to the close of business on the business day immediately preceding January 1, 2024, the Convertible Senior Notes will be convertible only upon satisfaction of certain conditions and during certain periods. On or after January 1, 2024, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes. The initial conversion rate is 101.8589 shares of our Class C common stock per $1,000 principal amount of Convertible Senior Notes
(equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock), subject to adjustment if certain events occur.
On or after December 6, 2022, we may redeem for cash all or any part of the Convertible Senior Notes, at our option, if the last reported sale price of our Class C common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If we undergo a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, we entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to our Class C common stock upon any conversion of Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on an initial cap price of $13.4750 per share of our Class C common stock, subject to certain adjustments under the terms of the capped call transactions.
The Convertible Senior Notes contain a cash conversion feature, and as a result, we have separated it into liability and equity components. We valued the liability component based on our borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
3.250% Senior Notes
In June 2016, we issued $600.0$600 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Notes”“Senior 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 Senior 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 Senior Notes to be redeemed or a “make-whole”"make-whole" amount applicable to such Senior Notes as described in the indenture governing the Senior 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 Senior 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. We incurred and deferred $5.3 million in financing costs in connection with the Notes.
Other Long Term Debt
In December 2012, we entered into a $50.0$50 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 December 31, 2017 and 2016, the outstanding balance on theIn July 2018, this loan was $40.0 million and $42.0 million, respectively. The weighted average interest rate on the loan was 2.5% and 2.0% for the years ended December 31, 2017 and 2016, respectively.repaid in full, without penalties, using borrowings under our revolving credit facility.
Interest expense, net was $34.5$47.3 million, $26.4$21.2 million, and $14.6$33.6 millionfor the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, 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. Amortization of deferred financing costs was $1.3$3.8 million, $1.2$2.4 million, and $0.8$1.5 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively.
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
We lease warehouse space, office facilities, space for our brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2033,2035, excluding extensions at our option, and include provisions for rental adjustments. In addition, this table includes executed lease agreements for brand and factory house stores that we did not yet occupy as of December 31, 2017.the end of Fiscal 2020. The operating leases generally contain renewal provisions for varying periods of time. Our significant contractual obligations and commitments as of December 31, 2017the end of Fiscal 2020 as well as significant agreements entered into during the period after December 31, 2017Fiscal 2020 through the date of this report are summarized in the following table:
| | | | | Payments Due by Period | | | Payments Due by Period |
| (in thousands) | | Total | | Less Than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More Than 5 Years | (in thousands) | | Total | | Less Than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More Than 5 Years |
| Contractual obligations | | | | | | | | | | | Contractual obligations | |
| Long term debt obligations (1) | | $ | 980,585 |
| | $ | 51,925 |
| | $ | 134,932 |
| | $ | 125,478 |
| | $ | 668,250 |
| Long term debt obligations (1) | | $ | 1,226,750 | | | $ | 19,500 | | | $ | 39,000 | | | $ | 539,000 | | | $ | 629,250 | |
| Lease obligations (2) | | 1,489,469 |
| | 140,257 |
| | 297,759 |
| | 279,406 |
| | 772,047 |
| |
| Operating lease obligations (2) | | Operating lease obligations (2) | | 1,200,324 | | | 202,220 | | | 308,485 | | | 222,258 | | | 467,361 | |
| Product purchase obligations (3) | | 1,093,665 |
| | 1,093,665 |
| | — |
| | — |
| | — |
| Product purchase obligations (3) | | 1,136,896 | | | 1,136,896 | | | — | | | — | | | — | |
| Sponsorships and other (4) | | 1,170,848 |
| | 150,428 |
| | 261,191 |
| | 241,493 |
| | 517,736 |
| Sponsorships and other (4) | | 361,619 | | | 106,727 | | | 154,544 | | | 87,895 | | | 12,453 | |
| Total | | $ | 4,734,567 |
| | $ | 1,436,275 |
| | $ | 693,882 |
| | $ | 646,377 |
| | $ | 1,958,033 |
| Total | | $ | 3,925,589 | | | $ | 1,465,343 | | | $ | 502,029 | | | $ | 849,153 | | | $ | 1,109,064 | |
(1) Includes estimated interest payments based on applicable fixed interest rates as of the end of Fiscal 2020, timing of scheduled payments, and the term of the debt obligations.
| |
(1) | Includes estimated interest payments based on applicable fixed and currently effective floating interest rates as of December 31, 2017, timing of scheduled payments, and the term of the debt obligations. |
| |
(2) | Includes the minimum payments for lease obligations. The lease obligations do not include any contingent rent expense we may incur at our brand and factory house stores based on future sales above a specified minimum or payments made for maintenance, insurance and real estate taxes. Contingent rent expense was $15.5 million for the year ended December 31, 2017. |
| |
(3) | We generally place orders with our manufacturers at least three to four months in advance of expected future sales. The amounts listed for product purchase obligations primarily represent our open production purchase orders with our manufacturers for our apparel, footwear and accessories, including expected inbound freight, duties and other costs. These open purchase orders specify fixed or minimum quantities of products at determinable prices. The product purchase obligations also includes fabric commitments with our suppliers, which secure a portion of our material needs for future seasons. The reported amounts exclude product purchase liabilities included in accounts payable as of December 31, 2017. |
| |
(4) | Includes sponsorships with professional teams, professional leagues, colleges and universities, individual athletes, athletic events and other marketing commitments in order to promote our brand. Some of these sponsorship agreements provide for additional performance incentives and product supply obligations. It is not possible to determine how much we will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to these sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and our decisions regarding product and marketing initiatives. In addition, it is not possible to determine the performance incentive amounts we may be required to pay under these agreements as they are primarily subject to certain performance based and other variables. The amounts listed above are the fixed minimum amounts required to be paid under these sponsorship agreements. Additionally, these amounts include minimum guaranteed royalty payments to endorsers and licensors based upon a predetermined percent of sales of particular products. |
(2) Includes the minimum payments for lease obligations. The lease obligations do not include any contingent rent expense we may incur at our brand and factory house stores based on future sales above a specified minimum or payments made for maintenance, insurance and real estate taxes. Contingent rent expense was $9.3 million for Fiscal 2020.
(3) We generally place orders with our manufacturers at least three to four months in advance of expected future sales. The amounts listed for product purchase obligations primarily represent our open production purchase orders with our manufacturers for our apparel, footwear and accessories, including expected inbound freight, duties and other costs. These open purchase orders specify fixed or minimum quantities of products at determinable prices. The product purchase obligations also includes fabric commitments with our suppliers, which secure a portion of our material needs for future seasons. The reported amounts exclude product purchase liabilities included in accounts payable as of the end of Fiscal 2020.
(4) Includes sponsorships with professional teams, professional leagues, colleges and universities, individual athletes, athletic events and other marketing commitments in order to promote our brand. Some of these sponsorship agreements provide for additional performance incentives and product supply obligations. It is not possible to determine how much we will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to these sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and our decisions regarding product and marketing initiatives. In addition, it is not possible to determine the performance incentive amounts we may be required to pay under these agreements as they are primarily subject to certain performance based and other variables. The amounts listed above are the fixed minimum amounts required to be paid under these sponsorship agreements. Additionally, these amounts include minimum guaranteed royalty payments to endorsers and licensors based upon a predetermined percent of sales of particular products.
The future cash installment payments for the one-time transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries enacted as part of the Tax Act in 2017, will be fully offset by our net operating loss carryback receivable under the CARES Act and therefore are no longer reflected as a long-term liability as of the balance sheet date.
The table above excludes a liability of $54.4$33.5 million for uncertain tax positions, including the related interest and penalties, recorded in accordanceaccord with applicable accounting guidance, as we are unable to reasonablyreasonable estimate the timing of settlement. Refer to Note 1013 to the Consolidated Financial Statements for a further discussion of our uncertain tax positions.
Off-Balance Sheet Arrangements
In connection with various contracts and agreements, we have 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 our counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on our historical experience and the estimated probability of future loss, we have determined the fair value of such indemnifications is not material to our financial position or results of operations.
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 discussion 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. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considersConsolidated Financial Statements. We consider 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.
There were no significant changes to our critical accounting policies during Fiscal 2020. The following description of our critical accounting policies largely summarize generally accepted accounting principles in the United States and are meant to provide clarity regarding our existing application of these policies.
Change in Year End
We operate and report with a fiscal year endedend of December 31 2017.
. During the first quarter of 2021, we announced a change in our fiscal year end to March 31 from December 31, effective for the fiscal year beginning after April 1, 2022. Accordingly, we will report a transition quarter that runs from January 1, 2022 through March 31, 2022. Our next fiscal year will run from April 1, 2022 through March 31, 2023.
Revenue Recognition
We recognize revenue pursuant to Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of both net sales of apparel, footwear and accessories, license and other revenues. NetConnected Fitness revenue. We recognize revenue when we satisfy our performance obligations by transferring control of promised products or services to our customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that we ultimately expect to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on our revenues from product sales are recognized uponpresented on a net basis within the Consolidated Statements of Operations, and therefore do not impact net revenues or costs of goods sold.
Revenue transactions associated with the sale of apparel, footwear, and accessories, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct-to-consumer channels. We satisfy the performance obligation and record revenues when transfer of ownership, including passage of titlecontrol has passed to the customer, andbased on the terms of sale. In our wholesale channel, transfer of risk of loss related to those goods. Transfer of title and risk of loss arecontrol is based upon shipment under free on board shipping point for most goods or upon receipt by the customer depending on the country of the sale and the agreement with the customer. In some instances, transfer of title and risk of loss take place at the point of sale, for example at our brand and factory house stores. We may also ship product directly from our supplier to the customerwholesale customers and recognize revenue when the product is delivered to and accepted by the customer. License revenuesIn our direct to consumer channel, transfer of control takes place at the point of sale for brand and factory house customers and upon shipment to substantially all e-commerce customers. Payment terms for wholesale transactions are primarily recognizedestablished in accordance with local and industry practices. Payment is generally required within 30 to 60 days of shipment to or receipt by the wholesale customer in the United States, and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. Payment is generally due at the time of sale for direct-to-consumer transactions.
Gift cards issued to customers by us are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. We also estimate and recognize revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that we do not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon shipmenthistorical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from our licensing arrangements is recognized over time during the period that licensees are provided access to our trademarks and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually guaranteed minimum royalty amount. Payments are generally due quarterly. We recognize revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the minimum is recognized as revenue over the contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that we are entitled to receive in exchange for providing access to our licensees. Sales taxes imposed on our revenuestrademarks.
Revenue from product sales are presentedConnected Fitness subscriptions is recognized on a netgross basis onand is recognized over the term of the subscription. We receive payments in advance of revenue recognition for subscriptions and these payments are recorded as contract liabilities in our consolidated statementsbalance sheet. Related commission cost is included in selling, general and administrative expense in the Consolidated Statement of income and therefore do not impact net revenues or costs of goods sold.Operations. Revenue from Connected Fitness digital advertising is recognized as we satisfy performance obligations pursuant to customer insertion orders.
We record reductions to revenue at the time of the transaction for estimated customer returns, allowances, markdowns and discounts. We base ourthese estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by us. The actual amount of customer returns and allowances, which isare inherently uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly higher or lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period in which we make such a determination. Provisions for customer specific discounts are based on contractual obligations with certain major customers. Reserves for returns, allowances, markdowns and discounts are recorded as an offset to accounts receivable as settlementsincluded within customer refund liability and the value of inventory associated with reserves for sales returns are made through offsets to outstanding customer invoices.included within prepaid expenses and other current assets on the consolidated balance sheet. As of December 31, 2017the end of Fiscal 2020 and 2016,Fiscal 2019, there were $246.6$203.4 million and $146.2$219.4 million, respectively, in reserves for customer returns, allowances, markdowns and discounts.discounts within customer refund liability and $57.9 million and $61.1 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 2 to the Consolidated Financial Statements for a further discussion of revenue recognition.
Allowance for Doubtful Accounts
We make ongoing estimates relating to the collectability of accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of our customers to pay outstanding balances and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine a smaller or larger reserve is appropriate, we would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made. As of December 31, 2017the end of Fiscal 2020 and 2016,Fiscal 2019, the allowance for doubtful accounts was $19.7 $20.4 million and $11.3$15.1 million, respectively.
Inventory Valuation and Reserves
Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. We value our inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. MarketNet realizable value is estimated based upon assumptions made about future demand and retail market conditions. If we determine that the estimated marketnet realizable value of our inventory is less than the carrying value of such inventory, we record a charge to cost of goods sold to reflect the lower of cost or market.net realizable value. If actual
market conditions are less favorable than those that we projected, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.
Goodwill, Intangible Assets and Long-Lived Assets
Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition and are allocated to the reporting units that are expected to receive the related benefits. Goodwill and indefinite lived intangible assets are not amortized and are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that it is more likely than not that the assets may be impaired.fair value of the reporting unit is less than its carrying amount. In conducting an annual impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that is the case, we perform the goodwill impairment test. We compare the fair value of the reporting unit with its carrying amount. We calculateestimate fair value using the discounted cash flows model, under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’sunit's business, and working capital effects. If the carrying amount of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit. We perform our annual impairment teststesting in the fourth quarter of each fiscal year.
As a result of the impacts of COVID-19, we determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. During Fiscal 2020, we recognized goodwill impairment charges of $51.6 million for the Latin America reporting unit and the Canada reporting unit, within the North America operating segment. Refer to Note 7 to the Consolidated Financial Statements for a further discussion of goodwill.
We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. These factors may include a significant deterioration of operating results, changes in business plans, or changes in anticipated cash flows. When factors indicate that an asset should be evaluated for possible impairment, Wewe review long-lived assets to assess recoverability from future operations using undiscounted cash flows. If future undiscounted cash flows are less than the carrying value, an impairment is recognized in earnings to the extent that the carrying value exceeds fair value.
Equity Method Investment
In April 2018, we invested ¥4.2 billion or $39.2 million in exchange for an additional 10% common stock ownership in Dome Corporation ("Dome"), our Japanese licensee. This additional investment brought our total investment in Dome's common stock to 29.5%, from 19.5%. We account for our investment in Dome under the equity method, given that we have the ability to exercise significant influence, but not control, over Dome. Investments under the equity method are required to be considered for impairment when events or circumstances suggest that the carrying amount may not be recoverable. If a qualitative assessment indicates that our investment in Dome may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates a decline in value that is determined to be other-than-temporary, an impairment charge would be recognized.
In connection with the preparation of our financial statements for the Fiscal 2019, we performed a qualitative assessment of potential impairment indicators for our investment in Dome and determined that indicators of impairment exist. While there was no single event or factor, we considered Dome's future rate of growth and profitability and strategic objectives. We performed a valuation of our investment in Dome and determined that the fair value of our investment is less than its carrying value by $39 million. We determined this decline in value to be other-than-temporary considering the extent to which the market value of our investment is less than the carrying value, the amount of Dome's indebtedness maturing within a short-term period, and Dome's long-term financial forecast. As a result, we recorded a $39 million impairment of our equity method investment in Dome in the fourth quarter of Fiscal 2019. The impairment charge was recorded within income (loss) from equity method investment on the Consolidated Statements of Operations and as a reduction to the investment balance within other long term assets on the Consolidated Balance Sheets. We calculate fair value using the discounted cash flows model, which indicates the fair value of the investment based on the present value of the cash flows that we expect the investment to generate in the future.
For Fiscal 2020, we recorded the allocable share of Dome's net income of $3.5 million (Fiscal 2019: net loss of $8.7 million; Fiscal 2018: net income of $1.0 million) within income (loss) from equity method investment on our Consolidated Statements of Operations, and as an adjustment to the investment balance within other long term assets on our Consolidated Balance Sheets. We performed a qualitative assessment of potential impairment
indicators for our investment in Dome and determined that indicators of impairment existed due to impacts from COVID-19. Accordingly, we performed a valuation of our investment in Dome and determined that the fair value of our investment was less than its carrying value by $8.6 million. We determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. Accordingly, our results for Fiscal 2020 include the impact of recording a $8.6 million impairment of our equity method investment in Dome, which reduced the carrying value to zero. The impairment charge was recorded within income (loss) from equity method investment on the Consolidated Statements of Operations and as a reduction to the investment balance within other long term assets on the Consolidated Balance Sheets. We calculated fair value using the discounted cash flows model, which indicates the fair value of the investment based on the present value of the cash flows that it expects the investment to generate in the future. As of the end of Fiscal 2020 and Fiscal 2019, the carrying value of our total investment in Dome was $0 million and $5.1 million, respectively.
In addition to the investment in Dome, we have a license agreement with Dome. We recorded license revenues from Dome of $40.1 million and $37.8 million for Fiscal 2020 and 2019, respectively. As of the end of Fiscal 2020, we have $22.9 million (Fiscal 2019: $15.6 million) in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within our Consolidated Balance Sheets. To the extent Dome continues to experience challenges in the performance of their business, we may not continue to realize the licensing revenues received from them in line with their past results. Furthermore, based on Dome’s financial performance, our ability to recover our investment in the long-term may be limited.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary. The Company has made the policy election to record any liability associated with Global Intangible Low Taxed Income (“GILTI”) in the period in which it is incurred.
Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent we believe it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such a determination is made.
A significant portion of our deferred tax assets relate to U.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future U.S. pre-tax earnings. Due to our challenged U.S. results we incurred significant net operating losses (“NOLs”) in these jurisdictions in 2017. Based on these factors, we have evaluated our ability to utilize these deferred tax assets in future years. In evaluating the recoverability of these deferred tax assets at December 31, 2017, we haveas of the end of Fiscal 2020, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
Availability of taxable income in the U.S. federal and certain state NOL carryback periods;
U.S. federal NOLs have an indefinite carryforward period, beginning in 2018 pursuant to the Tax Act;
Definite lived tax attributes with relatively long carryforward periods; a majority from 10 to 20 years;
•No history of U.S. federal and state tax attributes expiring unused;unused.
Three year cumulative U.S. federal and state pre-tax income;
Relative low values of pre-tax income required to realized deferred tax assets relative to historic income levels;
•Restructuring plans being undertaken in 2017, 2018, and 2020, which aim to improve profitability;future profitability.
Availability•Existing sources of taxable income.
•Available prudent and feasible tax planning strategies.
Negative
•Restructuring plan undertaken in Fiscal 2020 resulting in significant charges in pre-tax income, reducing profitability in the United States.
•The negative economic impact and uncertainty resulting from the COVID-19 pandemic.
•Cumulative pre-tax losses in recent years in the United States.
•Inherent challenges in forecasting future pre-tax earnings which rely, in part, on improved profitability from our restructuring efforts;efforts.
The continuing challenge of changes in the U.S. consumer retail business environment;
While relatively long, existence of definite lived tax attributes of certain U.S. federal tax credits and state NOLs;
As of December 31, 2017,the end of Fiscal 2020, we believe that the weight of the positivenegative evidence outweighs the negativepositive evidence regarding the realization of our U.S. deferred tax assets and have recorded a valuation allowance against the majority of the netU.S. deferred tax assets. We will continue to evaluate our ability to realize our net deferred tax assets on a quarterly basis.
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions or obtaining new information on particular tax positions may cause a change to the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statementsConsolidated Statements of income.Operations.
Stock-Based Compensation
We account for stock-based compensation in accordance with accounting guidance that requires all stock-based compensation awards granted to employees and directors to be measured at fair value and recognized as an expense in the financial statements. As of December 31, 2017,the end of Fiscal 2020, we had $87.7$67.5 million of unrecognized compensation expense expected to be recognized over a weighted average period of 3.22.39 years. This unrecognized compensation expense does not include any expense related to performance-based restricted stock units and stock options granted in Fiscal 2019 for which the performance targets havewere not been achieveddeemed probable as of December 31, 2017.the end of Fiscal 2020. All such performance awards for Fiscal 2019 were forfeited due to the performance targets not being achieved. We did not grant any performance awards in Fiscal 2020.
The assumptions used in calculating the fair value of stock-based compensation awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. In addition, compensation expense for performance-based awards is recorded over the related service period when achievement of the performance targets areis deemed probable, which requires management judgment. The achievement of certain revenue and operating income targets related to the performance-based restricted stock units and stock options granted in 2017 were not deemed probable as of December 31, 2017. Additional stock-based compensation expense of up to $5.7 million would have been recorded from grant date through 2017 for these performance-based restricted stock units and stock options had the full achievement of all operating targets been deemed probable; however, currently we do not believe that these targets will be met. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. Refer to Note 2 and Note 1215 to the Consolidated Financial Statements for a further discussion on stock-based compensation.
Recently Issued Accounting Standards
Refer to Note 2 to the notes to our financial statementsConsolidated Financial Statements included in this Form 10-K for our assessment of recently issued accounting standards.
|
| | | | |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Foreign Currency and Interest Rate Risk
We are exposed to global market risks, including the effects of changes in foreign currency and interest rates. We use derivative instruments to manage financial exposures that occur in the normal course of business and do not hold or issue derivatives for trading or speculative purposes.
We may elect to designate certain derivatives as hedging instruments under U.S. GAAP. We formally document all relationships between designated hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking hedged transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
Our foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of the end of Fiscal 2020, we had hedge instruments, primarily for British Pound/U.S. Dollar, U.S. Dollar/Chinese Renminbi, Euro/U.S. Dollar, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, and Australian Dollar/U.S. Dollar currency pairs. All derivatives are recognized on the consolidated balance sheets at fair value and classified based on the instruments maturity dates. The table below provides information about our foreign currency forward exchange agreements and presents the notional amounts and weighted average exchange rates by contractual maturity dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair Value as of Year Ended |
| (In thousands) | 2021 | 2022 | 2023 | 2024 | 2025 and Thereafter | Total | December 31, 2020 | December 31, 2019 |
| On-Balance Sheet Financial Instruments | | |
| USD Functional Currency | | | | | | | | |
| EUR | Notional | $ | 97,333 | | $ | 63,142 | | $ | — | | $ | — | | $ | — | | $ | 160,475 | | $ | (5,565) | | $ | 182 | |
| Weighted Average Exchange Rate | 1.19 | | 1.21 | | | | | 1.19 | | | |
| GBP | Notional | 179,180 | | 88,912 | | — | | — | | — | | 268,092 | | (6,634) | | (3,504) | |
| Weighted Average Exchange Rate | 1.33 | | 1.34 | | | | | 1.34 | | | |
| JPY | Notional | 5,448 | | — | | — | | — | | — | | 5,448 | | (126) | | 198 | |
| Weighted Average Exchange Rate | 105.27 | | — | | | | | 105.27 | | | |
| CNY Functional Currency | | | | | | | | |
| USD | Notional | 138,350 | | 70,400 | | — | | — | | — | | 208,750 | | (5,414) | | 531 | |
| Weighted Average Exchange Rate | 6.80 | | 6.80 | | | | | 6.81 | | | |
| CAD Functional Currency | | | | | | | | |
| USD | Notional | 86,500 | | 45,600 | | — | | — | | — | | 132,100 | | (3,824) | | (2,421) | |
| Weighted Average Exchange Rate | 1.31 | | 1.31 | | | | | 1.31 | | | |
| MXN Functional Currency | | | | | | | | |
| USD | Notional | 23,600 | | 14,010 | | — | | — | | — | | 37,610 | | (739) | | (2,137) | |
| Weighted Average Exchange Rate | 20.74 | | 21.35 | | | | | 20.97 | | | |
We currently generate a majority of our consolidated net revenues in the United States, and the reporting currency for our consolidated financial statementsConsolidated Financial Statements is the U.S. dollar. As our net revenues and expenses generated outside of the United States increase, our results of operations could be adversely impacted by changes in foreign currency exchange rates. For example, as we recognize foreign revenues in local foreign currencies and if the U.S. dollar strengthens, it could have a negative impact on our foreign revenues upon translation of those results into the U.S. dollar during theupon consolidation of our financial statements. In addition, we are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates onrelating to transactions generated by our foreigninternational subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions andnon-functional currency generated revenue, non-functional currency inventory purchases, denominatedinvestments in currenciesU.S. Dollar denominated
available-for-sale debt securities, and certain other than the functional currencyintercompany transactions. As of the purchasing entity. These exposures are included in other expense, net on the consolidated statementsend of income.
From time to time, we may elect to use foreign currency contracts to reduce the risk from exchange rate fluctuations primarily on intercompany transactions and projected inventory purchases for our international subsidiaries. As we expand our international business, we anticipate expanding our current hedging program to include additional currency pairs and instruments. We do not enter into derivative financial instruments for speculative or trading purposes.
As of December 31, 2017,Fiscal 2020, the aggregate notional value of our outstanding foreign currency contracts was $601.0 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, Mexican Peso/U.S. Dollar, Yen/U.S.
Dollar, Mexican Peso/Euro and South Korean Won/U.S. Dollar. currency pairs with contract maturities of one to eleven months. The majority of our foreign currency contracts are not designated as cash flow hedges was $812.5 million, with contract maturities ranging from one to twenty-four months.
In order to maintain liquidity and accordingly, changes in their fair value are recorded in earnings. Wefund business operations, we may enter into foreign currencylong term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of our long term debt can be expected to vary as a result of future business requirements, market conditions and other factors. We may elect to enter into interest rate swap contracts designatedto reduce the impact associated with interest rate fluctuations from time to time. Our interest rate swap contracts are accounted for as cash flow hedges. As of the end of Fiscal 2020, as all of our long-term debt bore fixed rate interest rates, we had no outstanding interest rate swap contracts.
For foreign currency contracts designated as cash flow hedges, the changes in fair value excluding any ineffective portion, is recorded inare reported as other comprehensive income until net incomeand are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. One of the criteria for this accounting treatment is affectedthe notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of the anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the variability in cash flowsend of the hedged transaction. The effectiveoriginally specified time period or within an additional two-month period of time, we are required to reclassify the cumulative change in fair value of the over-hedged 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 years ended December 31, 2017 and 2016, we reclassified $0.4 million and $0.3 million, respectively,hedge contract from otherOther comprehensive income (loss) to cost of goods sold related to foreign currency contracts designated as cash flow hedges. The fair value of our foreign currency contracts was a liability of $6.8 million as of December 31, 2017 and was included in other current liabilities on the consolidated balance sheet. The fair value of our foreign currency contracts was an asset of $15.2 million as of December 31, 2016 and was included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 9 to the Consolidated Financial Statements for a discussion of the fair value measurements. Included in otherOther expense, net wereduring the following amounts related to changesperiod in foreign currency exchange rates and derivative foreign currency contracts:
|
| | | | | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Unrealized foreign currency exchange rate gains (losses) | | $ | 29,246 |
| | $ | (12,627 | ) | | $ | (33,359 | ) |
| Realized foreign currency exchange rate gains (losses) | | 611 |
| | (6,906 | ) | | 7,643 |
|
| Unrealized derivative gains (losses) | | (1,217 | ) | | 729 |
| | 388 |
|
| Realized derivative gains (losses) | | (26,537 | ) | | 15,192 |
| | 16,404 |
|
We enter into foreign currencyderivative contracts with major financial institutions with investment grade credit ratings and are exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the foreign currencyderivative contracts. However, we monitor the credit quality of these financial institutions and consider the risk of counterparty default to be minimal. Although we have entered into foreign currency contracts to minimize some of the impact of foreign currency exchange rate fluctuations on future cash flows, we cannot be assured that foreign currency exchange rate fluctuations will not have a material adverse impact on our financial condition and results of operations.
Interest Rate Risk
In order to maintain liquidity and fund business operations, we enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. We may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. We utilize interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation.
As of December 31, 2017, the aggregate notional value of our outstanding interest rate swap contracts was $135.6 million. During the years ended December 31, 2017 and 2016, we recorded a $0.9 million and $2.0 million increase in interest expense, respectively, representing the effective portion of the contracts reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of $1.1 million as of December 31, 2017 and was 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.
Credit Risk
WeWe are exposed to credit risk primarily on our accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by our customer base. We believe that our allowance for doubtful accounts is sufficient to cover customer credit risks as of December 31, 2017. See the end of Fiscal 2020. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Allowance for Doubtful Accounts."Accounts" for a further discussion on our policies.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations in recent periods, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
|
| | | | |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.
The effectiveness of our internal control over financial reporting as of December 31, 2017,2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
|
| | | | | | | |
/s/ KEVIN A. PLANKATRIK FRISK | | Chairman of the Board of Directors and
Chief Executive Officer and President |
Kevin A. PlankPatrik Frisk | | |
| |
/s/ DAVIDE. E. BERGMAN | | Chief Financial Officer |
| David E. Bergman | | |
Dated: February 28, 201824, 2021
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Under Armour, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Under Armour, Inc. and its subsidiaries(the “Company”) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes and financial statement schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidatedfinancial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 2020and 2016, 2019,and the results of their itsoperations and their itscash flows for each of the three years in the period ended December 31, 2017 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting PrinciplePrinciples
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based payment awardsleases in 2017.2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Long-Lived Asset Impairment Analyses – Right-of-Use Assets
As described in Notes 3 and 7 of the consolidated financial statements, the Company has long-lived assets which are primarily comprised of property, plant and equipment, net of $658.7 million and operating right-of-use (ROU) assets of $536.7 million as of December 31, 2020. As a result of the impacts of COVID-19, management determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis. Management performed undiscounted cash flow analyses on its long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, management determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. Management estimated the fair value of these long-lived assets based on their market rent assessments or discounted cash flows. Management compared these estimated fair values to the net carrying values. Management recognized $89.7 million of long-lived asset impairment charges for 2020. Additionally, in March 2020, as a part of the 2020 restructuring plan, management made the strategic decision to forgo the opening of its New York City flagship store and the property is actively being marketed for sublease. Accordingly, in the first quarter of 2020, management recognized a ROU asset impairment of $290.8 million, reducing the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent.
The principal considerations for our determination that performing procedures relating to the long-lived asset impairment analyses for right-of-use assets is a critical audit matter are the significant judgment by management when developing the fair value measurement of the right-of-use assets, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the current market and sublease market rents. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment analyses, including controls over the valuation of the long-lived assets. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the methodology and approach used; testing the completeness and accuracy of the underlying data used in the impairment analyses; and evaluating the reasonableness of the current market and sublease market rent significant assumptions. Evaluating management’s assumptions related to the current market and sublease market rents involved evaluating whether the assumptions used were reasonable and consistent with external market and industry data. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the methodology and approach and reasonableness of the current market and sublease market rent assumptions.
Reserve for Customer Returns
As described in Note 2 to the consolidated financial statements, the Company recorded $203.4 million as of December 31, 2020 in reserves for returns, allowances, markdowns and discounts within customer refund liabilities. Management bases its estimates of the reserve for customer returns on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company.
The principal considerations for our determination that performing procedures relating to the reserve for customer returns is a critical audit matter are the significant judgment by management in estimating the customer returns reserve, which in turn led to a high degree of auditor judgment, subjectivity, and effort, in performing procedures and evaluating management’s significant assumption related to the amount of outstanding returns that have not yet been received by the Company.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of management’s customer returns reserve, including the assumption related to the outstanding returns that have not yet been received by the Company. These procedures also included, among others, testing management’s process for developing the customer returns reserve; evaluating the appropriateness of the method; testing the completeness, accuracy, and relevance of underlying data used in the estimate; and evaluating the reasonableness of the significant assumption related to the amount of outstanding returns that have not yet been received by the Company. Evaluating management’s assumption related to outstanding returns that have not yet been received by the Company involved evaluating whether the assumption used by management was reasonable considering (i) historical rates of customer returns; (ii) specific identification of outstanding returns; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 28, 201824, 2021
We have served as the Company’s auditor since 2003.
Under Armour, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 1,517,361 | | | $ | 788,072 | |
| Accounts receivable, net | 527,340 | | | 708,714 | |
| Inventories | 895,974 | | | 892,258 | |
| Prepaid expenses and other current assets | 282,300 | | | 313,165 | |
| Total current assets | 3,222,975 | | | 2,702,209 | |
| Property and equipment, net | 658,678 | | | 792,148 | |
| Operating lease right-of-use assets | 536,660 | | | 591,931 | |
| Goodwill | 502,214 | | | 550,178 | |
| Intangible assets, net | 13,295 | | | 36,345 | |
| Deferred income taxes | 23,930 | | | 82,379 | |
| Other long-term assets | 72,876 | | | 88,341 | |
| Total assets | $ | 5,030,628 | | | $ | 4,843,531 | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 575,954 | | | $ | 618,194 | |
| Accrued expenses | 378,859 | | | 374,694 | |
| Customer refund liabilities | 203,399 | | | 219,424 | |
| Operating lease liabilities | 162,561 | | | 125,900 | |
| Other current liabilities | 92,503 | | | 83,797 | |
| Total current liabilities | 1,413,276 | | | 1,422,009 | |
| Long term debt | 1,003,556 | | | 592,687 | |
| Operating lease liabilities, non-current | 839,414 | | | 580,635 | |
| Other long-term liabilities | 98,389 | | | 98,113 | |
| Total liabilities | 3,354,635 | | | 2,693,444 | |
| Commitments and contingencies (see Note 10) | 0 | | 0 |
| Stockholders’ equity | | | |
| Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of December 31, 2020 and 2019; 188,603,686 shares issued and outstanding as of December 31, 2020 (2019: 188,289,680) | 62 | | | 62 | |
| Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of December 31, 2020 and 2019. | 11 | | | 11 | |
| Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of December 31, 2020 and 2019; 231,953,667 shares issued and outstanding as of December 31, 2020 (2019: 229,027,730) | 77 | | | 76 | |
| Additional paid-in capital | 1,061,173 | | | 973,717 | |
| Retained earnings | 673,855 | | | 1,226,986 | |
| Accumulated other comprehensive loss | (59,185) | | | (50,765) | |
| Total stockholders’ equity | 1,675,993 | | | 2,150,087 | |
| Total liabilities and stockholders’ equity | $ | 5,030,628 | | | $ | 4,843,531 | |
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 312,483 |
| | $ | 250,470 |
|
| Accounts receivable, net | 609,670 |
| | 622,685 |
|
| Inventories | 1,158,548 |
| | 917,491 |
|
| Prepaid expenses and other current assets | 256,978 |
| | 174,507 |
|
| Total current assets | 2,337,679 |
| | 1,965,153 |
|
| Property and equipment, net | 885,774 |
| | 804,211 |
|
| Goodwill | 555,674 |
| | 563,591 |
|
| Intangible assets, net | 46,995 |
| | 64,310 |
|
| Deferred income taxes | 82,801 |
| | 136,862 |
|
| Other long term assets | 97,444 |
| | 110,204 |
|
| Total assets | $ | 4,006,367 |
| | $ | 3,644,331 |
|
| Liabilities and Stockholders��� Equity | | | |
| Current liabilities | | | |
| Revolving credit facility, current | $ | 125,000 |
| | $ | — |
|
| Accounts payable | 561,108 |
| | 409,679 |
|
| Accrued expenses | 296,841 |
| | 208,750 |
|
| Current maturities of long term debt | 27,000 |
| | 27,000 |
|
| Other current liabilities | 50,426 |
| | 40,387 |
|
| Total current liabilities | 1,060,375 |
| | 685,816 |
|
| Long term debt, net of current maturities | 765,046 |
| | 790,388 |
|
| Other long term liabilities | 162,304 |
| | 137,227 |
|
| Total liabilities | 1,987,725 |
| | 1,613,431 |
|
| Commitments and contingencies (see Note 6) |
|
| |
|
|
| Stockholders’ equity | | | |
| Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of December 31, 2017, and 2016; 185,257,423 shares issued and outstanding as of December 31, 2017, and 183,814,911 shares issued and outstanding as of December 31, 2016. | 61 |
| | 61 |
|
| Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of December 31, 2017, and December 31, 2016. | 11 |
| | 11 |
|
| Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of December 31, 2017, and 2016; 222,375,079 shares issued and outstanding as of December 31, 2017, and 220,174,048 shares issued and outstanding as of December 31, 2016. | 74 |
| | 73 |
|
| Additional paid-in capital | 872,266 |
| | 823,484 |
|
| Retained earnings | 1,184,441 |
| | 1,259,414 |
|
| Accumulated other comprehensive loss | (38,211 | ) | | (52,143 | ) |
| Total stockholders’ equity | 2,018,642 |
| | 2,030,900 |
|
| Total liabilities and stockholders’ equity | $ | 4,006,367 |
| | $ | 3,644,331 |
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Net revenues | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 3,963,313 |
| Net revenues | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | 5,193,185 | |
| Cost of goods sold | 2,737,830 |
| | 2,584,724 |
| | 2,057,766 |
| Cost of goods sold | 2,314,572 | | | 2,796,599 | | | 2,852,714 | |
| Gross profit | 2,238,723 |
| | 2,240,611 |
| | 1,905,547 |
| Gross profit | 2,160,095 | | | 2,470,533 | | | 2,340,471 | |
| Selling, general and administrative expenses | 2,086,831 |
| | 1,823,140 |
| | 1,497,000 |
| Selling, general and administrative expenses | 2,171,934 | | | 2,233,763 | | | 2,182,339 | |
| Restructuring and impairment charges | 124,049 |
| | — |
| | — |
| Restructuring and impairment charges | 601,599 | | | 0 | | | 183,149 | |
| Income from operations | 27,843 |
| | 417,471 |
| | 408,547 |
| |
| Income (loss) from operations | | Income (loss) from operations | (613,438) | | | 236,770 | | | (25,017) | |
| Interest expense, net | (34,538 | ) | | (26,434 | ) | | (14,628 | ) | Interest expense, net | (47,259) | | | (21,240) | | | (33,568) | |
| Other expense, net | (3,614 | ) | | (2,755 | ) | | (7,234 | ) | |
| Other income (expense), net | | Other income (expense), net | 168,153 | | | (5,688) | | | (9,203) | |
| Income (loss) before income taxes | (10,309 | ) | | 388,282 |
| | 386,685 |
| Income (loss) before income taxes | (492,544) | | | 209,842 | | | (67,788) | |
| Income tax expense | 37,951 |
| | 131,303 |
| | 154,112 |
| |
| Income tax expense (benefit) | | Income tax expense (benefit) | 49,387 | | | 70,024 | | | (20,552) | |
| Income (loss) from equity method investment | | Income (loss) from equity method investment | (7,246) | | | (47,679) | | | 934 | |
| Net income (loss) | (48,260 | ) | | 256,979 |
| | 232,573 |
| Net income (loss) | $ | (549,177) | | | $ | 92,139 | | | $ | (46,302) | |
| Adjustment payment to Class C capital stockholders | — |
| | 59,000 |
| | — |
| |
| Net income (loss) available to all stockholders | (48,260 | ) | | 197,979 |
| | 232,573 |
| |
| | | | | | | | | | | | |
| Basic net income (loss) per share of Class A and B common stock | $ | (0.11 | ) | | $ | 0.45 |
| | $ | 0.54 |
| |
| Basic net income (loss) per share of Class C common stock | $ | (0.11 | ) | | $ | 0.72 |
| | $ | 0.54 |
| |
| Diluted net income (loss) per share of Class A and B common stock | $ | (0.11 | ) | | $ | 0.45 |
| | $ | 0.53 |
| |
| Diluted net income (loss) per share of Class C common stock | $ | (0.11 | ) | | $ | 0.71 |
| | $ | 0.53 |
| |
| Basic net income (loss) per share of Class A, B and C common stock | | Basic net income (loss) per share of Class A, B and C common stock | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | |
| Diluted net income (loss) per share of Class A, B and C common stock | | Diluted net income (loss) per share of Class A, B and C common stock | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | |
| | | | | | | |
| Weighted average common shares outstanding Class A and B common stock | |
| Weighted average common shares outstanding Class A, B and C common stock | | Weighted average common shares outstanding Class A, B and C common stock | |
| Basic | 219,254 |
| | 217,707 |
| | 215,498 |
| Basic | 454,089 | | | 450,964 | | | 445,815 | |
| Diluted | 219,254 |
| | 221,944 |
| | 220,868 |
| Diluted | 454,089 | | | 454,274 | | | 445,815 | |
| | | | | | | |
| Weighted average common shares outstanding Class C common stock | |
| Basic | 221,475 |
| | 218,623 |
| | 215,498 |
| |
| Diluted | 221,475 |
| | 222,904 |
| | 220,868 |
| |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (loss)(Loss)
(In thousands)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Net income (loss) | $ | (48,260 | ) | | $ | 256,979 |
| | $ | 232,573 |
| Net income (loss) | $ | (549,177) | | | $ | 92,139 | | | $ | (46,302) | |
| Other comprehensive income (loss): | | | | | | Other comprehensive income (loss): | |
| Foreign currency translation adjustment | 23,357 |
| | (13,798 | ) | | (31,816 | ) | Foreign currency translation adjustment | (5,060) | | | 10,754 | | | (18,535) | |
| Unrealized gain (loss) on cash flow hedge, net of tax of $(5,668), $3,346 and $415 for the years ended December 31, 2017, 2016, and 2015 respectively. | (16,624 | ) | | 9,084 |
| | 1,611 |
| |
| Unrealized gain (loss) on cash flow hedge, net of tax benefit (expense) of $1,791, $7,798, and $(7,936) for the years ended December 31, 2020, 2019, and 2018, respectively. | | Unrealized gain (loss) on cash flow hedge, net of tax benefit (expense) of $1,791, $7,798, and $(7,936) for the years ended December 31, 2020, 2019, and 2018, respectively. | (18,075) | | | (21,646) | | | 22,800 | |
| Gain (loss) on intra-entity foreign currency transactions | 7,199 |
| | (2,416 | ) | | — |
| Gain (loss) on intra-entity foreign currency transactions | 14,715 | | | (886) | | | (5,041) | |
| Total other comprehensive income (loss) | 13,932 |
| | (7,130 | ) | | (30,205 | ) | |
| Total other comprehensive (loss) | | Total other comprehensive (loss) | (8,420) | | | (11,778) | | | (776) | |
| Comprehensive income (loss) | $ | (34,328 | ) | | $ | 249,849 |
| | $ | 202,368 |
| Comprehensive income (loss) | $ | (557,597) | | | $ | 80,361 | | | $ | (47,078) | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (loss) | | Total
Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance as of December 31, 2014 | 177,296 |
| | $ | 59 |
| | 36,600 |
| | $ | 12 |
| | 213,896 |
| | 71 |
| | $ | 508,279 |
| | $ | 856,687 |
| | $ | (14,808 | ) | | $ | 1,350,300 |
|
| Exercise of stock options | 360 |
| | — |
| | — |
| | — |
| | 360 |
| | — |
| | 2,852 |
| | — |
| | — |
| | 2,852 |
|
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (172 | ) | | — |
| | — |
| | — |
| | (172 | ) | | — |
| | — |
| | (12,727 | ) | | — |
| | (12,727 | ) |
| Issuance of Class A Common Stock, net of forfeitures | 1,996 |
| | 1 |
| | — |
| | — |
| | 1,996 |
| | 1 |
| | 19,134 |
| | — |
| | — |
| | 19,136 |
|
| Class B Convertible Common Stock converted to Class A Common Stock | 2,150 |
| | 1 |
| | (2,150 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60,376 |
| | — |
| | — |
| | 60,376 |
|
| Net excess tax benefits from stock-based compensation arrangements | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 45,917 |
| | — |
| | — |
| | 45,917 |
|
| Comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 232,573 |
| | (30,205 | ) | | 202,368 |
|
| Balance as of December 31, 2015 | 181,630 |
| | 61 |
| | 34,450 |
| | 11 |
| | 216,080 |
| | 72 |
| | 636,558 |
| | 1,076,533 |
| | (45,013 | ) | | 1,668,222 |
|
| Exercise of stock options | 792 |
| | — |
| | — |
| | — |
| | 971 |
| | — |
| | 6,203 |
| | — |
| | — |
| | 6,203 |
|
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (199 | ) | | — |
| | — |
| | — |
| | (276 | ) | | — |
| | — |
| | (15,098 | ) | | — |
| | (15,098 | ) |
| Issuance of Class A Common Stock, net of forfeitures | 1,592 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,884 |
| | — |
| | — |
| | 7,884 |
|
| Issuance of Class C Common Stock, net of forfeitures | — |
| | — |
| | — |
| | — |
| | 1,852 |
| | 1 |
| | 25,834 |
| | — |
| | — |
| | 25,835 |
|
| Issuance of Class C dividend | — |
| | — |
| | — |
| | — |
| | 1,547 |
| | — |
| | 56,073 |
| | (59,000 | ) | | — |
| | (2,927 | ) |
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 46,149 |
| | — |
| | — |
| | 46,149 |
|
| Net excess tax benefits from stock-based compensation arrangements | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44,783 |
| | — |
| | — |
| | 44,783 |
|
| Comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 256,979 |
| | (7,130 | ) | | 249,849 |
|
| Balance as of December 31, 2016 | 183,815 |
| | 61 |
| | 34,450 |
| | 11 |
| | 220,174 |
| | 73 |
| | 823,484 |
| | 1,259,414 |
| | (52,143 | ) | | 2,030,900 |
|
| | | | | | | | | | | | | | | | | | | | | | | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income | | Total
Equity |
| | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (loss) | | Total
Equity | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | |
| Balance as of December 31, 2017 | | Balance as of December 31, 2017 | 185,257 | | | 61 | | | 34,450 | | | 11 | | | 222,375 | | | 74 | | | 872,266 | | | 1,184,441 | | | (38,211) | | | $ | 2,018,642 | |
| Exercise of stock options | 609 |
| | — |
| | — |
| | — |
| | 556 |
| | — |
| | 3,664 |
| | — |
| | — |
| | 3,664 |
| Exercise of stock options | 2,084 | | | 1 | | | — | | | — | | | 2,127 | | | — | | | 6,747 | | | — | | | — | | | 6,748 | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (65 | ) | | — |
| | — |
| | — |
| | (78 | ) | | — |
| | — |
| | (2,781 | ) | | — |
| | (2,781 | ) | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (23) | | | — | | | — | | | — | | | (140) | | | — | | | — | | | (2,564) | | | — | | | (2,564) | |
| Issuance of Class A Common Stock, net of forfeitures | 898 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| | — |
| | — |
| | — |
| Issuance of Class A Common Stock, net of forfeitures | 392 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | — |
| | — |
|
| — |
|
| — |
| | 1,723 |
| | 1 |
| | 7,852 |
| | — |
| | — |
| | 7,853 |
| Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 2,060 | | | 1 | | | (4,168) | | | — | | | — | | | (4,167) | |
| Impact of adoption of accounting standard updates | — |
| | — |
|
| — |
|
| — |
| | — |
| | — |
| | (2,666 | ) | | (23,932 | ) | | — |
| | (26,598 | ) | Impact of adoption of accounting standard updates | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,507 | | | — | | | 3,507 | |
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 39,932 |
| | — |
| | — |
| | 39,932 |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 41,783 | | | — | | | — | | | 41,783 | |
| Comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (48,260 | ) | | 13,932 |
| | (34,328 | ) | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (46,302) | | | (776) | | | (47,078) | |
| Balance as of December 31, 2017 | 185,257 |
| | 61 |
| | 34,450 |
| | 11 |
| | 222,375 |
| | 74 |
| | 872,266 |
| | 1,184,441 |
| | (38,211 | ) | | 2,018,642 |
| |
| Balance as of December 31, 2018 | | Balance as of December 31, 2018 | 187,710 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 226,422 | | | $ | 75 | | | $ | 916,628 | | | $ | 1,139,082 | | | $ | (38,987) | | | $ | 2,016,871 | |
| Exercise of stock options and warrants | | Exercise of stock options and warrants | 441 | | | — | | | — | | | — | | | 293 | | | — | | | 2,101 | | | — | | | — | | | 2,101 | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (15) | | | — | | | — | | | — | | | (227) | | | — | | | — | | | (4,235) | | | — | | | (4,235) | |
| Issuance of Class A Common Stock, net of forfeitures | | Issuance of Class A Common Stock, net of forfeitures | 154 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 2,540 | | | 1 | | | 5,370 | | | — | | | — | | | 5,371 | |
| Impact of adoption of accounting standard updates | | Impact of adoption of accounting standard updates | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation expense | | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 49,618 | | | — | | | — | | | 49,618 | |
| Comprehensive loss | | Comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 92,139 | | | (11,778) | | | 80,361 | |
| Balance as of December 31, 2019 | | Balance as of December 31, 2019 | 188,290 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 229,028 | | | $ | 76 | | | $ | 973,717 | | | $ | 1,226,986 | | | $ | (50,765) | | | $ | 2,150,087 | |
| Exercise of stock options | | Exercise of stock options | 148 | | | — | | | — | | | — | | | 136 | | | — | | | 517 | | | — | | | — | | | 517 | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (1) | | | — | | | — | | | — | | | (262) | | | — | | | — | | | (3,954) | | | — | | | (3,954) | |
| Issuance of Class A Common Stock, net of forfeitures | | Issuance of Class A Common Stock, net of forfeitures | 166 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 3,052 | | | 1 | | | 4,225 | | | — | | | — | | | 4,226 | |
| Stock-based compensation expense | | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 42,070 | | | — | | | — | | | 42,070 | |
| Equity Component value of convertible notes issuance, net | | Equity Component value of convertible notes issuance, net | — | | | — | | | — | | | — | | | — | | | — | | | 40,644 | | | — | | | — | | | 40,644 | |
| Comprehensive income (loss) | | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (549,177) | | | (8,420) | | | (557,597) | |
| Balance as of December 31, 2020 | | Balance as of December 31, 2020 | 188,603 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 231,954 | | | $ | 77 | | | $ | 1,061,173 | | | $ | 673,855 | | | $ | (59,185) | | | $ | 1,675,993 | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | | Cash flows from operating activities | |
| Net income (loss) | $ | (48,260 | ) | | $ | 256,979 |
| | $ | 232,573 |
| Net income (loss) | $ | (549,177) | | | $ | 92,139 | | | $ | (46,302) | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities | | | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | Adjustments to reconcile net income (loss) to net cash provided by operating activities | |
| Depreciation and amortization | 173,747 |
| | 144,770 |
| | 100,940 |
| Depreciation and amortization | 164,984 | | | 186,425 | | | 181,768 | |
| Unrealized foreign currency exchange rate loss (gains) | (29,247 | ) | | 12,627 |
| | 33,359 |
| |
| Unrealized foreign currency exchange rate gain (loss) | | Unrealized foreign currency exchange rate gain (loss) | (9,295) | | | (2,073) | | | 14,023 | |
| Impairment charges | 71,378 |
| | — |
| | — |
| Impairment charges | 470,543 | | | 39,000 | | | 9,893 | |
| Amortization of bond premium | 254 |
| | — |
| | — |
| Amortization of bond premium | 12,070 | | | 254 | | | 254 | |
| Gain on sale of MyFitnessPal platform | | Gain on sale of MyFitnessPal platform | (179,318) | | | 0 | | | 0 | |
| Loss on disposal of property and equipment | 2,313 |
| | 1,580 |
| | 549 |
| Loss on disposal of property and equipment | 3,740 | | | 4,640 | | | 4,256 | |
| Stock-based compensation | 39,932 |
| | 46,149 |
| | 60,376 |
| Stock-based compensation | 42,070 | | | 49,618 | | | 41,783 | |
| Excess tax benefit (loss) from stock-based compensation arrangements | (75 | ) | | 44,783 |
| | 45,917 |
| |
| Deferred income taxes | 55,910 |
| | (43,004 | ) | | (4,426 | ) | Deferred income taxes | 43,992 | | | 38,132 | | | (38,544) | |
| Changes in reserves and allowances | 108,757 |
| | 70,188 |
| | 40,391 |
| Changes in reserves and allowances | 10,347 | | | (26,096) | | | (234,998) | |
| Changes in operating assets and liabilities (net of acquisitions): |
| |
| |
| |
| Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Accounts receivable | (79,106 | ) | | (249,853 | ) | | (191,876 | ) | Accounts receivable | 167,614 | | | (45,450) | | | 186,834 | |
| Inventories | (222,391 | ) | | (148,055 | ) | | (278,524 | ) | Inventories | 15,306 | | | 149,519 | | | 109,919 | |
| Prepaid expenses and other assets | (55,503 | ) | | (25,284 | ) | | (76,476 | ) | Prepaid expenses and other assets | 18,603 | | | 24,334 | | | (107,855) | |
| Other non-current assets | | Other non-current assets | (259,735) | | | 19,966 | | | 0 | |
| Accounts payable | 145,695 |
| | 202,446 |
| | (22,583 | ) | Accounts payable | (40,673) | | | 59,458 | | | 26,413 | |
| Accrued expenses and other liabilities | 109,823 |
| | 67,754 |
| | 76,854 |
| Accrued expenses and other liabilities | 318,532 | | | (18,987) | | | 134,594 | |
| Customer refund liability | | Customer refund liability | (19,250) | | | (80,710) | | | 305,141 | |
| Income taxes payable and receivable | (39,164 | ) | | (16,712 | ) | | (2,533 | ) | Income taxes payable and receivable | 2,511 | | | 18,862 | | | 41,051 | |
| Net cash provided by operating activities | 234,063 |
| | 364,368 |
| | 14,541 |
| Net cash provided by operating activities | 212,864 | | | 509,031 | | | 628,230 | |
| Cash flows from investing activities | | | | | | Cash flows from investing activities | | | | | |
| Sale of MyFitnessPal platform | | Sale of MyFitnessPal platform | 198,916 | | | 0 | | | 0 | |
| Purchase of businesses | | Purchase of businesses | (40,280) | | | 0 | | | 0 | |
| Purchases of property and equipment | (281,339 | ) | | (316,458 | ) | | (298,928 | ) | Purchases of property and equipment | (92,291) | | | (145,802) | | | (170,385) | |
| Purchases of property and equipment from related parties | — |
| | (70,288 | ) | | — |
| |
| Purchase of businesses, net of cash acquired | — |
|
| — |
| | (539,460 | ) | |
| Purchases of available-for-sale securities | — |
| | (24,230 | ) | | (103,144 | ) | |
| Sales of available-for-sale securities | — |
| | 30,712 |
| | 96,610 |
| |
| Sale of property and equipment | | Sale of property and equipment | 0 | | | 0 | | | 11,285 | |
| Purchase of equity method investment | | Purchase of equity method investment | 0 | | | 0 | | | (39,207) | |
| Purchases of other assets | (1,648 | ) | | (875 | ) | | (2,553 | ) | Purchases of other assets | 0 | | | (1,311) | | | (4,597) | |
| Net cash used in investing activities | (282,987 | ) | | (381,139 | ) | | (847,475 | ) | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | 66,345 | | | (147,113) | | | (202,904) | |
| Cash flows from financing activities | | | | | | Cash flows from financing activities | | | | | |
| Proceeds from long term debt and revolving credit facility | 763,000 |
| | 1,327,601 |
| | 650,000 |
| Proceeds from long term debt and revolving credit facility | 1,288,753 | | | 25,000 | | | 505,000 | |
| Payments on long term debt and revolving credit facility | (665,000 | ) | | (1,170,750 | ) | | (265,202 | ) | Payments on long term debt and revolving credit facility | (800,000) | | | (162,817) | | | (695,000) | |
| Purchase of capped call | | Purchase of capped call | (47,850) | | | 0 | | | 0 | |
| Employee taxes paid for shares withheld for income taxes | (2,781 | ) | | (15,098 | ) | | (12,728 | ) | Employee taxes paid for shares withheld for income taxes | (3,675) | | | (4,235) | | | (2,743) | |
| Proceeds from exercise of stock options and other stock issuances | 11,540 |
| | 15,485 |
| | 10,310 |
| Proceeds from exercise of stock options and other stock issuances | 4,744 | | | 7,472 | | | 2,580 | |
| Other financing fees | | Other financing fees | 100 | | | 63 | | | 306 | |
| Payments of debt financing costs | — |
|
| (6,692 | ) | | (947 | ) | Payments of debt financing costs | (5,219) | | | (2,553) | | | (11) | |
| Cash dividends paid | — |
| | (2,927 | ) | | — |
| |
| Contingent consideration payments for acquisitions | — |
| | (1,505 | ) | |
|
| |
| Net cash provided by financing activities | 106,759 |
| | 146,114 |
| | 381,433 |
| |
| Effect of exchange rate changes on cash and cash equivalents | 4,178 |
| | (8,725 | ) | | (11,822 | ) | |
| Net increase (decrease) in cash and cash equivalents | 62,013 |
| | 120,618 |
| | (463,323 | ) | |
| Cash and cash equivalents | | | | | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | 436,853 | | | (137,070) | | | (189,868) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | 16,445 | | | 5,100 | | | 12,467 | |
| Net increase in cash, cash equivalents and restricted cash | | Net increase in cash, cash equivalents and restricted cash | 732,507 | | | 229,948 | | | 247,925 | |
| Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | |
| Beginning of period | 250,470 |
| | 129,852 |
| | 593,175 |
| Beginning of period | 796,008 | | | 566,060 | | | 318,135 | |
| End of period | $ | 312,483 |
| | $ | 250,470 |
| | $ | 129,852 |
| End of period | $ | 1,528,515 | | | $ | 796,008 | | | $ | 566,060 | |
| | | | | | | | | | | |
| Non-cash investing and financing activities | | | | | | Non-cash investing and financing activities | |
| Change in accrual for property and equipment | $ | 10,580 |
| | $ | 16,973 |
| | $ | 17,758 |
| Change in accrual for property and equipment | $ | (13,875) | | | $ | (8,084) | | | $ | (14,611) | |
| Non-cash dividends | — |
| | (56,073 | ) | |
| |
| Property and equipment acquired under build-to-suit leases | — |
| | — |
| | 5,631 |
| |
| Other supplemental information | | | | | | Other supplemental information | |
| Cash paid for income taxes | 36,921 |
| | 135,959 |
| | 99,708 |
| |
| Cash paid (received) for income taxes, net of refunds | | Cash paid (received) for income taxes, net of refunds | 24,443 | | | 23,352 | | | (16,738) | |
| Cash paid for interest, net of capitalized interest | 29,750 |
| | 21,412 |
| | 11,176 |
| Cash paid for interest, net of capitalized interest | 28,626 | | | 18,031 | | | 28,586 | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the Audited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. (together with its wholly owned subsidiaries, the "Company") is a developer, marketer and distributor of branded athletic performance apparel, footwear, and accessories. TheseThe Company creates products are sold worldwideengineered to solve problems and worn bymake athletes at all levels, from youth to professional on playing fields around the globe,better, as well as by consumers with active lifestyles. The Under Armour Connected FitnessTM platform powers the world's largest digital health and fitness community.apps built to connect people and drive performance. The Company uses this platform to engage its consumersCompany's products are made, sold and increase awareness and sales of its products.worn worldwide.
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”). All intercompany balances and transactions have been eliminated.eliminated in consolidation. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.America ("U.S. GAAP").
On June 3, 2016,During the Boardfirst quarter of Directors approved2021, 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 a change in fiscal year end to March 31 from December 31, effective for the paymentfiscal year beginning after April 1, 2022. Accordingly, the Company’s 2021 fiscal year will end on December 31, 2021, followed by a three-month transition period from January 1, 2022 through March 31, 2022. The Company’s 2023 fiscal year will run from April 1, 2022 through March 31, 2023.
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The results of operations of this dividendacquisition have been consolidated with those of the Company beginning on March 2, 2020. Refer to Note 5 for a discussion of the acquisition.
On December 18, 2020, the Company completed the previously announced sale of its MyFitnessPal platform to an entity affiliated with Francisco Partners Management, L.P. and recognized a gain of approximately $179.3 million, which is included within Other income (expenses), net in the formConsolidated Statements of additional sharesOperations. Refer to Note 4 for a discussion of Class C stock,the sale.
During the year ended December 31, 2019 ("Fiscal 2019"), the Company recorded an adjustment related to prior periods to correct unrecorded consulting expenses incurred primarily in connection with cashthe 2018 restructuring plan. Selling, general and administrative expenses for Fiscal 2019 includes $5.5 million of expense that was understated in lieuprior periods. The Company concluded that the error was not material to any prior or interim periods presented.
During the year ended December 31, 2018 ("Fiscal 2018"), the Company identified an immaterial error in the presentation of premium subscriptions in its Connected Fitness reporting segment. Subscription revenue was previously recorded net of any fractional shares. This dividend was distributed on June 29, 2016,related commission. Beginning in the formfirst quarter of 1,470,256 sharesFiscal 2018, subscription revenue is recorded on a gross basis and the related commission cost is included in selling, general and administrative expense in the Consolidated Statements of Class C stockOperations. The Company concluded that the error was not material to any of its previously issued financial statements.
COVID-19
In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and $2.9global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”. The Company has been focused on protecting the health and safety of its teammates, athletes and consumers, working with its customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global pandemic, while managing the Company's business in response to a changing dynamic. The Company's business operations and financial performance for the year ended December 31, 2020 ("Fiscal 2020") were materially impacted by COVID-19. These impacts are discussed within these notes to the consolidated financial statements, including but not limited to discussions related to long-lived asset and goodwill impairment, leases, long-term debt, and income taxes.
In response to the pandemic, global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, was announced. The Company recognized certain incentives totaling $9 million during Fiscal 2020. The incentives were recorded as a reduction of the associated costs which the Company incurred within selling, general and administrative expenses in cash.the Consolidated Statements of Operations. Further, the
CARES Act includes modification to income tax provisions. Refer to Note 13 for discussion of the impacts of modifications to income tax provisions under the CARES Act.
Cash, and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at date of inception to be cash and cash equivalents. Included in interest expense, netThe Company's restricted cash is reserved for the years ended December 31, 2017, 2016 and 2015 was interest income of $0.4 million, $0.3 million and $0.2 million, respectively,payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's Consolidated Balance Sheet. The following table provides a reconciliation of cash, cash equivalents and restricted cash equivalents.reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows.
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Cash and cash equivalents | $ | 1,517,361 | | | $ | 788,072 | |
| Restricted cash | 11,154 | | | 7,936 | |
| Total cash, cash equivalents and restricted cash | $ | 1,528,515 | | | $ | 796,008 | |
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 its large sporting goods retailers.wholesale customers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required. TheNone of the Company's largest customer in North Americacustomers accounted for 12% and 16%more than 10% of accounts receivable as of December 31, 2017for Fiscal 2020 and December 31, 2016, respectively. The Company's largest customer accounted for 10% and 12% of net revenues for the years ended December 31, 2016 and 2015,Fiscal 2019, respectively. For the year ended December 31, 2017,Fiscal 2020, Fiscal 2019 and Fiscal 2018, no customer accounted for more than 10% of net revenues. Given the current global economic environment and impacts of COVID-19, the Company regularly evaluates the credit risk of its large wholesale customers which make up the majority of the Company's accounts receivable. Refer to "Credit Losses - Allowance for Doubtful Accounts" for a discussion of the evaluation of credit losses.
Sale of Accounts Receivable
The Company has an agreement with a financial institution to sell selected accounts receivable on a recurring, non-recourse basis. Under the agreement, at any time and from time to time the balance of up to $140 million of the Company's accounts receivable may be sold to the financial institution. The Company's ability to utilize this agreement, however, may be limited by the credit ratings of the Company's customers. The Company removes the sold accounts receivable from the Consolidated Balance Sheets at the time of sale. The Company does not retain any interests in the sold accounts receivable. The Company acts as the collection agent for the outstanding accounts receivable on behalf of the financial institution.
For Fiscal 2020 and Fiscal 2019, there were no amounts outstanding in connection with these arrangements. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the Consolidated Statements of Operations.
Credit Losses - Allowance for Doubtful Accounts
Credit losses are the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit losses primarily through customer receivables associated with the sales of product within the Company's wholesale and Connected Fitness channels, which are recorded in accounts receivable, net on the Company's Consolidated Balance Sheet. The Company also has other receivables, including receivables from licensing arrangements, which are recorded in prepaid expenses and other current assets on the Company's Consolidated Balance Sheet.
Credit is extended to customers based on a credit review. The credit review considers each customer’s financial condition, including the customer's established credit rating or the Company's assessment of the customer’s creditworthiness based on their financial statements absent a credit rating, local industry practices, and business strategy. A credit limit and terms are established for each customer based on the outcome of this review. The Company actively monitors ongoing credit exposure through continuous review of customer balances against terms and payments against due dates. To mitigate credit risk, the Company may require customers to provide security in the form of guarantees, letters of credit, or prepayment. The Company is also exposed to credit losses through credit card receivables associated with the sales of products within the Company's direct to consumer channel.
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company makes ongoing estimates relating to the collectabilitycollectibility of accounts receivable and maintainsrecords an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the reserve, theThe Company considersestablishes expected credit losses by evaluating historical levels of credit losses, and significantcurrent economic developments within the retail environmentconditions that could impact themay affect a customer’s ability of its customers to pay, outstanding balances and makes judgments about the creditworthiness of significant customers based on ongoingcustomers. These inputs are used to determine a range of expected credit evaluations. Becauselosses and an allowance is recorded within the Company cannot predict future changes in the financial stabilityrange. Accounts receivable are written off when there is no reasonable expectation of its customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers wererecovery.
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of December 31, 2019 | Charged to
Costs and
Expenses | Write-Offs
Net of
Recoveries | Balance as of
December 31, 2020 |
Allowance for doubtful accounts -
accounts receivable, net | $ | 15,083 | | $ | 10,456 | | $ | (5,188) | | $ | 20,350 | |
Allowance for doubtful accounts -
prepaid expenses and other current assets (1) | $ | 0 | | $ | 7,029 | | $ | 0 | | $ | 7,029 | |
(1) This balance includes an allowance pertaining to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event the Company determines a smaller or larger reserve is appropriate, it would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made. royalty receivable.
As of December 31, 2017 and 2016,the end of Fiscal 2019, the allowance for doubtful accounts was $19.7 million$15.1 million.
For Fiscal 2020, the increase in the reserve is primarily due to the evaluation of certain account balances in connection with negative developments that represent a higher risk of credit default. The allowance for doubtful accounts was established with information available, including reasonable and $11.3 million, respectively.
supportable estimates of future risk to the Company as of the end of Fiscal 2020. There may be further impacts due to COVID-19.
Inventories
Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. The Company values its inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. MarketNet realizable value is estimated based upon assumptions made about future demand and retail market conditions. If the Company determines that the estimated marketnet realizable value of its inventory is less than the carrying value of such inventory, it records a charge to cost of goods sold to reflect the lower of cost or market.net realizable value. If actual market conditions are less favorable than those projected by the Company, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary. The Company has made the policy election to record any liability associated with Global Intangible Low Tax Income (“GILTI”) in the period in which it is incurred.
Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statementsConsolidated Statements of income.Operations.
Property and Equipment
Property and equipment are stated at cost, including the cost of internal labor for software customized for internal use, less accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets: 3 to 10 years for furniture, office equipment, software and plant equipment and 10 to 35 years for site improvements, buildings and building equipment. Leasehold and tenant improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The cost of in-store apparel and footwear fixtures and displays are capitalized, included in furniture, fixtures and displays, and depreciated over 3 years. The Company periodically reviews assets’ estimated useful lives based upon actual experience and expected future utilization. A change in useful life is treated as a change in accounting estimate and is applied prospectively.
The Company capitalizes the cost of interest for long term property and equipment projects based on the Company’s weighted average borrowing rates in place while the projects are in progress. Capitalized interest was $2.1 million and $1.8 million as of December 31, 2017 and 2016, respectively.
Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in selling, general and administrative expenses for that period. Major additions and betterments are capitalized to the asset accounts while maintenance and repairs, which do not improve or extend the lives of assets, are expensed as incurred.
As a part of the Company's 2017 restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of $30.7 million, reducing the carrying value of these assets to their estimated fair values.
Goodwill, Intangible Assets and Long-Lived Assets
Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition and are allocated to the reporting units that are expected to receive the related benefits. Goodwill and indefinite lived intangible assets are not amortized and are required to be tested for impairment at least annually or sooner
whenever events or changes in circumstances indicate that it is more likely than not that the assets may be impaired.fair value of the reporting unit is less than its carrying amount. In conducting an annual impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that is the case, the Company performs the goodwill impairment test. The Company compares the fair value of the reporting unit with its carrying amount. The Company calculatesestimates fair value using the discounted cash flows model, under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: the Company's weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business, and working capital effects. If the carrying amount of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit.
During The Company performs its annual impairment testing in the thirdfourth quarter of 2017,each year.
As a result of the impacts of COVID-19, the Company madedetermined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the strategic decision to not pursue certain planned future revenue streams in its Connected Fitness business in connection withCompany’s reporting units as of March 31, 2020. During Fiscal 2020, the 2017 Restructuring Plan. TheCompany recognized goodwill impairment charges of $51.6 million for the Latin America reporting unit and the Canada reporting unit, within the North America operating segment. Further, as a result of the impacts of COVID-19, the Company determined that sufficient indicationindicators existed to trigger the performance of an interim long-lived asset impairment analysis. As a result, the Company recognized $89.7 million of long-lived asset impairment charges for Fiscal 2020. Refer to Note 7 to the Company’s Connected Fitness reporting unit resulting in goodwill impairmentconsolidated financial statements for a further discussion of $28.6 million, which represents all goodwill allocated to this reporting unit. The Company performs its annual impairment tests in the fourth quarter of each fiscal year. As of December 31, 2017, no impairment of goodwill was identified and the fair value of each reporting unit substantially exceeded its carrying value.goodwill.
The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. These factors may include a significant deterioration of operating results, changes in business plans, or changes in anticipated cash flows. When factors indicate that an asset should be evaluated for possible impairment, the Company reviews long-lived assets to assess recoverability from future operations using undiscounted cash flows. If future undiscounted cash flows are less than the carrying value, an impairment is recognized in earnings to the extent that the carrying value exceeds fair value. In connection with the Company's 2017 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
Accrued Expenses
At December 31, 2017,For Fiscal 2020, accrued expenses primarily included $92.7$77.9 million (Fiscal 2019: $118.7 million) and $47.0$45.9 million(Fiscal 2019: $63.2 million) of accrued compensation and benefits, and marketing expenses, respectively. At December 31, 2016, accrued expenses primarily included $60.8 million and $24.7 million of accrued compensation and benefits and marketing expenses, respectively.
Foreign Currency Translation and Transactions
The functional currency for each of the Company’s wholly owned foreign subsidiaries is generally the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Capital accounts are translated at historical foreign currency exchange rates. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive income. Adjustments that arise from foreign currency exchange rate changes on transactions, primarily driven by intercompany transactions, denominated in a currency other than the functional currency are included in other expense, net on the consolidated statementsConsolidated Statements of income.Operations.
Derivatives and Hedging Activities
The Company uses derivative financial instruments in the form of foreign currency and interest rate swap contracts to minimize the risk associated with foreign currency exchange rate and interest rate fluctuations. The Company accounts for derivative financial instruments pursuant to applicable accounting guidance. This guidance establishes accounting and reporting standards for derivative financial instruments and requires all derivatives to be recognized as either assets or liabilities on the balance sheet and to be measured at fair value. Unrealized derivative gain positions are recorded as other current assets or other long term assets, and unrealized derivative loss positions are recorded as other current liabilities or other long term liabilities, depending on the derivative financial instrument’s maturity date.
Currently, the majority of the Company’s foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are included in other expense, net on the consolidated statements of income. During 2014, the Company began entering into foreign currencyFor contracts designated as cash flow hedges, and consequently, 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. Additionally, the Company has designated its interest rate swap contract as a cash flow hedge and accordingly, the effective portion of changes in fair value are recorded inreported as other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation. The ineffective portion, if any, isare recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. One of the criteria for this accounting treatment is the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, the Company's estimates of the anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time
period or within an additional two-month period of time, the Company is required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income (loss) to Other expense, net during the period in which the decrease occurs. The Company does not enter into derivative financial instruments for speculative or trading purposes.
Revenue Recognition
The Company recognizes revenue pursuant to applicable accounting standards.Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of both net sales of apparel, footwear and accessories, license and other revenues. NetConnected Fitness revenue. The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on the Company’s revenues from product sales are recognized uponpresented on a net basis on the Consolidated Statements of Operations, and therefore do not impact net revenues or costs of goods sold.
Revenue transactions associated with the sale of apparel, footwear, and accessories, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct-to-consumer channels. The Company satisfies the performance obligation and records revenues when transfer of ownership, including passage of titlecontrol has passed to the customer, andbased on the terms of sale. In the Company’s wholesale channel, transfer of risk of loss related to those goods. Transfer of title and risk of losscontrol is based upon shipment under free on board shipping point for most goods or upon receipt by the customer depending on the country of the sale and the agreement with the customer. In some instances, transfer of title and risk of loss takes place at the point of sale, for example, at the Company’s brand and factory house stores. The Company may also ship product directly from its supplier to the customerwholesale customers and recognize revenue when the product is delivered to and accepted by the customer. LicenseIn the Company’s direct-to-consumer channel, transfer of control takes place at the point of sale for brand and other revenuesfactory house customers and upon shipment to substantially all e-commerce customers. Payment terms for wholesale transactions are primarily recognizedestablished in accordance with local and industry practices. Payment is generally required within 30 to 60 days of shipment to or receipt by the wholesale customer in the United States, and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. Payment is generally due at the time of sale for direct-to-consumer transactions.
Gift cards issued to customers by the Company are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon shipmenthistorical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually guaranteed minimum royalty amount. Payments are generally due quarterly. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually guaranteed minimum royalty amount) as licensed products are sold by the Company’s licensees. Sales taxes imposed onlicensee. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the Company’s revenuesminimum is recognized as revenue over the contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from product sales are presentedConnected Fitness subscriptions is recognized on a netgross basis onand is recognized over the consolidated statementsterm of incomethe subscription. The Company receives payments in advance of revenue recognition for subscriptions and therefore do not impact net revenues or costsare recorded as contract liabilities in the Company's Consolidated Balance Sheet. Related commission cost is included in selling, general and administrative expense in the Consolidated Statements of goods sold.Operations. Revenue from Connected Fitness digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly
higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on contractual obligationsnegotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns and discounts are recorded as an offset to accounts receivable as settlementsincluded within customer refund liability and the value of inventory associated with reserves for sales returns are made through offsets to outstanding customer invoices. As of December 31, 2017included within prepaid expenses and 2016,other current assets on the Consolidated Balance Sheet. The Company reviews and refines these estimates on at least a quarterly basis. For Fiscal 2020 and Fiscal 2019, there were $246.6$203.4 million and $146.2$219.4 million, respectively, in reserves for customer returns, allowances, markdowns and discounts.discounts within customer refund liability and $57.9 million and $61.1 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the Consolidated Balance Sheet. Refer to Note 19 to the Consolidated Financial Statements for a further discussion of disaggregated revenues.
Contract Liability
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitness applications, gift cards and royalty arrangements. Contract liabilities are included in other liabilities on the Company's Consolidated Balance Sheet. For Fiscal 2020 and Fiscal 2019, contract liability was $26.7 million and $60.4 million, respectively.
For Fiscal 2020, the Company recognized $16.1 million of revenue that was previously included in contract liability as of the end of Fiscal 2019. For Fiscal 2019, the Company recognized $48.5 million of revenue that was previously included in contract liability as of the end of Fiscal 2018. The change in the contract liability balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
Practical Expedients and Policy Elections
The Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than an additional promised service. Additionally, the Company has elected not to disclose certain information related to unsatisfied performance obligations for subscriptions for its Connected Fitness applications as they have an original expected length of one year or less.
Advertising Costs
Advertising costs are charged to selling, general and administrative expenses. Advertising production costs are expensed the first time an advertisement related to such production costs is run. Media (television, print and radio) placement costs are expensed in the month during which the advertisement appears, and costs related to event sponsorships are expensed when the event occurs. In addition, advertising costs include sponsorship expenses. Accounting for sponsorship payments is based upon specific contract provisions and the payments are generally expensed uniformly over the term of the contract after recording expense related to specific performance incentives once they are deemed probable. Advertising expense, including amortization of in-store marketing fixtures and displays, was $565.1$550.4 million,, $477.5 $578.9 million and $417.8$543.8 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively. At December 31, 2017 and 2016,For Fiscal 2020, prepaid advertising costs were $41.2$15.2 million and $32.0 million, respectively. (Fiscal 2019: $26.9 million).
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 outbound handling costs, included within selling, general and administrative expenses, were $101.5$80.5 million, $89.9$81.0 million and $63.7$91.8 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
MinorityEquity Method Investment
The Company holdshas a minoritycommon stock investment of 29.5% in Dome Corporation (“Dome”("Dome"), the Company’sCompany's Japanese licensee. The Company invested ¥1,140.0 million, or $15.5 million, in exchange for 19.5% common stock ownership in Dome. As of December 31, 2017 and 2016, the carrying value of the Company’s investment was $12.7 million and $11.7 million, respectively, and was included in other long term assets on the consolidated balance sheets. The investment is subject to foreign currency translation rate fluctuations as it is held by the Company’s European subsidiary.
licensee. The Company accounts for its investment in Dome under the costequity method, given that it does not havehas the ability to exercise significant influence. Additionally,influence, but not control, over Dome. During Fiscal 2020, the Company concludedrecorded its allocable share of Dome's net income of $3.5 million (Fiscal 2019: net loss of $8.7 million; Fiscal 2018: net income
of $1 million), within income (loss) from equity method investment on the Consolidated Statements of Operations and as an adjustment to the investment balance within other long term assets on the Consolidated Balance Sheet.
The Company performed a qualitative assessment of potential impairment indicators for its investment in Dome and determined that no event or changeindicators of impairment existed due to impacts from COVID-19. Accordingly, the Company performed a valuation of its investment in circumstances occurred duringDome and determined that the year ended December 31, 2017 that may havefair value of its investment was less than its carrying value by $8.6 million. The Company determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. Accordingly, the Company's results for Fiscal 2020 include the impact of recording a significant adverse effect$8.6 million impairment of the Company's equity method investment in Dome, which reduced the carrying value to 0.The impairment charge was recorded within income (loss) from equity method investment on the Consolidated Statements of Operations and as a reduction to the investment balance within other long term assets on the Consolidated Balance Sheets. The Company calculated fair value using the discounted cash flows model, which indicates the fair value of the investment.investment based on the present value of the cash flows that it expects the investment to generate in the future. For Fiscal 2020 there was 0 carrying value associated with the Company's equity investment in Dome (Fiscal 2019: $5.1 million).
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $40.1 million and $37.8 million for Fiscal 2020 and Fiscal 2019, respectively. For Fiscal 2020, the Company had $22.9 million (Fiscal 2019: $15.6 million) in licensing receivables outstanding recorded in the prepaid expenses and other current assets line item within the Company's Consolidated Balance Sheet.
On March 2, 2020, as part of the Company's acquisition of Triple, the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For Fiscal 2020, the Company recorded the allocable share of UA Sports Thailand’s net loss of $1.1 million within income (loss) from equity method investment on the Consolidated Statements of Operations and as an adjustment to the investment balance within other long term assets on the Consolidated Balance Sheets. As of the end of Fiscal 2020 , the carrying value of the Company’s total investment in UA Sports Thailand was $4.5 million. Refer to Note 5 for a discussion of the acquisition.
Earnings per Share
Basic earnings per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Any stock-based compensation awards that are determined to be participating securities, which are stock-based compensation awards that entitle the holders to receive dividends prior to vesting, are included in the calculation of basic earnings per share using the two class method. Diluted earnings per common share is computed by dividing net income available to common stockholders for the period by the diluted weighted average common shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options, warrants, restricted stock units and other equity awards. Refer to Note 1114 for a further discussion of earnings per share.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based compensation awards granted to employees and directors to be measured at fair value and recognized as an expense in the financial statements. In addition, this guidance requires that excess tax benefits related to stock-based compensation awards be reflected as operating cash flows.
The Company uses the Black-Scholes option-pricing model to estimate the fair market value of stock-based compensation awards. The Company uses the “simplified method” to estimate the expected life of options, as permitted by accounting guidance. The “simplified method” calculates the expected life of a stock option equal to the time from grant to the midpoint between the vesting date and contractual term, taking into account all vesting tranches. The risk free interest rate is based on the yield for the U.S. Treasury bill with a maturity equal to the expected life of the stock option. Expected volatility is based on the Company's historical average. Compensation expense is recognized net of forfeitures on a straight-line basis over the total vesting period, which is the implied requisite service period. Compensation expense for performance-based awards is recorded over the implied requisite service period when achievement of the performance target is deemed probable.
The Company issues new shares of Class A Common Stock and Class C Common Stock upon exercise of stock options, grant of restricted stock or share unit conversion. Refer to Note 1215 for further details on stock-based compensation.
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.
Further, the full impact of COVID-19 cannot reasonably be estimated. The Company has made appropriate
accounting estimates and assumptions based on the facts and circumstances available as of the reporting date.
The Company may experience further impacts based on long-term effects on the Company's customers and the
countries in which the Company operates. As a result of these uncertainties, actual results could differ from those
estimates and assumptions.
Fair Value of Financial Instruments
The carrying amounts shown for the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short term maturity of those instruments. As of the end of Fiscal 2020, the fair value of the Company's 3.250% Senior Notes were $602.6 million (Fiscal 2019: $587.5 million). The fair value of the Company's 1.50% Convertible Senior Notes, which was $526.3 million and $568.1issued in May 2020, was $828.2 million as of December 31, 2017 and 2016, respectively.the end of Fiscal 2020. The fair value of the Company's other long term debt approximates its carrying value based on the variable nature of interest rates and current market rates available to the Company. The fair value of foreign currency contracts is based on the net difference between the U.S. dollars 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 exchange rate. The fair value of the interest rate swap
contract is based on 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.
Recently Issued Accounting Standards
In May 2014,August 2020, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update ("ASU") 2014-09, which supersedes(ASU) 2020-06. The amendment in this update simplifies the most current revenue recognition requirements.accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This ASUupdate also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to recognize revenueprovide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in a waythe entity’s financial statements, and information about events, conditions, and circumstances that depictscan affect how to assess the transferamount or timing of goods or servicesan entity’s future cash flows related 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 beinstruments. The guidance is effective for annualinterim and interimannual periods beginning after December 15, 2017, with early adoption for annual and interim periods beginning after December 15, 2016 permitted.
2021. The Company’s initial assessment of theCompany is currently evaluating this 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. On the Consolidated Balance Sheet, reserves for returns, allowances, discounts and markdowns will be included as other current liabilities rather than accounts receivable, net and the value of inventory associated with reserves for sales returns will be included within prepaid expenses and other current assets. While the Company has not completed its evaluation, it expectsdetermine the impact of the adoption of this ASU would primarily change presentation withinit may have on its consolidated financial statements but is currently not expected to have a material effect on income from operations.statements.
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, the Company would not restate the prior financial statements presented. The guidance in this ASU requires the Company 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 January of 2016,March 2020, the FASB issued ASU 2016-01 which simplifies2020-04, ReferenceRateReform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting. The ASU provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the impairment assessmentamendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of equity investments.reference rate reform. This ASU requires equityis currently effective and upon adoption may be applied prospectively to contract modifications and hedging relationships made on or before December 31, 2022. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra-period tax allocation, interim period accounting, and accounting for ownership changes in investments, to be measured at fair value with changes recognized in net income. This ASU eliminates the requirement to disclose the methods and assumptions to estimate fair value for financial instruments, requires the use of the exit price for disclosure purposes, requires the change in liability due to a change in credit risk to be presented inamong other comprehensive income, requires separate presentation of financial assets and liabilities by measurement category and form of asset (securities and loans) and clarifies the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods beginning January 1, 2018 using a cumulative-effect adjustment to the balance sheet. The guidance related to equity securities without readily determinable fair values (including disclosure requirements) shall be applied prospectively to equity investments that exist as of the date of adoption of this update. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
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 forwithin those 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, 2019.2020 and may be early adopted. The Company has formed a committee and initiated the review process forelected to early adopt this standard as of January 1, 2020. The 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 todid not have a material impact on itsthe consolidated balance sheet for recognition of lease-related assets and liabilities.financial statements.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. The Company has not yet made an accounting policy election in regards to the GILTI provisions under the Tax Act. The Company will make its GILTI accounting policy election during the one-year measurement period as allowed by the SEC. No amounts have been recorded in the Company's 2017 financial statements for the impact of GILTI provisions.
Recently Adopted Accounting Standards
In MarchJune 2016, the FASB issued ASU 2016-09,2016-13 - Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amended the impairment model to utilize an expected loss methodology in place of the previously used incurred loss methodology, which affects all entities that issue share-based payment awards to their employees. The amendmentsresults in this ASU cover such areas as themore timely 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.losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions. The Company adopted the provisions of this ASU on January 1, 2017 on a prospective basis2020 and recorded an excess tax deficiency of $1.3 million as an increase in income tax expense relatedthere was no material impact 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, upon adoption of the guidance in this ASU, the Company recorded a $1.9 million cumulative-effect benefit to retained earningsConsolidated Financial Statements as of the date of adoption. The Company adopted the provisionsResults for reporting periods as of this ASU related to changes on the Consolidated Statement of Cash Flows on a retrospective basis. 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 increases of $44.8 million and $45.9 million to cash flows from operating activities for the years ended December 31, 2016 and 2015, respectively. This also resulted in decreases of $15.1 million and $12.7 million to cash flows from financing activities for the year ended December 31, 2015 and 2016, respectively.
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 benefit2020 are presented under the new standard, while prior results continue to retained earnings of $26.0 million as ofbe reported under the date of adoption.previous standard.
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 Related Impairment
A description of significant restructuring and related impairment charges is included below:
2017 Restructuring Plan Charges
On July 27, 2017,March 31, 2020, the Company's Board of Directors approved a restructuring plan ("2020 restructuring plan") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation. The Company identified further opportunities and on September 2, 2020, the Company’s Board of Directors approved a $75 million increase to the restructuring plan, (the “2017resulting in an updated 2020 restructuring plan”)plan of approximately $550 million to more closely align its financial resources$600 million of total estimated pre-tax restructuring and related charges.
The restructuring and related charges primarily consist of up to approximately:
•$219 million of cash restructuring charges, comprised of up to: $61 million in facility and lease termination costs, $30 million in employee severance and benefit costs, and $128 million in contract termination and other restructuring costs; and
•$381 million of non-cash charges comprised of an impairment of $291 million related to the Company’s New York City flagship store and $90 million of intangibles and other asset related impairments.
The Company recorded $472.7 million and $183.1 million of restructuring and related impairment charges for Fiscal 2020 and Fiscal 2018, respectively. There were 0 restructuring charges incurred during Fiscal 2019. The Company previously implemented a restructuring plan in 2018. The summary of the costs recorded during Fiscal 2020 as well as the Company's current estimates of the amount expected to be incurred in connection with the critical priorities2020 restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Restructuring and related impairment charges recorded | | Estimated restructuring and related Impairment charges (1) |
| (In thousands) | | Year ended December 31, 2020 (A) | | Remaining to be incurred (B) | | Total (A+B) |
| Costs recorded in cost of goods sold: | | | | | | |
| Contract-based royalties | | $ | 11,608 | | | 0 | | | 11,608 | |
| Inventory write-offs | | 768 | | | 3,400 | | | 4,168 | |
| Total costs recorded in cost of goods sold | | 12,376 | | | 3,400 | | | 15,776 | |
| | | | | | |
| Costs recorded in restructuring and impairment charges: | | | | | | |
| Property and equipment impairment | | 29,280 | | | 8,098 | | | 37,378 | |
| Intangible asset impairment | | 4,351 | | | 0 | | | 4,351 | |
| Right-of-use asset impairment | | 293,495 | | | 0 | | | 293,495 | |
| Employee related costs | | 28,579 | | | 1,421 | | | 30,000 | |
| Contract exit costs (2) | | 79,008 | | | 89,992 | | | 169,000 | |
| Other asset write off | | 13,074 | | | 15,926 | | | 29,000 | |
| Other restructuring costs | | 12,564 | | | 8,436 | | | 21,000 | |
| Total costs recorded in restructuring and related impairment charges | | 460,351 | | | 123,873 | | | 584,224 | |
| Total restructuring and impairment charges | | $ | 472,727 | | | $ | 127,273 | | | $ | 600,000 | |
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the business. After completionrange of the 2017estimated remaining charges expected to be recorded by the Company in connection with the restructuring plan.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
The lease term for the Company's New York City flagship store commenced on March 1, 2020 and an operating lease right-of-use ("ROU") asset and corresponding operating lease liability of $344.8 million was recorded on the Company's Consolidated Balance Sheet. In March 2020, as a part of the 2020 restructuring plan, the Company recognized approximately $100.4 millionmade the strategic decision to forgo the opening of pre-tax chargesits New York City flagship store and the property is actively being marketed for sublease. Accordingly, in connection with this restructuring plan. In addition to these charges,the first quarter of Fiscal 2020, the Company also recognized restructuring related goodwilla ROU asset impairment charges of approximately $28.6 million for its Connected Fitness business.
Impairment
As a part of the 2017 restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of $30.7$290.8 million, reducing the carrying value of these assetsthe lease asset to theirits estimated fair values.value. Fair value was estimated using an income-approach based on management’smanagement's forecast of future cash flows expected to be derived from the assets' use.property based on current sublease market rent. Rent expense or sublease income related to this lease will be recorded within other income (expense) on the Consolidated Statements of Operations.
Additionally, in connection with the 2017All restructuring plan, strategic decisions were made during the third quarter of 2017 to abandon the use of certain intangible assetsand related impairment charges are included in the Company's Corporate Other non-operating segment, of which $397.6 million are North America related, $14.4 million are EMEA related, $14.9 million are Latin America related, $6.8 million are Asia-Pacific related and $4.6 million are Connected Fitness reporting unit. related for Fiscal 2020.
These intangible assets included technologycharges require the Company to make certain judgements and brand names, resulting in total intangible assetestimates regarding the amount and timing of restructuring and related impairment charges of $12.1 million, reducingor recoveries. The estimated liability could change subsequent to its recognition, requiring adjustments to 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 fromexpense and the assets use. In addition,liability recorded. On a quarterly basis, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the 2017 restructuring plan.
The Company determined sufficient indication existed to trigger the performance ofconducts an interim goodwill impairment for the Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair valueevaluation 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 of the goodwill was impaired.
The summary of the costs incurred during the year ended December 31, 2017 in connection with the 2017 restructuring plan arerelated liabilities and expenses and revises its assumptions and estimates as follows:
|
| | | | | |
| | | Year Ended December 31, | |
| (In thousands) | | 2017 | |
| Costs recorded in cost of goods sold: | | | |
| Inventory write-offs (1) | | $ | 5,077 |
| |
| Total costs recorded in cost of goods sold | | 5,077 |
| |
| | | | |
| Costs recorded in restructuring and impairment charges: | | | |
| Goodwill impairment | | 28,647 |
| |
| Property and equipment impairment | | 30,677 |
| |
| Employee related costs | | 14,572 |
| |
| Intangible asset impairment | | 12,054 |
| |
| Contract exit costs | | 12,029 |
| |
| Other restructuring costs | | 26,070 |
| |
| Total costs recorded in restructuring and impairment charges | | 124,049 |
| |
| Total restructuring, impairment and restructuring related costs | | $ | 129,126 |
| |
(1) This table includes an additional non-cash charge of $5.1 million for the year ended December 31, 2017 associated with the disposition of inventory outside of current liquidation channels in line with the 2017 restructuring plan.
appropriate as new or updated information becomes available.
A summary of the activity in the restructuring reserve related to the Company's 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017 Restructuring Plan is as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | Employee Related Costs | | Contract Exit Costs | | Other Restructuring Related Costs |
| Balance at January 1, 2020 | $ | 462 | | | $ | 17,843 | | | $ | 0 | |
| Additions charged to expense | 27,452 | | | 72,747 | | | 11,843 | |
| Cash payments charged against reserve | (14,584) | | | (28,456) | | | (5,745) | |
| Changes in reserve estimate | (462) | | | (492) | | | 0 | |
| Balance at December 31, 2020 | $ | 12,868 | | | $ | 61,642 | | | $ | 6,098 | |
Latin America operating model change
During the fourth quarter of Fiscal 2020, the Company determined to change to a distributor model in Chile, which is expected to be effective in early 2021. The Company determined that as of the end of Fiscal 2020, the Chile subsidiary met the criteria to be classified as held for sale under Accounting Standard Codification (ASC) 360, Property, Plant, and Equipment. Included within Total current assets and Total other long term assets on the Consolidated Balance Sheet as of the end of Fiscal 2020 are inventory with the carrying value of $1.2 million and property and equipment with the carrying value of $13.6 million, respectively, which represent assets held for sale.
4. Sale of MyFitnessPal
|
| | | | | | | | | | | |
| | Employee Related costs | | Contract Exit Costs | | Other Restructuring Related Costs |
| Balance at January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
|
| Additions charged to expense | 14,572 |
| | 12,029 |
| | 13,070 |
|
| Cash payments charged against reserve | (10,017 | ) | | (9,181 | ) | | (10,070 | ) |
| Balance at December 31, 2017 | $ | 4,555 |
| | $ | 2,848 |
| | $ | 3,000 |
|
2018 Restructuring Plan
On February 9, 2018,October 28, 2020, the Company's BoardCompany entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell its MyFitnessPal platform, and on December 18, 2020, the sale was completed. Pursuant to the Purchase Agreement, the aggregate sale price for the transaction was $345 million, of Directors approved an additional restructuring plan (the "2018 restructuring plan") identifying further opportunitieswhich $215 million was payable upon closing. The Company received $198.7 million at closing after giving effect to optimize operations. In conjunction with this plan, approximately $110$16 million of purchase price and other adjustments. The sale includes up to $130 million in earnout payments, which are based on the achievement of pre-tax restructuringcertain revenue targets over a three-year period. The potential earnout payments include up to $35 million payable in calendar year 2022, $45 million payable in calendar year 2023 and $50 million payable in calendar year 2024. The Company recognized a gain of approximately $179.3 million, which is included in Other income (expenses), net in the Consolidated Statements of Operations. The Company made an election to record the contingent earnout portion of the arrangement when the earnout payments are determined to be realizable in the future periods. In connection with the sale, we agreed to provide certain transition services to MyFitnessPal for an expected period up to nine months from the date of sale. The continuing cash flows related chargesto these items are not expected to be incurred duringsignificant.
5. Acquisition
Triple Pte. Ltd.
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's 2018 fiscal year, including:
Up to $105.0products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, charges, consistingnet of up to: $55.0$8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in facility and lease terminations and $50.0pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020.
The Company incurred $1.0 million in contract terminationacquisition related costs that were expensed during Fiscal 2020. These costs are included in selling, general and other restructuring charges; and,administrative expenses within the Consolidated Statements of Operations. Pro forma results are not presented, as the acquisition was not considered material to the consolidated Company.
Up to $25.0 million in non-cash charges comprised of approximately $10.0 million of inventory related charges and approximately $15.0 million of intangibles and other asset related impairments.
4.6. Property and Equipment, Net
Property and equipment are stated at cost, including the cost of internal labor for software customized for internal use, less accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
| | | | | |
| Years |
| Furniture, office equipment, software and plant equipment (1) | 3 to 10 |
| Site improvements, buildings and building equipment | 10 to 35 |
Leasehold and tenant improvements
| Shorter of the remaining lease term or related asset life |
(1) The cost of in-store apparel and footwear fixtures and displays are capitalized, included in furniture, fixtures and displays, and depreciated over 3 years.
The Company periodically reviews assets’ estimated useful lives based upon actual experience and expected future utilization. A change in useful life is treated as a change in accounting estimate and is applied prospectively.
The Company capitalizes the cost of interest for long term property and equipment projects based on the Company’s weighted average borrowing rates in place while the projects are in progress. Capitalized interest was $1.4 million as of the end of Fiscal 2020 (Fiscal 2019: $1.6 million).
Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in selling, general and administrative expenses for that period. Major additions and betterments are capitalized to the asset accounts while maintenance and repairs, which do not improve or extend the lives of assets, are expensed as incurred.
Property and equipment consisted of the following:
| | | | | December 31, | | | December 31, |
| (In thousands) | | 2017 | | 2016 | (In thousands) | | 2020 | | 2019 |
| Leasehold and tenant improvements | | $ | 431,761 |
| | $ | 326,617 |
| Leasehold and tenant improvements | | $ | 540,847 | | | $ | 563,061 | |
| Furniture, fixtures and displays | | 204,926 |
| | 168,720 |
| Furniture, fixtures and displays | | 236,527 | | | 235,721 | |
| Buildings | | 47,625 |
| | 47,216 |
| Buildings | | 48,382 | | | 52,184 | |
| Software | | 232,660 |
| | 151,059 |
| Software | | 339,756 | | | 337,577 | |
| Office equipment | | 98,802 |
| | 75,196 |
| Office equipment | | 125,695 | | | 126,412 | |
| Plant equipment | | 144,484 |
| | 124,140 |
| Plant equipment | | 130,155 | | | 144,844 | |
| Land | | 83,574 |
| | 83,574 |
| Land | | 83,626 | | | 83,626 | |
| Construction in progress | | 148,488 |
| | 204,362 |
| Construction in progress | | 31,217 | | | 54,771 | |
| Other | | 20,438 |
| | 20,383 |
| Other | | 6,047 | | | 4,071 | |
| Subtotal property and equipment | | 1,412,758 |
| | 1,201,267 |
| Subtotal property and equipment | | 1,542,252 | | | 1,602,267 | |
| Accumulated depreciation | | (526,984 | ) | | (397,056 | ) | Accumulated depreciation | | (883,574) | | | (810,119) | |
| Property and equipment, net | | $ | 885,774 |
| | $ | 804,211 |
| Property and equipment, net | | $ | 658,678 | | | $ | 792,148 | |
Construction in progress primarily includes costs incurred for software systems, leasehold improvements and in-store fixtures and displays not yet placed in use.
Depreciation expense related to property and equipment was $164.3 million, $130.7 million and $86.3$154.4 million for Fiscal 2020 (Fiscal 2019: $177.3 million; Fiscal 2018: $173.4 million).
7. Long-Lived Asset and Goodwill Impairment
Long-Lived Asset Impairment
As a result of the years ended Decemberimpacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis in Fiscal 2020. The Company performed undiscounted cash flow analyses on its long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. Accordingly, the Company estimated the fair values of these long-lived assets based on their market rent assessments or discounted cash flows. The Company compared these estimated fair values to the net carrying values. Accordingly, the Company recognized $89.7 million of long-lived asset impairment charges for Fiscal 2020. There were no long-lived asset impairment charges in Fiscal 2019 or Fiscal 2018. The long-lived impairment charge was recorded within restructuring and impairment charges on the Consolidated Statements of Operations and as a reduction to the related asset balances on the Consolidated Balance Sheets. The long-lived asset impairment charges for Fiscal 2020 are included within the Company's operating segments as follows: $47.6 million recorded in North America, $23.0 million recorded in Asia-Pacific, $13.3 million recorded in Latin America, and $5.8 million recorded in EMEA.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: the Company's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, the Company recognized $290.8 million of long-lived asset impairment charges related to the Company's New York City flagship store, which was recorded in connection with the Company's 2020 restructuring plan for Fiscal 2020. Refer to Note 3 for a further discussion of the restructuring and related impairment charges.
Goodwill Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2017, 20162020. In the first quarter of 2020, the Company performed discounted cash flow analyses and 2015, respectively.determined that the estimated fair values of the Latin America reporting unit and the Canada reporting unit within the North America operating segment no longer exceeded their carrying value, resulting in a full impairment of the goodwill allocated to their respective reporting units. The Company recognized goodwill impairment charges of $51.6 million for Fiscal 2020 for these reporting units within restructuring and impairment charges on the Consolidated Statements of Operation, and as a reduction to the goodwill balance on the Consolidated Balance Sheets. There were no triggering events or goodwill impairment charges recorded during the remainder of Fiscal 2020.
The determination of the Company’s reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates used in the discounted cash flow analyses, which are based on Level 3 inputs, include: the Company’s weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting unit's business, long-term rate of growth and profitability of the reporting unit's business, working capital effects, and changes in market conditions, consumer trends or strategy.
5. Goodwill and Intangible Assets, Net
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | North America | | EMEA | | Asia-Pacific | | Latin America | | Connected Fitness | | Total |
| Balance as of December 31, 2018 | | $ | 317,500 | | | $ | 104,823 | | | $ | 79,410 | | | $ | 44,761 | | | $ | 0 | | | $ | 546,494 | |
| Effect of currency translation adjustment | | 788 | | | 1,243 | | | (242) | | | 1,895 | | | 0 | | | 3,684 | |
| Balance as of December 31, 2019 | | 318,288 | | | 106,066 | | | 79,168 | | | 46,656 | | | 0 | | | 550,178 | |
| Effect of currency translation adjustment | | (1,420) | | | 6,971 | | | 8,486 | | | (10,426) | | | 0 | | | 3,611 | |
| Impairment | | (15,345) | | | 0 | | | 0 | | | (36,230) | | | 0 | | | (51,575) | |
| Balance as of December 31, 2020 | | $ | 301,523 | | | $ | 113,037 | | | $ | 87,654 | | | $ | 0 | | | $ | 0 | | | $ | 502,214 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | North America | | EMEA | | Asia-Pacific | | Latin America | | Connected Fitness | | Total |
| Balance as of December 31, 2016 | | $ | 317,323 |
| | $ | 99,245 |
| | $ | 77,586 |
| | $ | 42,436 |
| | $ | 27,001 |
| | $ | 563,591 |
|
| Effect of currency translation adjustment | | 1,132 |
| | 11,910 |
| | 3,737 |
| | 2,305 |
| | 1,646 |
| | 20,730 |
|
| Impairment | | — |
| | — |
| | — |
| | — |
| | (28,647 | ) | | (28,647 | ) |
| Balance as of December 31, 2017 | | $ | 318,455 |
| | $ | 111,155 |
| | $ | 81,323 |
| | $ | 44,741 |
| | $ | — |
| | $ | 555,674 |
|
The following table summarizestables summarize the Company’s intangible assets as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2020 | | |
| (In thousands) | | Useful Lives from Date of Acquisitions (in years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Impairment | | Sale of Business | | Purchase of Business | | Net
Carrying
Amount | | | | | | | |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | |
| Technology | | 5-7 | | $ | 1,138 | | | $ | (145) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 993 | | | | | | | | |
| Customer relationships | | 2-3 | | 0 | | | (1,208) | | | 0 | | | 0 | | | 8,770 | | | 7,562 | | | | | | | | |
| User/Nutrition database | | 10 | | 46,314 | | | (23,790) | | | (4,351) | | | (18,173) | | | 0 | | | 0 | | | | | | | | |
| Lease-related intangible assets | | 1-15 | | 12,896 | | | (9,180) | | | (1,058) | | | 0 | | | 0 | | | 2,658 | | | | | | | | |
| Other | | 5-10 | | 295 | | | (188) | | | 0 | | | 0 | | | 0 | | | 107 | | | | | | | | |
| Total | | | | $ | 60,643 | | | $ | (34,510) | | | $ | (5,410) | | | $ | (18,173) | | | $ | 8,770 | | | $ | 11,320 | | | | | | | | |
| Indefinite-lived intangible assets | | | | | | | | | | | | | | 1,975 | | | | | | | | |
| Intangible assets, net | | | | | | | | | | | | | | $ | 13,295 | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2017 | | December 31, 2016 |
| (In thousands) | | Useful Lives from Date of Acquisitions (in years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Impairment | | Net Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | | | |
| User base | | 10 | | $ | 48,561 |
| | $ | (13,499 | ) | | $ | — |
| | $ | 35,062 |
| | $ | 47,653 |
| | $ | (8,733 | ) | | $ | 38,920 |
|
| Technology | | 5-7 | | 19,611 |
| | (9,524 | ) | | (10,087 | ) | | — |
| | 19,612 |
| | (8,221 | ) | | 11,391 |
|
| Customer relationships | | 2-3 | | 9,527 |
| | (9,527 | ) | | — |
| | — |
| | 9,527 |
| | (9,527 | ) | | — |
|
| Trade name | | 4-5 | | 7,653 |
| | (5,686 | ) | | (1,967 | ) | | — |
| | 7,653 |
| | (4,816 | ) | | 2,837 |
|
| Nutrition database | | 10 | | 4,500 |
| | (1,256 | ) | | — |
| | 3,244 |
| | 4,500 |
| | (806 | ) | | 3,694 |
|
| Lease-related intangible assets | | 1-15 | | 3,896 |
| | (3,232 | ) | | — |
| | 664 |
| | 3,896 |
| | (3,075 | ) | | 821 |
|
| Other | | 5-10 | | 1,353 |
| | (892 | ) | | — |
| | 461 |
| | 1,373 |
| | (666 | ) | | 707 |
|
| Total | | | | $ | 95,101 |
| | $ | (43,616 | ) | | $ | (12,054 | ) | | $ | 39,431 |
| | $ | 94,214 |
| | $ | (35,844 | ) | | $ | 58,370 |
|
| Indefinite-lived intangible assets | | | | | | | | | | 7,564 |
| | | | | | 5,940 |
|
| Intangible assets, net | | | | | | | | | | $ | 46,995 |
| | | | | | $ | 64,310 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2019 |
| (In thousands) | | Useful Lives from Date of Acquisitions (in years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Impairment | | Sale of Business | | Purchase of Business | | Net
Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | |
| Technology | | 5-7 | | $ | 2,536 | | | $ | (965) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,571 | |
| Customer relationships | | 2-3 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| User/Nutrition database | | 10 | | 52,727 | | | (25,472) | | | 0 | | | 0 | | | 0 | | | 27,255 | |
| Lease-related intangible assets | | 1-15 | | 5,152 | | | (2,380) | | | 0 | | | 0 | | | 0 | | | 2,772 | |
| Other | | 5-10 | | 1,428 | | | (1,154) | | | 0 | | | 0 | | | 0 | | | 275 | |
| Total | | | | $ | 61,843 | | | $ | (29,970) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 31,871 | |
| Indefinite-lived intangible assets | | | | | | | | | | | | | | 4,474 | |
| Intangible assets, net | | | | | | | | | | | | | | $ | 36,345 | |
Amortization expense, which is included in selling, general and administrative expenses, was $8.2$7.0 million, $13.0$6.1 million and $13.9$6.1 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively. The following is the estimated amortization expense for the Company’s intangible assets as of December 31, 2017:the end of Fiscal 2020:
| | | | | |
| (In thousands) | |
| 2021 | $ | 2,124 | |
| 2022 | 2,020 | |
| 2023 | 1,660 | |
| 2024 | 1,497 | |
| 2025 | 1,497 | |
| 2026 and thereafter | 272 | |
| Amortization expense of intangible assets | $ | 9,070 | |
8. Leases
The Company enters into operating leases both domestically and internationally, to lease certain warehouse space, office facilities, space for its brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial
|
| | | |
| (In thousands) | |
| 2018 | $ | 5,715 |
|
| 2019 | 5,608 |
|
| 2020 | 5,536 |
|
| 2021 | 5,447 |
|
| 2022 | 5,428 |
|
| 2023 and thereafter | 11,697 |
|
| Amortization expense of intangible assets | $ | 39,431 |
|
As the rate implicit in the Company's lease agreements is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. Variable lease payments primarily consist of payments dependent on sales in brand and factory house stores. The Company has elected to combine lease and non-lease components in the determination of lease costs for its leases. The lease liability includes lease payments related to options to extend or renew the lease term only if the Company is reasonably certain to exercise those options. 6.The Company recognizes lease expense on a straight-line basis over the lease term. Included in selling, general and administrative expenses were operating lease costs of $156.7 million for Fiscal 2020 (Fiscal 2019: $166.4 million; Fiscal 2018: $152.7 million). Included in these amounts were $9.3 million in variable lease payments under non-cancelable operating lease agreements for Fiscal 2020 (Fiscal 2019: $12.9 million; Fiscal 2018: $14.2 million).
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | |
| Year ended December 31, |
| 2020 | 2019 |
| Weighted average remaining lease term (in years) | 9.12 | 6.73 |
| Weighted average discount rate | 3.83 | % | 4.26 | % |
Supplemental cash flow and other information related to leases was as follows:
| | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash outflows from operating leases | $ | 155,990 | | $ | 116,811 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 390,957 | | $ | 70,075 | |
Maturities of lease liabilities are as follows:
| | | | | |
| (In thousands) | |
| 2021 | $ | 196,725 | |
| 2022 | 163,631 | |
| 2023 | 143,868 | |
| 2024 | 125,173 | |
| 2025 | 97,085 | |
| 2026 and thereafter | 467,361 | |
| Total lease payments | $ | 1,193,843 | |
| Less: Interest | 191,866 | |
| Total present value of lease liabilities | $ | 1,001,977 | |
| |
As of the end of Fiscal 2020, the Company has additional operating lease obligations that have not yet commenced of approximately $6.5 million, which are not reflected in the table above.
9. Credit Facility and Other Long Term Debt
Credit Facility
TheOn March 8, 2019, the Company is party to aentered into an amended and restated credit agreement that providesby and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the “credit agreement”). The credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances. In May 2020, the Company entered into an amendment to the credit agreement (the “amendment” and, the credit agreement as amended, the “amended credit agreement” or the “revolving credit facility”), pursuant to which the prior revolving credit commitments for up towere reduced from $1.25 billion to $1.1 billion of borrowings,borrowings. From time to time throughout 2020, the Company borrowed funds under this facility as well as term loan commitments,a precautionary measure in each case maturingorder to increase the cash position and preserve liquidity given the ongoing uncertainty in January 2021.global markets resulting from the COVID-19 pandemic. As of December 31, 2017 the end of Fiscal 2020 and Fiscal 2019, there were 0 amounts outstanding balance under the revolving credit facility was $125.0 million and $161.3 million of term loan borrowings remained outstanding. facility.
AtExcept during the covenant suspension period (as defined below), at the Company's request and the lender's consent, revolving and or term loan borrowingscommitments under the amended credit agreement may be increased by up to $300.0$300 million in aggregate, subject to certain conditions as set forth in the amended credit agreement, as amended.agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
The borrowingsBorrowings under the revolving credit facility have maturities of less than one year. Up to $50.0$50 million of the facility may be used for the issuance of letters of credit. There were $4.5$4.3 million of letters of credit outstanding as of December 31, 2017.then end of Fiscal 2020 (Fiscal 2019: $5.0 million).
The obligations of the Company under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of the Company, subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of the Company and the subsidiary guarantors, excluding real property, capital stock in and debt of the subsidiaries holding certain real property and other customary exceptions.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit the Company's ability of the Company and its subsidiaries to, among other things, incur additional secured and unsecured indebtedness, make restricted payments, pledge theirthe assets as security, make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries), undergo fundamental changes, andsell the assets outside the ordinary course of business, enter into transactions with affiliates. affiliates and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)).
The Company is alsorequired to comply with specific consolidated leverage and interest coverage ratios during specified periods. Prior to the amendment, the Company was 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 1.001.0 (the “interest coverage covenant”), and isthe Company was not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("1.0 (the “leverage covenant”), as described in more detail in the credit agreement. The amended credit agreement provides for suspensions of and adjustments to the leverage covenant (including definitional changes
impacting the calculation of the ratio) and the interest coverage covenant beginning with the quarter ended June 30, 2020, and ending on the date on which financial statements for the quarter ended June 30, 2022 are delivered to lenders under the amended credit agreement (the “covenant suspension period”) as summarized below and described in more detail in the amended credit agreement:
•For the fiscal quarter ended June 30, 2020, the interest coverage covenant was suspended and the leverage covenant required that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0.
•For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the interest coverage covenant and the leverage ratio"covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, the Company must instead maintain minimum liquidity of $550.0 million (the “liquidity covenant”) (with liquidity being the sum of certain cash and cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement).
•For the fiscal quarter ending September 30, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and the Company must comply with the liquidity covenant.
•For the fiscal quarter ending December 31, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and the Company must comply with the liquidity covenant.
•Beginning on January 1, 2022, the liquidity covenant is terminated. For the fiscal quarter ending March 31, 2022, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the interest coverage covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
As of December 31, 2017,the end of Fiscal 2020, the Company was in compliance with these ratios. In February 2018, the Company amended the credit agreement to amend the definition of consolidated EBITDA, and to provide that the Company's trailing four-quarter consolidated leverage ratio may not exceed 3.75 to 1.00 for the four quarters ended June 30, 2018, and 4.00 to 1.00 for the four quarters ended September 30, 3018. Beginning with the four quarters ended December 31, 2018 and thereafter, the consolidated leverage ratio requirement will return to 3.25 to 1.00. applicable covenants.
In addition, the amended 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 amended credit agreement, will be considered an event of default under the amended credit agreement.
BorrowingsDuring the covenant suspension period, the applicable margin for loans is 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, borrowings under the amended credit agreement bear interest at a rate per annum equal to, at the Company’sCompany'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”“pricing grid”) based on the consolidated leverage ratio and ranges between 1.00%1.25% to 1.25%1.75% for adjusted LIBOR loans and 0.00%0.25% to 0.25%0.75% for alternate base rate loans. The weighted average interest rate under the outstanding term loans and revolving credit facility borrowings was 2.2%2.3% and 1.6%3.6% during Fiscal 2020 and Fiscal 2019, respectively. During the years ended December 31, 2017 and 2016, respectively. Thecovenant suspension period, the commitment fee rate is 0.40% per annum. Otherwise, the Company pays a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of December 31, 2017,the end of Fiscal 2020, the commitment fee was 17.515 basis points. Since inception, theThe Company incurred and deferred $3.9$7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, the Company issued $500 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) was $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness outstanding under its revolving credit facility and pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company’s subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating
covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of the Company’s Class C common stock or a combination of cash and shares of Class C common stock, at the Company’s election as described further below. The initial conversion rate is 101.8589 shares of the Company’s Class C common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, the Convertible Senior Notes will be convertible only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class C common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class C common stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company’s Class C common stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company’s Class C common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to the Company’s Class C common stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company’s Class C common stock, representing a premium of 75% above the last reported sale price of the Company’s Class C common stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
The Convertible Senior Notes contain a cash conversion feature, and as a result, the Company has separated its carrying value into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
In connection with the Convertible Senior Notes issuance, the Company incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.0 million allocated to the debt component and $2.2 million allocated to the equity component.
The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using an effective interest rate of 6.8%.
The Convertible Senior Notes consist of the following components:
| | | | | |
| Year ended December 31, |
| (In thousands) | 2020 |
| Liability component | |
| Principal | $ | 500,000 | |
| Unamortized debt discount | (79,031) | |
| Unamortized issuance costs | (8,501) | |
| Net carrying amount | $ | 412,468 | |
| |
| Equity component, net of issuance costs | $ | 88,672 | |
Interest expense related to the Convertible Senior Notes consists of the following components:
| | | | | |
| Year ended December 31, |
| (In thousands) | 2020 |
| Coupon interest | $ | 4,375 | |
| Non-cash amortization of debt discount | 11,816 | |
| Amortization of deferred financing costs | 1,451 | |
| Convertible senior notes interest expense | $ | 17,642 | |
In connection with the issuance of the Convertible Senior Notes, the Company recorded an $11 million net deferred tax liability and a corresponding reduction in valuation allowance. As a result, there was no net impact to the Company’s deferred income taxes or additional paid in capital on the Consolidated Balance Sheet.
3.250% Senior Notes
In June 2016, the Company issued $600.0$600 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Notes”“Senior 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), theThe Company may redeem some or all of the Senior 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 asprices 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.
Senior Notes. The indenture governing the Senior Notes contains negative 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 andlimit the Company’s ability to consolidate, merge or transfer all or substantially all of its properties or assets to another person,engage in each casecertain transactions and are subject to material exceptions described in the indenture. The Company incurred and deferred $5.3$5.4 million in financing costs in connection with the Senior Notes.
Other Long Term Debt
In December 2012, the Company entered into a $50.0$50 million recourse loan collateralized by the land, buildings and tenant improvements comprising its corporate headquarters. In July 2018, this loan was paid in full, without penalties, using borrowings under 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'srevolving 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 December 31, 2017 and 2016, the outstanding balance on the loan was $40.0 million and $42.0 million, respectively. The weighted average interest rate on the loan was 2.5% and 2.0% for the years ended December 31, 2017 and 2016, respectively.facility.
The following are the scheduled maturities of long term debt as of December 31, 2017:the end of Fiscal 2020:
| | | | | |
| (In thousands) | |
| 2021 | $ | 0 | |
| 2022 | 0 | |
| 2023 | 0 | |
| 2024 | 500,000 | |
| 2025 | 0 | |
| 2026 and thereafter | 600,000 | |
| Total scheduled maturities of long term debt | $ | 1,100,000 | |
| |
| Current maturities of long term debt | $ | 0 | |
|
| | | |
| (In thousands) | |
| 2018 | $ | 27,000 |
|
| 2019 | 63,000 |
|
| 2020 | 25,000 |
|
| 2021 | 86,250 |
|
| 2022 | — |
|
| 2023 and thereafter | 600,000 |
|
| Total scheduled maturities of long term debt | $ | 801,250 |
|
| | |
| Current maturities of long term debt | $ | 27,000 |
|
Interest expense, net was $34.5$47.3 million, $26.4$21.2 million, and $14.6$33.6 million for the years ended December 31, 2017, 2016Fiscal 2020, 2019 and 2015,2018, 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. Amortization of deferred financing costs was $1.3$3.8 million, $1.2$2.4 million, and $0.8$1.5 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.
7.10. Commitments and Contingencies
Obligations Under Operating Leases
The Company leases warehouse space, office facilities, space for its brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2033, excluding extensions at the Company’s option, and include provisions for rental adjustments. The table below includes executed lease agreements for brand and factory house stores that the Company did not yet occupy as of December 31, 2017 and does not include contingent rent the Company may incur at its stores based on future sales above a specified minimum or payments made for maintenance, insurance and real estate taxes. The following is a schedule of future minimum lease payments for non-cancelable real property operating leases as of December 31, 2017 as well as significant operating lease agreements entered into during the period after December 31, 2017 through the date of this report:
|
| | | | |
| (In thousands) | | |
| 2018 | | 140,257 |
|
| 2019 | | 139,304 |
|
| 2020 | | 158,455 |
|
| 2021 | | 147,094 |
|
| 2022 | | 132,312 |
|
| 2023 and thereafter | | 772,047 |
|
| Total future minimum lease payments | | $ | 1,489,469 |
|
Included in selling, general and administrative expense was rent expense of $141.2 million, $109.0 million and $83.0 million for the years ended December 31, 2017, 2016 and 2015, respectively, under non-cancelable operating lease agreements. Included in these amounts was contingent rent expense of $15.5 million, $13.0 million and $11.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Sports Marketing and Other Commitments
Within the normal course of business, the Company enters into contractual commitments in order to promote the Company’s brand and products. These commitments include sponsorship agreements with teams and athletes on the collegiate and professional levels, official supplier agreements, athletic event sponsorships and other marketing commitments. The following is a schedule of the Company’s future minimum payments under its sponsorship and other marketing agreements as of December 31, 2017,2020, as well as significant sponsorship and other marketing agreements entered into during the period after December 31, 20172020 through the date of this report:
| | | (In thousands) | | (In thousands) | |
| 2018 | 150,428 |
| |
| 2019 | 135,165 |
| |
| 2020 | 126,026 |
| |
| 2021 | 121,710 |
| 2021 | $ | 106,727 | |
| 2022 | 119,783 |
| 2022 | 85,090 | |
| 2023 and thereafter | 517,736 |
| |
| 2023 | | 2023 | 69,454 | |
| 2024 | | 2024 | 55,525 | |
| 2025 | | 2025 | 32,370 | |
| 2026 and thereafter | | 2026 and thereafter | 12,453 | |
| Total future minimum sponsorship and other payments | $ | 1,170,848 |
| Total future minimum sponsorship and other payments | $ | 361,619 | |
The amounts listed above are the minimum compensation obligations and guaranteed royalty fees required to be paid under the Company’s sponsorship and other marketing agreements. The amounts listed above do not include additional performance incentives and product supply obligations provided under certain agreements. It is not possible to determine how much the Company will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to the sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and the Company’s decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.
Other
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 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.
In re Under Armour Securities Litigation
On March 23, 2017, three3 separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the “Court”“District Court”) were consolidated under the caption In re Under Armour Securities Litigation,, Case No. 17-cv-00388-RDB (the “Consolidated Securities Action”). On August 4, 2017, the lead plaintiff in the Consolidated Securities Action, Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Aberdeen”), joined by named plaintiff Bucks County Employees Retirement Fund (“Bucks County”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s Chiefthen-Chief Executive Officer, Kevin Plank, and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint allegesalleged 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. The Amended Complaint also assertsasserted 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 arewere asserted against the Company, the Company’s Chief Executive Officer,Mr. Plank, 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. The Amended Complaint allegesalleged 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.
On November 9, 2017, the Company and the other defendants filed motions to dismiss the Amended Complaint. On September 19, 2018, the District Court dismissed the Securities Act claims with prejudice and the Exchange Act claims without prejudice. Lead plaintiff Aberdeen, joined by named plaintiff Monroe County Employees’ Retirement Fund (“Monroe”), filed a Second Amended Complaint on November 16, 2018, asserting claims under the Exchange Act and naming the Company and Mr. Plank as the remaining defendants. The remaining defendants filed a motion to dismiss the Second Amended Complaint which is still pendingon January 17, 2019. On August 19, 2019, the District Court dismissed the Second Amended Complaint with prejudice.
In September 2019, plaintiffs Aberdeen and Bucks County filed an appeal in the United States Court of Appeals for the Fourth Circuit challenging the decisions by the District Court on September 19, 2018 and August 19, 2019 (the “Appeal”). The Appeal was fully briefed as of January 16, 2020.
On November 6 and December 17, 2019, two purported shareholders of the Company filed putative securities class actions in the District Court against the Company and certain of its current and former executives (captioned Patel v. Under Armour, Inc., No. 1:19-cv-03209-RDB (“Patel”), and Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB (“Waronker”), respectively). The complaints in Patel and Waronker alleged violations of Section 10(b) (and Rule 10b-5) of the Exchange Act, against all defendants, and Section 20(a) control person liability under the Exchange Act against the current and former officers named in the complaints. The complaints claimed that thedefendants’ disclosures and statements supposedly misrepresented or omitted that the Company was purportedly shifting sales between quarterly periods allegedly to appear healthier and that the Company was under investigation by and cooperating with the Court.United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) since July 2017.
On November 18, 2019, Aberdeen, the lead plaintiff in the Consolidated Securities Action, filed in the District Court a motion for an indicative ruling under Federal Rule of Civil Procedure 62.1 (the “Rule 62.1 Motion”) seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). The Rule 62.1 Motion alleged that purported newly discovered evidence entitled Aberdeen to relief from the District Court’s final judgment. Aberdeen also filed motions seeking (i) to consolidate the Patel and Waronker cases with the Consolidated Securities Action, and (ii) to be appointed lead plaintiff over the consolidated cases.
On January 22, 2020, the District Court granted Aberdeen’s Rule 62.1 motion and indicated that it would grant a motion for relief from the final judgment and provide Aberdeen with the opportunity to file a third amended
complaint if the Fourth Circuit remanded for that purpose. The District Court further stated that it would, upon remand, consolidate the Patel and Waronker cases with the Consolidated Securities Action and appoint Aberdeen as the lead plaintiff over the consolidated cases.
On August 13, 2020, the Fourth Circuit remanded the Appeal to the District Court for the limited purpose of allowing the District Court to rule on Aberdeen’s motion seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). On September 14, 2020, the District Court issued an order granting that relief. The District Court’s order also consolidated the Patel and Waronker cases into the Consolidated Securities Action and appointed Aberdeen as lead plaintiff over the Consolidated Securities Action.
On October 14, 2020, Aberdeen, along with named plaintiffs Monroe and KBC Asset Management NV, filed a third amended complaint (the “TAC”) in the Consolidated Securities Action, asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company’s performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with DOJ and the SEC since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
On December 4, 2020, the Company and Mr. Plank filed a motion to dismiss the TAC for failure to state a claim.Briefing on the motion to dismiss is expected to be completed in March 2021.
The Company believescontinues to believe that the claims asserted in the Consolidated Securities 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 this matter.
State Court Derivative Complaints
In June and July 2018, 2 purported stockholder derivative complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively). The cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The consolidated complaint in the Kenney matter names Mr. Plank, certain other current and former members of the Company’s Board of Directors, certain former Company executives, and Sagamore Development Company, LLC (“Sagamore”) as defendants, and names the Company as a nominal defendant. The consolidated complaint asserts breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants and asserts a claim against Sagamore for aiding and abetting certain of the alleged breaches of fiduciary duty. The consolidated complaint seeks damages on behalf of the Company and certain corporate governance related actions.
The consolidated complaint includes allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products, as well as stock sales by certain individual defendants. The consolidated complaint also makes allegations related to the Company’s purchase of certain parcels of land from entities controlled by Mr. Plank (through Sagamore). Sagamore purchased the parcels in 2014. Its total investment in the parcels was approximately $72.0 million, which included the initial $35.0 million purchase price for the property, an additional $30.6 million to terminate a lease encumbering the property and approximately $6.4 million of development costs. As previously disclosed, in June 2016, the Company purchased the unencumbered parcels for $70.3 million in order to further expand the Company’s corporate headquarters to accommodate its growth needs. The Company negotiated apurchase price for the parcels that it determined represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels. In connection with its evaluation of the potential purchase, the Company engaged an independent third-party to appraise the fair market value of the parcels, and the Audit Committee of the Company’s Board of Directors engaged its own independent appraisal firm to assess the parcels. The Audit Committee determined that the terms of the purchase were reasonable and fair, and the transaction was approved by the Audit Committee in accordance with the Company’s policy on transactions with related persons.
On March 29, 2019, the court in the consolidated Kenney action granted the Company’s and the defendants’ motion to stay that case pending the outcome of both the Consolidated Securities Action and an earlier-filed derivative action asserting similar claims relating to the Company’s purchase of parcels in Port Covington
(which action has since been dismissed in its entirety).The court ordered stay in the consolidated Kenney action remains in effect at this time.
Prior to the filing of the derivative complaints in Kenney v. Plank, et al. and Luger v. Plank, et al., both of the purported stockholders had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed both of these purported stockholders of that determination.
Between August 11, 2020 and October 21, 2020, 3 additional purported shareholder derivative complaints were filed in Maryland state court (in cases captioned Cordell v. Plank, et al. (filed August 11, 2020), Klein v. Plank, et al. (filed October 2, 2020), and Salo v. Plank, et al. (filed October 21, 2020), respectively).
The complaints in these cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant.The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring; and/or (vi) stock sales by certain individual defendants. The complaints assert breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
Prior to the filing of the derivative complaints in these three actions, none of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints.
The Company believes that the claims asserted in the derivative complaints filed in Maryland state court are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
Federal Court Derivative Complaints
In July 2018, a stockholder derivative complaint was filed in the United States District Court for the District of Maryland, in a case captioned Andersen v. Plank, et al. The complaint in the Andersen matter names Mr. Plank, certain other current and former members of the Company’s Board of Directors and certain former Company executives as defendants, and names the Company as a nominal defendant. The complaint asserts breach of fiduciary duty and unjust enrichment claims against the individual defendants, and seeks damages on behalf of the Company and certain corporate governance related actions. The complaint includes allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products and stock sales by certain individual defendants.
The Andersen action was stayed from December 2018 to August 2019 and again from September 2019 to September 2020 (the “2019 Stay Order”).Pursuant to a series of court ordered stipulations, the terms of the 2019 Stay Order remained in effect through and including January 19, 2021.The stay expired on January 19, 2021.
Prior to the filing of the complaint in the Andersen action, the plaintiff had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the complaint.Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed the plaintiff of that determination.During the pendency of the Andersen action, the plaintiff sent the Company’s Board of Directors a second letter demanding that the Company pursue claims similar to the claims asserted in the TAC in the Consolidated Securities Action.Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed the plaintiff of that determination.
In September 2020, 2 additional derivative complaints were filed in the United States District Court for the District of Maryland (in cases captioned Olin v. Plank, et al. (filed September 1, 2020), and Smith v. Plank, et al. (filed September 8, 2020), respectively). Prior to the filing of the derivative complaints in these two actions, neither of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints.On November 20, 2020, another derivative complaint was filed in the United States District Court for
the District of Maryland, in a case captioned Viskovich v. Plank, et al.Prior to filing his derivative complaint, the plaintiff in the Viskovich matter made a demand that the Company’s Board of Directors pursue the claims asserted in the complaint but filed suit before the Board had responded to the demand.
The complaints in the Olin, Smith, and Viskovich cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant.The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; and/or (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring. The complaints assert breach of fiduciary duty, unjust enrichment, gross mismanagement, and/or corporate waste claims against the individual defendants. The Viskovich complaint also asserts a contribution claim against certain defendants under the federal securities laws. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
On January 27, 2021, the court entered an order consolidating for all purposes the Andersen, Olin, Smith and Viskovich actions into a single action under the caption Andersen v. Plank, et al. (the “Federal Court Derivative Action”).
The Company believes that the claims asserted in the Federal Court Derivative Action are without merit and intends to defend this matter 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.
Wells Notices
In addition to the Company’s material pending legal proceedings, as previously disclosed, in July 2020, the Company, as well as Kevin Plank and David Bergman (together, the “Executives”), received “Wells Notices” from the SEC relating to the Company’s disclosures covering the third quarter of 2015 through the period ending December 31, 2016, regarding the use of “pull forward” sales in connection with revenue during those quarters. The Wells Notices informed the Company that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and each of the Executives that would allege certain violations of the Securities Act and the Securities Exchange Act and certain rules promulgated thereunder. The Wells Notices delivered to the Executives also reference potential charges related to the Executives’ participation in the Company’s violations, as well as control person liability under the Exchange Act.
The potential relief to be sought referenced in the Wells Notices included an injunction, a cease-and-desist order, disgorgement, prejudgment interest, and civil monetary penalties, as well as, in the case of the Executives, a bar from serving as an officer or director of a public company. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, and to date no legal proceedings have been brought against the Company or the Executives with respect to this matter. The Company and the Executives maintain that their actions were appropriate and are pursuing the Wells Notice process, and also are engaging in a dialogue with the SEC Staff to work toward a resolution of this matter. 8.
11. Stockholders’ Equity
The Company’s Class A Common Stock and Class B Convertible Common Stock have an authorized number of shares at December 31, 2017 of 400.0 million shares and 34.5 million shares, respectively, and each have a par value of $0.0003 1/3 per share.share as of December 31, 2020. Holders of Class A Common Stock and Class B Convertible Common Stock have identical rights, including liquidation preferences, except that the holders of Class A Common Stock are entitled to one1 vote per share and holders of Class B Convertible Common Stock are entitled to 10 votes per share on all matters submitted to a stockholder vote. Class B Convertible Common Stock may only be held by Kevin Plank, the Company’s founder, Executive Chairman and Brand Chief, Executive Officer, or a related party of Mr. Plank, as specifieddefined in the Company’s charter. As a result, Mr. Plank has a majority voting control over the Company. Upon the transfer of shares of Class B Convertible Stock to a person other than Mr. Plank or a related party of Mr. Plank, the shares automatically convert into shares of Class A Common Stock on a one-for-one basis. In addition, all of the outstanding shares of Class B Convertible Common Stock will automatically convert into shares of Class A Common Stock on a one-for-one basis upon the death or disability of Mr. Plank or on the record date for any stockholders’ meeting upon which the shares of Class A Common Stock and Class B Convertible Common Stock beneficially owned by Mr. Plank is less than 15% of the total shares of Class A Common Stock and Class B Convertible
Common Stock outstanding or upon the other events specified in the Class C Charter.Articles Supplementary to the Company's charter as documented below. Holders of the Company’s common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.
In June 2015, theThe Company's BoardClass C Common Stock has an authorized number of Directors (the “Board”) approved Articles Supplementary to the Company's charter which designatedof 400.0 million shares of common stock asand have a new class of common stock, referred to as the Class C common stock, par value of $0.0003 1/3 per share. The Articles Supplementary became effective on June 15, 2015. In April 2016, the Company issued sharesshare as of Class C common stock as a dividend to the Company's holders of Class A and Class B common stock on a one-for-one basis.December 31, 2020. The terms of the Class C common stock are substantially identical to those of the Company's Class A common stock, except that the Class C common stock has no voting rights (except in limited circumstances), will automatically convert into Class A common stock under certain circumstances and includes provisions intended to ensure equal treatment of Class C common stock and Class B common stock in certain corporate transactions, such as mergers, consolidations, statutory share exchanges, conversions or negotiated tender offers, and including consideration incidental to these transactions.
9.12. 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:
| | | | | December 31, 2017 | | December 31, 2016 | | December 31, 2020 | | December 31, 2019 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 8) | | $ | — |
| | $ | (6,818 | ) | | $ | — |
| | $ | — |
| | $ | 15,238 |
| | $ | — |
| |
| Interest rate swap contracts (see Note 8) | | — |
| | 1,088 |
| | — |
| | — |
| | (420 | ) | | — |
| |
| Derivative foreign currency contracts (see Note 17) | | Derivative foreign currency contracts (see Note 17) | | $ | 0 | | | $ | (22,122) | | | $ | 0 | | | $ | 0 | | | $ | (7,151) | | | $ | 0 | |
| Interest rate swap contracts (see Note 17) | | Interest rate swap contracts (see Note 17) | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | | | 0 | | | $ | 0 | |
| TOLI policies held by the Rabbi Trust | | — |
| | 5,756 |
| | — |
| | — |
| | 4,880 |
| | — |
| TOLI policies held by the Rabbi Trust | | $ | 0 | | | $ | 7,697 | | | $ | 0 | | | $ | 0 | | | $ | 6,543 | | | $ | 0 | |
| Deferred Compensation Plan obligations | | — |
| | (7,971 | ) | | — |
| | — |
| | (7,023 | ) | | — |
| Deferred Compensation Plan obligations | | $ | 0 | | | $ | (14,314) | | | $ | 0 | | | $ | 0 | | | $ | (10,839) | | | $ | 0 | |
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 Company purchases marketable securities that are designated as available-for-sale. 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 the end of December 31, 2020, the fair value of the Company's Convertible Senior Notes was $828.2 million. As of December 31, 2020 and December 31, 2019, the fair value of the Company's Senior Notes was $526.3$602.6 million and $568.1$587.5 million, as of December 31, 2017 and 2016, respectively. The carrying value of the Company's other long term debt approximated its fair value as of December 31, 2017the end of Fiscal 2020 and 2016.Fiscal 2019. The fair value of long-termlong 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 have been reduced to
10.fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
13. Provision for Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The Tax Act includes a number of changes to existing U.S. tax laws that impact the Company including the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The Tax Act also provides for a one-time transition tax on indefinitely reinvested foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective change beginning in 2018, including the elimination of certain domestic deductions and credits, capitalization of research and development expenditures, and additional limitations on the deductibility of executive compensation and interest.
The Company recognized the income tax effects of the Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Tax Act for which accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The changes to existing U.S. tax laws as a result of the Tax Act, which have the most significant impact on the company’s provision for income taxes as of December 31, 2017 are as follows:
Reduction of the U.S. Corporate Income Tax Rate
The company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the company’s deferred tax assets and liabilities were adjusted to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $24.9 million increase in income tax expense for the year ended December 31, 2017 and a corresponding $24.9 million decrease in net deferred tax assets as of December 31, 2017.
Transition Tax on Foreign Earnings
The company recognized a provisional income tax expense of $13.9 million for the year ended December 31, 2017 related to the one-time transition tax on indefinitely reinvested foreign earnings. The determination of the transition tax requires further analysis regarding the amount and composition of the company’s historical foreign earnings, the amount of foreign tax credits available, and the ability to utilize certain foreign tax credits, which is expected to be completed in 2018.
The adjustments to the deferred tax assets and liabilities and the liability for the transition tax on indefinitely reinvested foreign earnings, including the analysis of our ability to fully utilize foreign tax credits associated with the transition tax, are provisional amounts estimated based on information reviewed as of December 31, 2017. As we complete our analysis of the Tax Act, review all information, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to the provisional amounts that we have recorded as of December 31, 2017 that may materially impact our provision for income taxes. Any subsequent adjustment will be recorded to current income tax expense in the quarter of 2018 when the analysis is completed.
Income (loss) before income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Income (loss) before income taxes | | | | | |
| United States | $ | (478,465) | | | $ | 81,122 | | | $ | (121,396) | |
| Foreign | (14,079) | | | 128,720 | | | 53,608 | |
| Total | $ | (492,544) | | | $ | 209,842 | | | $ | (67,788) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Income (loss) before income taxes: | | | | | |
| United States | $ | (131,475 | ) | | $ | 251,321 |
| | $ | 272,739 |
|
| Foreign | 121,166 |
| | 136,961 |
| | 113,946 |
|
| Total | $ | (10,309 | ) | | $ | 388,282 |
| | $ | 386,685 |
|
The components of the provision for income taxestax expense (benefit) consisted of the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Current | | | | | |
| Federal | $ | (30,047) | | | $ | 7,232 | | | $ | (15,005) | |
| State | 34 | | | 771 | | | 3,253 | |
| Foreign | 16,720 | | | 21,952 | | | 34,975 | |
| (13,293) | | | 29,955 | | | 23,223 | |
| Deferred | | | | | |
| Federal | 50,620 | | | 12,750 | | | (27,808) | |
| State | 587 | | | 25,508 | | | (6,202) | |
| Foreign | 11,473 | | | 1,811 | | | (9,765) | |
| 62,680 | | | 40,069 | | | (43,775) | |
| Income tax expense (benefit) | $ | 49,387 | | | $ | 70,024 | | | $ | (20,552) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Current | | | | | |
| Federal | $ | (46,931 | ) | | $ | 116,637 |
| | $ | 102,317 |
|
| State | (8,336 | ) | | 29,989 |
| | 27,500 |
|
| Other foreign countries | 34,005 |
| | 32,394 |
| | 28,336 |
|
| | (21,262 | ) | | 179,020 |
| | 158,153 |
|
| Deferred | | | | | |
| Federal | 51,447 |
| | (35,748 | ) | | 707 |
|
| State | 12,080 |
| | (10,658 | ) | | (5,703 | ) |
| Other foreign countries | (4,314 | ) | | (1,311 | ) | | 955 |
|
| | 59,213 |
| | (47,717 | ) | | (4,041 | ) |
| Provision for income taxes | $ | 37,951 |
| | $ | 131,303 |
| | $ | 154,112 |
|
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| U.S. federal statutory income tax rate | $ | (103,434) | | 21.0 | % | | $ | 44,067 | | 21.0 | % | | $ | (14,235) | | 21.0 | % |
| State taxes, net of federal tax impact | (29,341) | | 6.0 | % | | 4,620 | | 2.2 | % | | (6,715) | | 9.9 | % |
| Unrecognized tax benefits | 2,260 | | (0.5) | % | | (2,031) | | (1.0) | % | | (7,598) | | 11.2 | % |
| Permanent tax benefits - MyFitnessPal Sale | (118,321) | | 24.0 | % | | 0 | | 0 | % | | 0 | | 0 | % |
| Other permanent tax benefits/nondeductible expenses | 15,993 | | (3.2) | % | | 328 | | 0.2 | % | | 5,609 | | (8.2) | % |
| Intercompany asset sale | 0 | | 0 | % | | 0 | | 0 | % | | (18,834) | | 27.8 | % |
| Foreign rate differential | (972) | | 0.2 | % | | (10,494) | | (5.0) | % | | (12,294) | | 18.1 | % |
| Valuation allowance | 302,575 | | (61.4) | % | | 30,137 | | 14.4 | % | | 33,058 | | (48.8) | % |
| Impacts related to Tax Act | (13,987) | | 2.8 | % | | 0 | | 0 | % | | 1,536 | | (2.3) | % |
| Other | (5,386) | | 1.1 | % | | 3,397 | | 1.6 | % | | (1,079) | | 1.6 | % |
| Effective income tax rate | $ | 49,387 | | (10.0) | % | | $ | 70,024 | | 33.4 | % | | $ | (20,552) | | 30.3 | % |
On March 27, 2020, the CARES Act, which provides relief to taxpayers affected by COVID-19, was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including provisions for the deferral of the employer share of payroll tax payments, modifications to the net interest deduction limitations, carryback of net operating losses generated in Fiscal 2018, Fiscal 2019 and Fiscal 2020 tax years, alternative minimum tax credit refunds, and technical corrections to tax depreciation methods for qualified improvement property.
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| U.S. federal statutory income tax rate | $ | (3,608 | ) | 35.0 | % | | $ | 135,899 |
| 35.0 | % | | $ | 135,340 |
| 35.0 | % |
| State taxes, net of federal tax impact | (9,537 | ) | 92.5 |
| | 9,447 |
| 2.4 |
| | 12,252 |
| 3.2 |
|
| Unrecognized tax benefits | 1,178 |
| (11.4 | ) | | 4,377 |
| 1.1 |
| | 12,931 |
| 3.4 |
|
| Permanent tax benefits/nondeductible expenses | 2,246 |
| (21.8 | ) | | (5,177 | ) | (1.3 | ) | | 8,475 |
| 2.2 |
|
| Goodwill impairment | 8,522 |
| (82.7 | ) | | — |
| — |
| | — |
| — |
|
| Foreign rate differential | (25,563 | ) | 248.0 |
| | (25,768 | ) | (6.6 | ) | | (21,262 | ) | (5.5 | ) |
| Valuation allowance | 29,563 |
| (290.3 | ) | | 8,798 |
| 2.3 |
| | 10,504 |
| 2.7 |
|
| Impacts related to Tax Act | 38,833 |
| (376.7 | ) | | — |
| — |
| | — |
| — |
|
| Other | (3,683 | ) | 39.2 |
| | 3,727 |
| 0.9 |
| | (4,128 | ) | (1.1 | ) |
| Effective income tax rate | $ | 37,951 |
| (368.2 | )% | | $ | 131,303 |
| 33.8 | % | | $ | 154,112 |
| 39.9 | % |
The decrease inprovision with the 2017 full year effectivemost significant impact on the Company relates to the carryback of the federal net operating losses. The Company has recorded a benefit to income tax expense of approximately $35 million for current year net operating losses to be carried back under the CARES Act, including $13.9 million benefit for years with a statutory rate asof 35% compared to 2016, is primarily attributable to the significant decrease in pre-tax earnings. In 2017, thecurrent statutory rate of 21%.
The Company recorded 2020 income tax benefits forexpense on pretax losses, in the United States and reductions in the Company's total liability for unrecognized tax benefits as a result of a lapse in the statute of limitations during the current period. These benefits were offset byincluding the impact of recording valuation allowances for previously recognized deferred tax assets in the Tax Act, non-deductible goodwill impairment chargesU.S. and the recording of certain valuation allowances.China and current year U.S. pre-tax losses not able to be carried back, compared to 2019 income tax expense recorded on pre-tax income.
Deferred tax assets and liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2020 | | 2019 |
| Deferred tax assets | | | | |
| Operating lease liabilities | | $ | 257,233 | | | $ | 140,673 | |
| U.S. Federal and State Capital Loss | | 69,332 | | | 0 | |
| Foreign net operating loss carry-forwards | | 51,040 | | | 31,524 | |
| Reserves and accrued liabilities | | 50,226 | | | 25,676 | |
| Intangible assets | | 31,965 | | | 20,041 | |
| U.S. state net operating loss | | 28,343 | | | 24,124 | |
| Inventory | | 28,079 | | | 32,209 | |
| Allowance for doubtful accounts and sales return reserves | | 19,864 | | | 23,257 | |
| Stock-based compensation | | 12,447 | | | 14,828 | |
| Foreign tax credits | | 10,023 | | | 11,807 | |
| Tax credits | | 8,775 | | | 7,480 | |
| Deductions limited by income | | 7,509 | | | 714 | |
| Other | | 3,303 | | | 4,835 | |
| Total deferred tax assets | | 578,139 | | | 337,168 | |
| Less: valuation allowance | | (388,432) | | | (101,997) | |
| Total net deferred tax assets | | $ | 189,707 | | | $ | 235,171 | |
| | | | |
| Deferred tax liabilities | | | | |
| Right-of-use asset | | $ | (136,308) | | | $ | (118,917) | |
| Convertible debt instruments | | (9,878) | | | 0 | |
| Prepaid expenses | | (9,443) | | | (15,862) | |
| Property, plant and equipment | | (8,107) | | (16,956) | |
| Other | | (4,780) | | | (1,717) | |
| Total deferred tax liabilities | | (168,516) | | | (153,452) | |
| Total deferred tax assets, net | | $ | 21,191 | | | $ | 81,719 | |
|
| | | | | | | | |
| | | December 31, |
| (In thousands) | | 2017 | | 2016 |
| Deferred tax asset | | | | |
| Allowance for doubtful accounts and sales return reserves | | $ | 52,745 |
| | $ | 53,811 |
|
| Foreign net operating loss carry-forwards | | 34,542 |
| | 26,964 |
|
| Tax basis inventory adjustment | | 30,531 |
| | 25,776 |
|
| Reserves and accrued liabilities | | 20,500 |
| | 38,819 |
|
| Stock-based compensation | | 19,002 |
| | 32,910 |
|
| Deferred rent | | 18,735 |
| | 21,168 |
|
| U.S. net operating loss carryforward | | 13,382 |
| | 3,032 |
|
| Foreign tax credit carry-forwards | | 11,918 |
| | 8,664 |
|
| State tax credits, net of federal impact | | 8,555 |
| | 7,408 |
|
| Inventory obsolescence reserves | | 5,241 |
| | 15,479 |
|
| Other | | 4,340 |
| | 3,107 |
|
| Total deferred tax assets | | 219,491 |
| | 237,138 |
|
| Less: valuation allowance | | (73,544 | ) | | (37,969 | ) |
| Total net deferred tax assets | | 145,947 |
| | 199,169 |
|
| | | | | |
| Deferred tax liability | | | | |
| Property, plant and equipment | | (43,924 | ) | | (45,178 | ) |
| Prepaid expenses | | (18,336 | ) | | (8,628 | ) |
| Intangible assets | | — |
| | (6,815 | ) |
| Other | | (1,218 | ) | | (2,506 | ) |
| Total deferred tax liabilities | | (63,478 | ) | | (63,127 | ) |
| Total deferred tax assets, net | | $ | 82,469 |
| | $ | 136,042 |
|
| | | | | |
|
All deferred tax assets and liabilities are classified inas non-current on the Consolidated Balance Sheets as of December 31, 20172020 and December 31, 2016.2019. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and actual operating results in future years could differ from ourthe Company's current assumptions, judgments and estimates.
A significant portion of the Company'sCompany’s deferred tax assets relate to U.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future U.S. pre-tax earnings. Due to the Company's losses in the United States, the Company incurred significant net operating losses (“NOLs”) in these jurisdictions in 2017. Based on these factors, the Company has evaluated its ability to utilize these deferred tax assets in future years. In evaluating the recoverability of these deferred tax assets at December 31, 2017,2020, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
Availability of taxable income in the U.S. federal and certain state NOL carryback periods;
U.S. federal NOLs have an indefinite carryforward period beginning in 2018, pursuant to the Tax Act.
Definite lived tax attributes with relatively long carryforward periods; a majority from 10 to 20 years;
•No history of U.S. federal and state tax attributes expiring unused;unused.
Three year cumulative U.S. federal and state pre-tax income;
Relatively low values of pre-tax income required to realized deferred tax assets relative to historic income levels;
•Restructuring plans being undertaken in 2017, 2018, and 2020, which aim to improve profitability; andfuture profitability.
•Existing sources of taxable income
•Available prudent and feasible tax planning strategies.
Negative
•Restructuring plan undertaken in 2020 resulting in significant charges in pre-tax income, reducing profitability in the United States.
•The negative economic impact and uncertainty resulting from the COVID-19 pandemic.
•Cumulative pre-tax losses in recent years in the United States.
•Inherent challenges in forecasting future pre-tax earnings which rely, in part, on improved profitability from our restructuring efforts;efforts.
The continuing challengeAs of changes in the U.S. consumer retail business environment; and
While relatively long, existenceend of definite lived tax attributes of certain U.S. federal tax credits and state NOLs.
Based on all available evidence considered,Fiscal 2020, the Company believes it is more likely than not, that mostthe weight of the U.S. federal and statenegative evidence outweighs the positive evidence regarding the realization of the United States deferred tax assets and have recorded will ultimately be realized. However, as of December 31, 2017, a valuation allowance of $15.9$308.2 million has been recorded against certain statethe U.S. deferred tax assets, whereexcluding certain state tax credits. The Company will continue to evaluate its ability to realize its net deferred tax assets on a quarterly basis.
As of the end of Fiscal 2020, the Company has determined realization is not more likely than not. Additionally, valuation allowances have been recorded against certainhad $28.3 million in deferred tax assets associated with foreign and$473.3 million in state net operating loss carryforwards and foreign$8.8 million in deferred tax assets associated with tax credits, the majority of which are definite lived. Certain of the definite lived state net operating losses and state tax creditcredits will begin to expire within one to five years, and the majority will begin to expire within five to twenty years. The Company had $69.3 million in deferred tax assets associated with federal and state capital loss carryforwards totaling $125.1 million as discussed further below.
As of December 31, 2017,2020, which, if unused, will expire in five years.
As of the end of Fiscal 2020, the Company had $34.5$51 million in deferred tax assets associated with approximately $116.0$231.3 million in foreign net operating loss carryforwards and $10 million in deferred tax assets associated with foreign tax credit carryforwards. While the majority of whichthe foreign net operating loss carryforwards and foreign tax credit carryforwards have an indefinite carryforward period. Asperiod, certain are definite lived, with the majority to expire within 5 to 12 years. Additionally, as of December 31, 2017,2020, the Company is not able to forecast the utilization of thea majority of the deferred tax assets associated with foreign net operating loss carryforwards. Therefore,carryforwards, foreign tax credit carryforwards and certain other foreign deferred tax assets and has recorded a valuation allowance of $32.8$80.2 million was recorded against the Company's netthese foreign deferred tax assets in 2017.assets.
As of December 31, 2017 the Company had $13.4 million in deferred tax assets associated with $207.5 million in state net operating loss carryforwards, which will begin to expire in 3 to 20 years. Asend of December 31, 2017 the Company believes certain deferred tax assets associated with state net operating loss carryforwards will expire unused based on the Company’s projections. Therefore, a valuation allowance of $11.7 million is recorded against these net deferred tax assets as of December 31, 2017.
As of December 31, 2017, the Company had $11.9 million in deferred tax assets associated with foreign tax credits. As of December 31, 2017 the Company believes that a portion of the foreign taxes paid would not be creditable against its future income taxes. Therefore, a valuation allowance of $9.9 million was recorded against the Company's net deferred tax assets as of December 31, 2017.
As of December 31, 2017, the Company had $8.6 million in deferred tax assets associated with state tax credits, net of federal impact, which will begin to expire in 5 to 20 years. As of December 31, 2017, the Company is not able to forecast the utilization of certain deferred tax assets associated with state tax credits. Therefore a valuation allowance of $3.2 million is recorded against these net deferred tax assets as of December 31, 2017.
As of December 31, 2017,Fiscal 2020, approximately $158.7$383.1 million of cash and cash equivalents was held by the Company's non-U.S. subsidiaries whose cumulative undistributed earnings total $488.4$644.2 million. TheseThe Tax Act imposed U.S. federal tax on all post-1986 foreign unrepatriated earnings wereaccumulated through December 31, 2017. The portion of these earnings not subject to U.S. federal income tax as part of the one-time transition tax on indefinitely reinvested foreign earnings required by the Tax Act.should, in general, not be subject to U.S. federal income tax. The Company will continue to permanently reinvest these earnings, as well as future earnings from ourits foreign subsidiaries, to fund international growth and operations. If the Company was to repatriate indefinitely reinvested foreign funds, it would still be required to accrue and pay certain taxes upon repatriation, including foreign withholding taxes and certain U.S. state taxes and record foreign exchange rate impacts. Determination of the unrecorded deferred tax liability that would be incurred if such amounts were repatriated is not practicable.
As of December 31, 2017the end of Fiscal 2020 and 2016,Fiscal 2019, the total liability for unrecognized tax benefits, including related interest and penalties, was approximately $55.3$46.9 million and $70.4$44.3 million, respectively. The following table represents a reconciliation of the Company's total unrecognized tax benefits balances, excluding interest and penalties, for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015.Fiscal 2018.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Beginning of year | | $ | 41,194 | | | $ | 55,855 | | | $ | 51,815 | |
| Increases as a result of tax positions taken in a prior period | | 1,738 | | | 1,545 | | | 1,978 | |
| Decreases as a result of tax positions taken in a prior period | | (2,309) | | | (11,005) | | | (1,600) | |
| Increases as a result of tax positions taken during the current period | | 2,142 | | | 1,158 | | | 12,802 | |
| Decreases as a result of settlements during the current period | | (1,500) | | | (6,359) | | | 0 | |
| Reductions as a result of a lapse of statute of limitations during the current period | | 0 | | | 0 | | | (9,140) | |
| Reductions as a result of divestiture | | (951) | | | 0 | | | 0 | |
| End of year | | $ | 40,314 | | | $ | 41,194 | | | $ | 55,855 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Beginning of year | | $ | 64,359 |
| | $ | 42,611 |
| | $ | 28,353 |
|
| Increases as a result of tax positions taken in a prior period | | 457 |
| | 661 |
| | 203 |
|
| Decreases as a result of tax positions taken in a prior period | | (40 | ) | | — |
| | — |
|
| Increases as a result of tax positions taken during the current period | | 14,580 |
| | 26,482 |
| | 14,382 |
|
| Decreases as a result of tax positions taken during the current period | | — |
| | — |
| | — |
|
| Decreases as a result of settlements during the current period | | (13,885 | ) | | — |
| | — |
|
| Reductions as a result of a lapse of statute of limitations during the current period | | (13,656 | ) | | (5,395 | ) | | (327 | ) |
| End of year | | $ | 51,815 |
| | $ | 64,359 |
| | $ | 42,611 |
|
As of December 31, 2017, $46.2the end of Fiscal 2020, $31.7 million of unrecognized tax benefits, excluding interest and penalties, would impact the Company's effective tax rate if recognized.
As of December 31, 2017the end of Fiscal 2020, Fiscal 2019 and 2016,Fiscal 2018, the liability for unrecognized tax benefits included $3.5$4.3 million, $3.1 million, and $6.1$4.2 million, respectively, for the accrual of interest and penalties.For each of the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, the Company recorded $1.6$1.2 million, $3.1$2.0 million, and $1.7$1.9 million, respectively, for the accrual of interest and penalties in its consolidated statementsConsolidated Statements of operations. Operations.The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statementsConsolidated Statements of operations.Operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service for the years 2015 and 2016 tax years.through 2017. The majority of the Company's other returns for years before 20142015 are no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities.
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
11.14. Earnings (Loss) per Share
The calculation of earnings (loss) per share for common stock shown below excludes the income attributable to outstanding restricted stock awards from the numerator and excludes the impact of these awards from the denominator. The following is a reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands, except per share amounts) | | 2017 | | 2016 | | 2015 |
| Numerator | | | | | | |
| Net income (loss) | | $ | (48,260 | ) | | $ | 256,979 |
| | $ | 232,573 |
|
| Adjustment payment to Class C capital stockholders | | — |
| | 59,000 |
| | — |
|
| Net income (loss) available to all stockholders | | $ | (48,260 | ) | | $ | 197,979 |
| | $ | 232,573 |
|
| | | | | | | |
| Denominator - Class A and B shares | | | | | | |
| Weighted average common shares outstanding | | 219,254 |
| | 217,707 |
| | 215,498 |
|
| Effect of dilutive securities | | — |
| | 4,237 |
| | 5,370 |
|
| Weighted average common shares and dilutive securities outstanding | | 219,254 |
| | 221,944 |
| | 220,868 |
|
| Earnings per share Class A and B —basic | | $ | (0.11 | ) | | $ | 0.45 |
| | $ | 0.54 |
|
| Earnings per share Class A and B—diluted | | $ | (0.11 | ) | | $ | 0.45 |
| | $ | 0.53 |
|
| | | | | | | |
| Denominator - Class C shares | | | | | | |
| Weighted average common shares outstanding | | 221,475 |
| | 218,623 |
| | 215,498 |
|
| Effect of dilutive securities | | — |
| | 4,281 |
| | 5,370 |
|
| Weighted average common shares and dilutive securities outstanding | | 221,475 |
| | 222,904 |
| | 220,868 |
|
| Earnings (loss) per share Class C — basic | | $ | (0.11 | ) | | $ | 0.72 |
| | $ | 0.54 |
|
| Earnings (loss) per share Class C — diluted | | $ | (0.11 | ) | | $ | 0.71 |
| | $ | 0.53 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands, except per share amounts) | | 2020 | | 2019 | | 2018 |
| Numerator | | | | | | |
| Net income (loss) | | $ | (549,177) | | | $ | 92,139 | | | $ | (46,302) | |
| | | | | | |
| Denominator | | | | | | |
| Weighted average common shares outstanding Class A, B and C | | 454,089 | | | 450,964 | | | 445,815 | |
| Effect of dilutive securities Class A, B and C | | 0 | | | 3,310 | | | 0 | |
| Weighted average common shares and dilutive securities outstanding Class A, B and C | | 454,089 | | | 454,274 | | | 445,815 | |
| | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | |
| Diluted net income (loss) per share of Class A, B and C common stock | | $ | (1.21) | | | $ | 0.20 | | | $ | (0.10) | |
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options, and restricted stock units representing 6.4 million, 1.8 million and warrants representing 256.0 thousand, 114.0 thousand and 770.0 thousand3.3 million shares of Class A and C common stock outstanding for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively, were excluded from the computation of diluted earnings per share because their effect would be anti-dilutive. StockDue to the Company being in a net loss position for Fiscal 2020 and Fiscal 2018, there were no stock options or restricted stock units and warrants representing 4.7 million, 691.6 thousand and 770.0 thousand shares of Class C common stock outstanding for the years ended December 31, 2017, 2016 and 2015, respectively, were excluded fromincluded in the computation of diluted earnings per share, becauseas their effect would behave been anti-dilutive.
12.15. Stock-Based Compensation
Stock Compensation Plans
The Under Armour, Inc. SecondThird Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the “2005 Plan”) provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. Stock options and restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a two to five year period. The
contractual term for stock options is generally ten10 years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan. The 2005 Plan terminates in 2025. As of December 31, 2017, 7.9the end of Fiscal 2020, 10.1 million Class A shares and 15.524.9 million Class C shares are available for future grants of awards under the 2005 Plan.
Total stock-based compensation expense for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015Fiscal 2018 was $39.9$42.1 million $46.1, $49.6 million and $60.4$41.8 million, respectively. The related tax benefits, excluding consideration of valuation allowances, were $9.0 million, $11.8 million, and $10.0 million for Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively. The valuation allowances associated with these benefits were $9.0 million, $2.7 million, and $1.1 million for Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively. As of December 31, 2017,the end of Fiscal 2020, the Company had $87.7$67.5 million of unrecognized compensation expense expected to be recognized over a weighted average period of 3.22.39 years. This unrecognized compensation expense does not include any expense related to performance-based restricted stock units and stock options for which the performance targets have not been deemed probable as of December 31, 2017.the end of Fiscal 2020 and Fiscal 2018. Refer to “Stock Options” and “Restricted Stock and Restricted Stock Units” below for further information on these awards.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) allows for the purchase of Class A Common Stock and Class C Common Stock by all eligible employees at a 15% discount from fair market value subject to certain limits as defined in the ESPP. As of December 31, 2017,the end of Fiscal 2020, 2.7 million Class A shares and 1.22.0 million Class C shares are available for future purchases under the ESPP. During the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015, 563.9Fiscal 2018, 482.9 thousand, 290.8329.1 thousand and 103.3393.8 thousand Class C shares were purchased under the ESPP, respectively.
Non-Employee Director Compensation Plan and Deferred Stock Unit Plan
The Company’s Non-Employee Director Compensation Plan (the “Director Compensation Plan”) provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the “DSU Plan”). Each new non-employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at $100.0$100 thousand on the grant date and vesting in three equal annual installments. In addition, each non-employee director receives, following each annual stockholders’ meeting, a grant under the 2005 Plan of restricted stock units covering stock valued at $150.0$150 thousand on the grant date. Each award vests 100% on the date of the next annual stockholders’ meeting following the grant date.
The receipt of the shares otherwise deliverable upon vesting of the restricted stock units automatically defers into deferred stock units under the DSU Plan. Under the DSU Plan each deferred stock unit represents the Company’s obligation to issue one1 share of the Company’s Class A or Class C Common Stock with the shares delivered six months following the termination of the director’s service.
Stock Options
The weighted average fair value of a stock option granted for the years ended December 31, 2017, 2016,Fiscal 2020, Fiscal 2019 and 2015Fiscal 2018 was $19.04, $14.87,$6.61, $8.70 and $27.21$6.91, respectively. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Risk-free interest rate | 1.5 | % | | 2.5 | % | | 2.8 | % |
| Average expected life in years | 6.25 | | 6.50 | | 6.50 |
| Expected volatility | 43.1 | % | | 41.0 | % | | 40.4 | % |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 2.1 | % | | 1.4 | % | | 1.8 | % |
| Average expected life in years | 6.50 |
| | 6.50 |
| | 6.00 |
|
| Expected volatility | 39.6 | % | | 39.5 | % | | 44.3 | % |
| Expected dividend yield | — | % | | — | % | | — | % |
A summary of the Company’s stock options as of December 31, 2017, 2016the end of Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, and changes during the years then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | Number of Stock Options | | Weighted Average Exercise Price | | Number of Stock Options | | Weighted Average Exercise Price | | Number of Stock Options | | Weighted Average Exercise Price |
| Outstanding, beginning of year | | 1,969 | | | $ | 16.61 | | | 2,732 | | | $ | 12.98 | | | 3,782 | | | $ | 12.71 | |
| Granted, at fair market value | | 303 | | | 15.13 | | | 460 | | | 19.39 | | | 579 | | | 15.41 | |
| Exercised | | (410) | | | 3.54 | | | (733) | | | 3.41 | | | (1,262) | | | 5.53 | |
| Expired | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Forfeited | | 0 | | | 0 | | | (490) | | | 19.04 | | | (367) | | | 35.55 | |
| Outstanding, end of year | | 1,862 | | | $ | 19.31 | | | 1,969 | | | $ | 16.61 | | | 2,732 | | | $ | 12.98 | |
| Options exercisable, end of year | | 766 | | | $ | 22.41 | | | 913 | | | $ | 15.45 | | | 1,366 | | | $ | 7.70 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | Number of Stock Options | | Weighted Average Exercise Price | | Number of Stock Options | | Weighted Average Exercise Price | | Number of Stock Options | | Weighted Average Exercise Price |
| Outstanding, beginning of year | | 4,265 |
| | $ | 9.63 |
| | 6,008 |
| | $ | 7.26 |
| | 5,622 |
| | $ | 4.14 |
|
| Granted, at fair market value | | 734 |
| | 19.04 |
| | 335 |
| | 36.05 |
| | 1,158 |
| | 20.15 |
|
| Exercised | | (1,046 | ) | | 3.72 |
| | (1,763 | ) | | 3.52 |
| | (720 | ) | | 3.96 |
|
| Expired | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Forfeited | | (171 | ) | | 17.59 |
| | (315 | ) | | 26.26 |
| | (52 | ) | | 2.27 |
|
| Outstanding, end of year | | 3,782 |
| | $ | 12.71 |
| | 4,265 |
| | $ | 9.63 |
| | 6,008 |
| | $ | 7.26 |
|
| Options exercisable, end of year | | 2,512 |
| | $ | 5.85 |
| | 3,385 |
| | $ | 4.30 |
| | 4,892 |
| | $ | 4.13 |
|
Included in the table above are 0.50.2 million and 0.3 million performance-based stock options awarded to certain executivesthe Company’s Executive Chairman and key employeesBrand Chief under the 2005 Plan for Fiscal 2019 and Fiscal 2018, respectively. There were 0 performance-based stock options awarded during the years ended December 31, 2017 and 2016, respectively.Fiscal 2020. The performance-based stock options awarded in 2017 and 2016Fiscal 2019 have weighted average grant date fair values of $19.04 and $14.87, respectively,$8.70 and have vesting that is tied to the achievement of certain combined annual operating income targets.
The intrinsic value of stock options exercised during the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015Fiscal 2018 was $16.3$4.5 million, $63.9$12.4 million and $27.5$15.2 million, respectively.
For Fiscal 2020, Fiscal 2019 and Fiscal 2018 income tax benefits related to stock options exercised, excluding consideration of valuation allowances were $1.2 million, $2.7 million, and $3.5 million, respectively. The valuation allowances associated with these benefits were $0.3 million, $0.7 million, and $0.5 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively.
The following table summarizes information about stock options outstanding and exercisable as of December 31, 2017:the end of Fiscal 2020:
(In thousands, except per share amounts)
| | | Options Outstanding | Options Outstanding | | Options Exercisable | Options Outstanding | | Options Exercisable |
Number of Underlying Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value | | Number of Underlying Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value | Number of Underlying Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value | | Number of Underlying Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value |
| 3,782 | | $ | 12.71 |
| | 4.55 | | $ | 22,679 |
| | 2,512 | | $ | 5.85 |
| | 2.52 | | $ | 22,553 |
| |
| 1,862 | | 1,862 | | | $ | 19.31 | | | 7.18 | | $ | 186 | | | 766 | | | $ | 22.41 | | | 6.02 | | $ | 186 | |
Restricted Stock and Restricted Stock Units
A summary of the Company’s restricted stock and restricted stock units as of December 31, 2017, 2016the end of Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, and changes during the years then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In thousands, except per share amounts) | | Number of Restricted Shares | | Weighted Average Grant Date Fair Value | | Number of Restricted Shares | | Weighted Average Fair Value | | Number of Restricted Shares | | Weighted Average Fair Value |
| Outstanding, beginning of year | | 6,661 | | | $ | 18.02 | | | 8,284 | | | $ | 18.03 | | | 9,923 | | | $ | 24.41 | |
| Granted | | 4,572 | | | 13.09 | | | 3,501 | | | 19.32 | | | 5,165 | | | 15.57 | |
| Forfeited | | (2,217) | | | 16.68 | | | (2,760) | | | 18.56 | | | (4,745) | | | 27.43 | |
| Vested | | (2,742) | | | 17.86 | | | (2,364) | | | 20.24 | | | (2,059) | | | 24.95 | |
| Outstanding, end of year | | 6,274 | | | $ | 15.52 | | | 6,661 | | | $ | 18.02 | | | 8,284 | | | $ | 18.03 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (In thousands, except per share amounts) | | Number of Restricted Shares | | Weighted Average Grant Date Fair Value | | Number of Restricted Shares | | Weighted Average Fair Value | | Number of Restricted Shares | | Weighted Average Fair Value |
| Outstanding, beginning of year | | 6,771 |
| | $ | 19.68 |
| | 6,760 |
| | $ | 23.23 |
| | 9,020 |
| | $ | 15.21 |
|
| Granted | | 7,630 |
| | 18.84 |
| | 4,002 |
| | 35.20 |
| | 2,030 |
| | 38.36 |
|
| Forfeited | | (2,290 | ) | | 28.71 |
| | (935 | ) | | 30.35 |
| | (652 | ) | | 24.29 |
|
| Vested | | (2,188 | ) | | 24.78 |
| | (3,056 | ) | | 16.25 |
| | (3,638 | ) | | 11.61 |
|
| Outstanding, end of year | | 9,923 |
| | 24.41 |
| | 6,771 |
| | 19.68 |
| | 6,760 |
| | 23.23 |
|
Included in the table above are 1.9 million, 2.50.6 million and 1.70.8 million performance-based restricted stock units awarded to certain executives and key employees under the 2005 Plan during the years ended December 31, 2017, 2016Fiscal 2019 and 2015,Fiscal 2018, respectively.
There were no performance-based restricted stock units awarded during Fiscal 2020. The performance-based restricted stock units awarded in 2017, 2016Fiscal 2019 and 2015Fiscal 2018 have weighted average grant date fair values of $18.76, $35.71$19.39, and $37.87,$15.60, respectively, and have vesting that is tied to the achievement of certain combined annual revenue and operating income targets.
During Fiscal 2019, the year ended December 31, 2017,Company granted performance-based restricted stock units or stock options with vesting conditions tied to the achievement of revenue and operating income targets for 2019 and 2020. During Fiscal 2019, the Company deemed the achievement of certainthese revenue and operating income targets improbable, for the performance-based stock options and restricted stock units granted in 2017, and recordedaccordingly, a reversal of expense of $4.2$2.9 million for the three months ended December 31, 2017. During the year ended December 31, 2016, the Company deemed the achievement of certain operating income targets improbableand $1.5 million were recorded for the performance-based stock options and restricted stock units granted in 2015 and 2016, and recorded reversals of expense of $3.6 million and $8.0 million, respectively, for the three months ended December 31, 2016. During the year ended December 31, 2015, the Company deemed the achievement of certain operating income targets probable for the performance-based stock options for Fiscal 2020 and restricted stock units granted in 2015 and 2014, and recorded $33.2 million for these awards, including a cumulative adjustment of $10.0 million during the three months ended September 30, 2015. The Company will assess the probability of the achievement of the operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based stock options and restricted stock units will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. Additional stock based compensation of up to $5.7 million would have been recorded through December 31, 2017 for all performance-based stock options and restricted stock units granted in 2017 had the full achievement of these operating income targets been deemed probable.Fiscal 2019, respectively.
Warrants
In 2006, theThe Company issued fully vested and non-forfeitable warrants to purchase 1.92 million shares of the Company's Class A Common Stock and 1.93 million shares of the Company’s Class C Common Stock to NFL Properties as partial consideration for footwear promotional rights which were recorded as an intangible asset.asset in 2006. The warrants havehad a term of 12 years from the date of issuance and an exercise price of $4.66 per Class A share and $4.59$4.56 per Class C share. AsIn August 2018, all of December 31, 2017, all outstandingthe warrants were exercisable, and no warrants were exercised.exercised on a net exercise basis.
13.16. Other Employee Benefits
The Company offers a 401(k) Deferred Compensation Plan for the benefit of eligible employees. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company matches a portion of the participant’s contribution and recorded expense of $7.4$5.4 million, $9.0$7.5 million and $7.0$9.9 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. During Fiscal 2020, the years ended December 31, 2017, 2016 and 2015, respectively.Company temporarily suspended 401(k) matching contributions for approximately five months as part of the Company's capital preservation efforts in response to COVID-19. Shares of the Company’s Class A Common Stock and Class C common stock are not investment options in this plan.
In addition, the Company offers the Under Armour, Inc. Deferred Compensation Plan which allows a select group of management or highly compensated employees, as approved by the Compensation Committee, to make an annual base salary and/or bonus deferral for each year. As of December 31, 2017the end of Fiscal 2020 and 2016,Fiscal 2019, the Deferred Compensation Plan obligations were $8.0$14.3 million and $7.0$10.8 million, respectively, and were included in other long term liabilities on the consolidated balance sheets.Consolidated Balance Sheets.
The Company established thea Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of December 31, 2017the end of Fiscal 2020 and 2016,Fiscal 2019, the assets held in the Rabbi Trust were TOLI policies with cash-surrender values of $5.8$7.7 million and $4.9$6.5 million, respectively. These assets are consolidated and are included in other long term assets on the consolidated balance sheet.Consolidated Balance Sheet. Refer to Note 912 for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
14.17. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of the end of Fiscal 2020, the Company has hedge instruments, primarily for British Pound/U.S. Dollar, U.S. Dollar/Chinese Renminbi, Euro/U.S. Dollar, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, and Australian Dollar/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date.
| | | | | | | | | | | | | | |
| (In thousands) | Balance Sheet Classification | December 31, 2020 | | December 31, 2019 |
| Derivatives designated as hedging instruments under ASC 815 | | |
| Foreign currency contracts | Other current assets | $ | 0 | | | $ | 4,040 | |
| Foreign currency contracts | Other long term assets | 0 | | | 24 | |
| Interest rate swap contracts | Other long term assets | 0 | | | 0 | |
| Total derivative assets designated as hedging instruments | $ | 0 | | | $ | 4,064 | |
| | | | |
| Foreign currency contracts | Other current liabilities | $ | 17,601 | | | 8,772 | |
| Foreign currency contracts | Other long term liabilities | 6,469 | | | 2,443 | |
| Total derivative liabilities designated as hedging instruments | $ | 24,070 | | | $ | 11,215 | |
| | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | |
| Foreign currency contracts | Other current assets | $ | 2,384 | | | 2,337 | |
| Total derivative assets not designated as hedging instruments | $ | 2,384 | | | 2,337 | |
| | | | |
| Foreign currency contracts | Other current liabilities | $ | 6,464 | | | 9,510 | |
| Total derivative liabilities not designated as hedging instruments | $ | 6,464 | | | 9,510 | |
The following table presents the amounts in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity |
| Net revenues | $ | 4,474,667 | | $ | 2,098 | | | $ | 5,267,132 | | $ | 18,789 | | | $ | 5,193,185 | | $ | (1,748) | |
| Cost of goods sold | $ | 2,314,572 | | $ | 9,516 | | | $ | 2,796,599 | | $ | 4,703 | | | $ | 2,852,714 | | $ | (1,279) | |
| Interest expense, net | $ | (47,259) | | $ | (36) | | | $ | (21,240) | | $ | 1,598 | | | $ | (33,568) | | $ | 386 | |
| Other expense, net | $ | 168,153 | | $ | 25 | | | $ | (5,688) | | $ | 871 | | | $ | (9,203) | | $ | 1,537 | |
The following tables present the amounts affecting the Statements of Comprehensive Income (Loss).
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2019 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of December 31, 2020 |
| Derivatives designated as cash flow hedges | | | |
| Foreign currency contracts | $ | (6,005) | | $ | (8,336) | | $ | 11,567 | | $ | (25,908) | |
| Interest rate swaps | (577) | | 0 | | (36) | | (541) | |
| Total designated as cash flow hedges | $ | (6,582) | | $ | (8,336) | | $ | 11,531 | | $ | (26,449) | |
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2018 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of
December 31, 2019 |
| Derivatives designated as cash flow hedges | | | |
| Foreign currency contracts | $ | 21,908 | | $ | (3,550) | | $ | 24,363 | | $ | (6,005) | |
| Interest rate swaps | 954 | | 67 | | 1,598 | | (577) | |
| Total designated as cash flow hedges | $ | 22,862 | | $ | (3,483) | | $ | 25,961 | | $ | (6,582) | |
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2017 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of
December 31, 2018 |
| Derivatives designated as cash flow hedges | | | |
| Foreign currency contracts | $ | (8,312) | | $ | 28,730 | | $ | (1,490) | | $ | 21,908 | |
| Interest rate swaps | 438 | | 902 | | 386 | | 954 | |
| Total designated as cash flow hedges | $ | (7,874) | | $ | 29,632 | | $ | (1,104) | | $ | 22,862 | |
The following table presents the amounts in the Consolidated Statements of Operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity |
| Other expense, net | $ | 168,153 | | $ | (2,173) | | | $ | (5,688) | | $ | (6,141) | | | $ | (9,203) | | $ | (13,688) | |
Cash Flow Hedges
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 andnon-functional currency generated revenue, non-functional currency inventory purchases, investments in U.S. Dollar denominated in currenciesavailable-for-sale debt securities, and certain other than the functional currency of the purchasing entity. From time to time, theintercompany transactions. The Company may elect to enterenters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on intercompany transactions and projected inventory purchases for its international subsidiaries.
these transactions. Certain contracts are designated as cash flow hedges. As of December 31, 2017,the end of Fiscal 2020, the aggregate notional value of the Company's outstanding foreign currency contractscash flow hedges was $601.0$812.5 million, which hadwith contract maturities ranging from one to eleventwenty-four 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 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 years ended December 31, 2017 and 2016, the Company reclassified $0.4 million and $0.3 million from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges, respectively. The fair value of the Company’s foreign currency contracts was a liability of $6.8 million as of December 31, 2017 and was included in other current liabilities on the consolidated balance sheet. The fair value of the Company's foreign currency contracts was an asset of $15.2 million as of December 31, 2016 and was included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 9 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:
|
| | | | | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Unrealized foreign currency exchange rate gains (losses) | | $ | 29,246 |
| | $ | (12,627 | ) | | $ | (33,359 | ) |
| Realized foreign currency exchange rate gains (losses) | | 611 |
| | (6,906 | ) | | 7,643 |
|
| Unrealized derivative gains (losses) | | (1,217 | ) | | 729 |
| | 388 |
|
| Realized derivative gains (losses) | | (26,537 | ) | | 15,192 |
| | 16,404 |
|
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company entersmay enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long-termlong term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate
fluctuations. The Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in their fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation. hedges. Refer to Note 69 for a discussion of long term debt.
As of December 31, 2017, the end of Fiscal 2020, the Company had no outstanding interest rate swap contracts.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the Consolidated Statements of Operations in the same manner as the underlying exposure.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of the end of Fiscal 2020, the total notional value of the Company's outstanding interest rate swap contractsundesignated derivative instruments was $135.6 million . During the years ended December 31, 2017 and 2016, the Company recorded a $0.9 million and $2.0 million increase in interest expense, respectively, representing the effective portion of the contracts reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of $1.1 million as of December 31, 2017 and was 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.$313.1 million.
Credit Risk
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.
15.
18. Related Party Transactions
The Company has an operating lease agreement with an entity controlled by the Company’s Chief Executive OfficerChairman and Brand Chief to lease an aircraft for business purposes. The Company paid $2.0 million, $2.0 million, and $2.0 million in lease payments to the entity for its use of the aircraft during the years ended December 31, 2017, 2016each of Fiscal 2020, Fiscal 2019 and 2015, respectively. NoFiscal 2018. NaN amounts were payable to this related party as of December 31, 2017the end of Fiscal 2020 and 2016.Fiscal 2019. The Company determined the lease payments were at fair market lease rates.
In June 2016, the Company purchased parcels of land from an entity controlled by the Company's CEO,Executive Chairman and Brand Chief, to be utilized to expand the Company’s corporate headquarters to accommodate its growth needs. The purchase price for these parcels totaled $70.3 million. The Company determined that the purchase price for the land represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels, including costs related to the termination of a lease encumbering the parcels.
In connection with the purchase of these parcels, in September 2016, the parties entered into an agreement pursuant to which the parties will share the burden of any special taxes arising due to infrastructure projects in the surrounding area. The allocation to the Company is based on the expected benefits to the Company’s parcels from these projects. No obligations were owed by either party under this agreement as of December 31, 2017.the end of Fiscal 2020.
16.19. Segment Data and Related InformationDisaggregated Revenue
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;America, Europe, the Middle East and Africa (“EMEA”);, Asia-Pacific, and Asia-Pacific.Latin America. 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. As a result of the change in the operating model in Chile, there will be no impact on segment reporting and Latin America will continue to be disclosed as a separate reportable segment, based on reporting to CODM for Fiscal 2021.
Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and other corporate support functions; costs related to the Company's global assets and global marketing, costs related to the Company’s headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses. Effective January 1, 2021, following the sale of MyFitnessPal and the winding down of the Endomondo platform, revenues for the remaining MapMyFitness platform will be included in Corporate Other.
Segment Data
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
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Net revenues | | | | | | |
| North America | | $ | 2,944,978 | | | $ | 3,658,353 | | | $ | 3,735,293 | |
| EMEA | | 598,296 | | | 621,137 | | | 591,057 | |
| Asia-Pacific | | 628,657 | | | 636,343 | | | 557,431 | |
| Latin America | | 164,825 | | | 196,132 | | | 190,795 | |
| Connected Fitness | | 135,813 | | | 136,378 | | | 120,357 | |
| Corporate Other (1) | | 2,098 | | | 18,789 | | | (1,748) | |
| Total net revenues | | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | 5,193,185 | |
(1) Corporate Other revenues consist of corporate service costsforeign currency hedge gains and losses related to revenues generated by entities within North America have not been allocated to the Company's other segments. Asoperating segments, but managed through 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. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
Company's central foreign exchange risk management program.
|
| | | | | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Net revenues | | | | | | |
| North America | | $ | 3,802,406 |
| | $ | 4,005,314 |
| | $ | 3,455,737 |
|
| EMEA | | 469,997 |
| | 330,584 |
| | 203,109 |
|
| Asia-Pacific | | 433,647 |
| | 268,607 |
| | 144,877 |
|
| Latin America | | 181,324 |
| | 141,793 |
| | 106,175 |
|
| Connected Fitness | | 89,179 |
| | 80,447 |
| | 53,415 |
|
| Intersegment Eliminations | | — |
| | (1,410 | ) |
| — |
|
| Total net revenues | | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 3,963,313 |
|
Net revenues in the United States were $3,626.6$2,720.3 million, $3,843.7$3,394.4 million, and $3,317.0$3,464 million for the years ended December 31, 2017, 2016Fiscal 2020, Fiscal 2019 and 2015,Fiscal 2018, respectively.
| | | (In thousands) | | Year Ended December 31, | (In thousands) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 | 2020 | | 2019 | | 2018 |
| Operating income (loss) | | | | | | | Operating income (loss) | |
| North America | | $ | 20,179 |
| | $ | 408,424 |
| | $ | 460,961 |
| North America | | $ | 474,584 | | | $ | 733,442 | | | $ | 718,195 | |
| EMEA | | 17,976 |
| | 11,420 |
| | 3,122 |
| EMEA | | 60,592 | | | 53,739 | | | 30,388 | |
| Asia-Pacific | | 82,039 |
| | 68,338 |
| | 36,358 |
| Asia-Pacific | | 2 | | | 97,641 | | | 103,527 | |
| Latin America | | (37,085 | ) | | (33,891 | ) | | (30,593 | ) | Latin America | | (42,790) | | | (3,160) | | | (16,879) | |
| Connected Fitness | | (55,266 | ) | | (36,820 | ) | | (61,301 | ) | Connected Fitness | | 17,063 | | | 17,140 | | | 5,948 | |
| Total operating income | | 27,843 |
| | 417,471 |
| | 408,547 |
| |
| Corporate Other | | Corporate Other | | (1,122,889) | | | (662,032) | | | (866,196) | |
| Total operating income (loss) | | Total operating income (loss) | | (613,438) | | | 236,770 | | | (25,017) | |
| Interest expense, net | | (34,538 | ) | | (26,434 | ) | | (14,628 | ) | Interest expense, net | | (47,259) | | | (21,240) | | | $ | (33,568) | |
| Other expense, net | | (3,614 | ) | | (2,755 | ) | | (7,234 | ) | |
| Other income (expense), net | | Other income (expense), net | | 168,153 | | | (5,688) | | | $ | (9,203) | |
| Income (loss) before income taxes | | $ | (10,309 | ) | | $ | 388,282 |
| | $ | 386,685 |
| Income (loss) before income taxes | | $ | (492,544) | | | $ | 209,842 | | | $ | (67,788) | |
The operating income (loss) information for Corporate Other presented above includes the impact of all restructuring and impairment related charges related to each of the Company's 2017 restructuring plan2020 and 2018 restructuring plan. Charges incurred and expected to be incurred by segment in connection with each of the respective restructuring plansplans. These unallocated charges are as follows:
| | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2020 | | 2018 |
| Unallocated restructuring, impairment and restructuring related charges | | | |
| North America related | $ | 397,616 | | | $ | 115,687 | |
| EMEA related | 14,388 | | | 34,699 | |
| Asia-Pacific related | 6,771 | | | 1 | |
| Latin America related | 14,915 | | | 27,107 | |
| Connected Fitness related | 4,694 | | | 1,505 | |
| Corporate Other related | 21,967 | | | 24,950 | |
| Total unallocated restructuring, impairment and restructuring related charges | $ | 460,351 | | | $ | 203,949 | |
|
| | | | | | | | |
(In thousands) | | Costs Incurred During the Year Ended December 31, 2017 (1) | | Costs to be Incurred During the Year Ending December 31, 2018 |
| Costs recorded in restructuring and impairment charges: | | | | |
| North America | | $ | 63,170 |
| | $ | 109,000 |
|
| EMEA | | 1,525 |
| | 6,000 |
|
| Asia-Pacific | | 38 |
| | — |
|
| Latin America | | 11,506 |
| | 18,000 |
|
| Connected Fitness | | 47,810 |
| | — |
|
| Total costs recorded in restructuring and impairment charges | | $ | 124,049 |
| | $ | 133,000 |
|
(1) This table excludes additional non-cashThere were 0 restructuring charges of $5.1 million associated with the reduction of inventory outside of current liquidation channels in line with the 2017 restructuring plan.
incurred during Fiscal 2019.
Long-lived assets are primarily composed of Property and equipment, net.Equipment, net and ROU assets. The Company's long-lived assets by geographic area were as follows:
| | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2020 | | 2019 |
| Long-lived assets | | | |
| United States | $ | 896,789 | | | $ | 1,051,089 | |
| Canada | 23,122 | | | 23,268 | |
| Total North America | 919,911 | | | 1,074,357 | |
| Other foreign countries | 275,427 | | | 309,722 | |
| Total long-lived assets | $ | 1,195,338 | | | $ | 1,384,079 | |
Disaggregation of Revenue
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of net revenues and cash flows are affected by economic factors for the fiscal periods presented.
|
| | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| 2017 | | 2016 | |
| Long-lived assets | | | | | |
| United States | | $ | 763,477 |
| | $ | 728,841 |
| |
| Canada | | 14,077 |
| | 11,126 |
| |
| Total North America | | 777,554 |
| | 739,967 |
| |
| Other foreign countries | | 108,220 |
| | 64,244 |
| |
| Total long lived assets | | $ | 885,774 |
| | $ | 804,211 |
| |
Net revenues by product category are as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Apparel | $ | 2,882,562 | | | $ | 3,470,285 | | | $ | 3,464,120 | |
| Footwear | 934,333 | | | 1,086,551 | | | 1,063,175 | |
| Accessories | 414,082 | | | 416,354 | | | 422,496 | |
| Net Sales | 4,230,977 | | | 4,973,190 | | | 4,949,791 | |
| License revenues | 105,779 | | | 138,775 | | | 124,785 | |
| Connected Fitness | 135,813 | | | 136,378 | | | 120,357 | |
| Corporate Other (1) | 2,098 | | | 18,789 | | | (1,748) | |
| Total net revenues | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | 5,193,185 | |
|
| | | | | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Apparel | | $ | 3,287,121 |
| | $ | 3,229,142 |
| | $ | 2,801,062 |
|
| Footwear | | 1,037,840 |
| | 1,010,693 |
| | 677,744 |
|
| Accessories | | 445,838 |
| | 406,614 |
| | 346,885 |
|
| Total net sales | | 4,770,799 |
| | 4,646,449 |
| | 3,825,691 |
|
| Licensing revenues | | 116,575 |
| | 99,849 |
| | 84,207 |
|
| Connected Fitness | | 89,179 |
| | 80,447 |
| | 53,415 |
|
| Intersegment Eliminations | | — |
| | (1,410 | ) | | — |
|
| Total net revenues | | $ | 4,976,553 |
| | $ | 4,825,335 |
| | $ | 3,963,313 |
|
Net revenues inby distribution channel are as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Wholesale | $ | 2,383,353 | | | $ | 3,167,625 | | | $ | 3,141,983 | |
| Direct-to-Consumer | 1,847,624 | | | 1,805,565 | | | 1,807,808 | |
| Net Sales | 4,230,977 | | | 4,973,190 | | | 4,949,791 | |
| License revenues | 105,779 | | | 138,775 | | | 124,785 | |
| Connected Fitness | 135,813 | | | 136,378 | | | 120,357 | |
| Corporate Other (1) | 2,098 | | | 18,789 | | | (1,748) | |
| Total Net Revenues | $ | 4,474,667 | | | $ | 5,267,132 | | | $ | 5,193,185 | |
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the United States were $3,626.6 million, $3,843.7 million, and $3,317.0 million forCompany's operating segments, but managed through the years ended December 31, 2017, 2016 and 2015, respectively.Company's central foreign exchange risk management program.
17.20. Unaudited Quarterly Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Quarter Ended (unaudited) | | Year Ended December 31, |
| March 31, | | June 30, | | September 30, | | December 31, | |
| 2020 | | | | | | | | | | |
| Net revenues | | $ | 930,240 | | | $ | 707,640 | | | $ | 1,433,021 | | | $ | 1,403,766 | | | $ | 4,474,667 | |
| Gross profit | | 430,984 | | | 349,169 | | | 686,320 | | | 693,622 | | | 2,160,095 | |
| Income (loss) from operations | | (558,180) | | | (169,674) | | | 58,570 | | | 55,846 | | | (613,438) | |
| Net income (loss) | | $ | (589,681) | | | $ | (182,896) | | | $ | 38,946 | | | $ | 184,454 | | | $ | (549,177) | |
| Basic net income (loss) per share of Class A, B and C common stock | | $ | (1.30) | | | $ | (0.40) | | | $ | 0.09 | | | $ | 0.41 | | | $ | (1.21) | |
| Diluted net income (loss) per share of Class A, B and C common stock | | $ | (1.30) | | | $ | (0.40) | | | $ | 0.09 | | | $ | 0.40 | | | $ | (1.21) | |
| | | | | | | | | | |
| 2019 | | | | | | | | | | |
| Net revenues | | $ | 1,204,722 | | | $ | 1,191,729 | | | $ | 1,429,456 | | | $ | 1,441,225 | | | $ | 5,267,132 | |
| Gross profit | | 544,787 | | | 554,321 | | | 689,898 | | | 681,527 | | | 2,470,533 | |
| Income (loss) from operations | | 35,259 | | | (11,482) | | | 138,920 | | | 74,073 | | | 236,770 | |
| Net income (loss) | | $ | 22,477 | | | $ | (17,349) | | | $ | 102,315 | | | $ | (15,304) | | | $ | 92,139 | |
| Basic net income (loss) per share of Class A, B and C common stock | | $ | 0.05 | | | $ | (0.04) | | | $ | 0.23 | | | $ | (0.03) | | | $ | 0.20 | |
| Diluted net income (loss) per share of Class A, B and C common stock | | $ | 0.05 | | | $ | (0.04) | | | $ | 0.23 | | | $ | (0.03) | | | $ | 0.20 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Quarter Ended (unaudited) | | Year Ended December 31, |
| March 31, | | June 30, | | September 30, | | December 31, | |
| 2017 | | | | | | | | | | |
| Net revenues | | $ | 1,117,331 |
| | $ | 1,088,245 |
| | $ | 1,405,615 |
| | $ | 1,365,362 |
| | $ | 4,976,553 |
|
| Gross profit | | 505,423 |
| | 498,246 |
| | 645,350 |
| | 589,704 |
| | 2,238,723 |
|
| Income (loss) from operations | | 7,536 |
| | (4,785 | ) | | 62,180 |
| | (37,088 | ) | | 27,843 |
|
| Net income (loss) | | (2,272 | ) | | (12,308 | ) | | 54,242 |
| | (87,922 | ) | | (48,260 | ) |
| Net income (loss) available to all stockholders | | $ | (2,272 | ) | | $ | (12,308 | ) | | $ | 54,242 |
| | $ | (87,922 | ) | | $ | (48,260 | ) |
| Basic net income (loss) per share of Class A and B common stock | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | 0.12 |
| | $ | (0.20 | ) | | $ | (0.11 | ) |
| Basic net income (loss) per share of Class C common stock | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | 0.12 |
| | $ | (0.20 | ) | | $ | (0.11 | ) |
| Diluted net income (loss) per share of Class A and B common stock | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | 0.12 |
| | $ | (0.20 | ) | | $ | (0.11 | ) |
| Diluted net income (loss) per share of Class C common stock | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | 0.12 |
| | $ | (0.20 | ) | | $ | (0.11 | ) |
| | | | | | | | | | | |
| 2016 | | | | | | | | | | |
| Net revenues | | $ | 1,047,702 |
| | $ | 1,000,783 |
| | $ | 1,471,573 |
| | $ | 1,305,277 |
| | $ | 4,825,335 |
|
| Gross profit | | 480,636 |
| | 477,647 |
| | 698,624 |
| | 583,704 |
| | 2,240,611 |
|
| Income from operations | | 34,883 |
| | 19,378 |
| | 199,310 |
| | 163,900 |
| | 417,471 |
|
| Net income | | 19,180 |
| | 6,344 |
| | 128,225 |
| | 103,230 |
| | 256,979 |
|
Adjustment payment to Class C
capital stockholders | | — |
| | 59,000 |
| | — |
| | — |
| | 59,000 |
|
| Net income (loss) available to all stockholders | | 19,180 |
| | (52,656 | ) | | 128,225 |
| | 103,230 |
| | 197,979 |
|
| Basic net income (loss) per share of Class A and B common stock | | $ | 0.04 |
| | $ | (0.12 | ) | | $ | 0.29 |
| | $ | 0.24 |
| | $ | 0.45 |
|
| Basic net income (loss) per share of Class C common stock | | $ | 0.04 |
| | $ | 0.15 |
| | $ | 0.29 |
| | $ | 0.24 |
| | $ | 0.72 |
|
| Diluted net income (loss) per share of Class A and B common stock | | $ | 0.04 |
| | $ | (0.12 | ) | | $ | 0.29 |
| | $ | 0.23 |
| | $ | 0.45 |
|
| Diluted net income (loss) per share of Class C common stock | | $ | 0.04 |
| | $ | 0.15 |
| | $ | 0.29 |
| | $ | 0.23 |
| | $ | 0.71 |
|
Basic and diluted net income (loss) per share are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not equal the total for the year.
|
| | | | |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
| | | | |
| ITEM 9A. | 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. The Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, as stated in their report which appears herein.
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 onin July 5, 2017, in our North America, EMEA, and Connected Fitness operations. The second phase of this implementation became operational in April of 2019 in China and South Korea. The third and final phase of this implementation became operational in April of 2020 in Mexico. We believe the implementation of the systemsthis system and related changes to internal controls will enhance our overall internal controls over financial reporting. We also believe the necessary steps have been takenexpect 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 changessee enhancements to our processes and proceduresglobal systems, which in turn, result in changes to our internal control over financial reporting. While we expect FMSwill then continue to strengthen our internal controls over financial controlsreporting by automating certainselect manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitororganization. We believe that our robust assessment provides effective global coverage for key control activities that support our internal controls as each of the affected areas evolve.over financial reporting conclusion. For a discussion of risks related to the implementation of new systems,the information technology system, see our Risk Factors in Part I, Item 1A - "Risk Factors - Risks Related1A.
We have assessed the impact on changes to Our Business - Risksour internal controls over financial reporting, and uncertainties associated with the implementation of information systems may negatively impact our business."
Thereconclude that there have been no 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 have materially affected, or that are reasonably likely to materially affect our internal controlcontrols over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that a significant number of our employees are working remotely due to the COVID-19 pandemic. We continue to monitor and assess impacts of the COVID-19 pandemic on our controls in order to minimize the impact on the design and operating effectiveness of our controls.
|
| | | | |
| ITEM 9B. | OTHER INFORMATION |
None.
On February 26, 2018, Karl-Heinz (Charlie) Maurath, our Chief Revenue Officer, notified us of his decision to retire, effective March 31, 2018.
Amendment to Material Contract
On February 22, 2018, we entered into Amendment No. 4 to our existing Credit Agreement, originally dated May 29, 2014, by and among Under Armour, Inc. as borrower, JPMorgan Chase Bank, N.A., as administrative agent and the other lenders party thereto, as amended (the “Credit Agreement”). The fourth amendment to the Credit Agreement (the “Amendment”) modified the definitions of “consolidated EBITDA” and “consolidated total indebtedness” used in the Credit Agreement, which are utilized to calculate our compliance with certain covenants set forth set forth in the Credit Agreement, including our consolidated leverage ratio covenant. The Credit Agreement requires that the ratio of our trailing four-quarter consolidated total indebtedness to consolidated EBITDA be no greater than 3.25 to 1.00. The Amendment further provides that for the four quarters ended June 30, 2018, our consolidated leverage ratio will not exceed 3.75 to 1.00, and for the four quarters ended September 30, 2018, 4.00 to 1.00. Beginning with the four quarters ended December 31, 2018 and thereafter, the consolidated leverage ratio requirement will return to 3.25 to 1.00. The other material terms of the Credit Agreement, as amended, remain unchanged.
In the ordinary course of their business, the financial institutions party to the Amendment and certain of their affiliates have in the past and/or may in the future engage in investment and commercial banking or other transactions of a financial nature with us or our affiliates, including the provision of certain advisory services and the making of loans to the Company and its affiliates in the ordinary course of their business for which they will receive customary fees or expenses.
The foregoing does not constitute a complete summary of the terms of the Amendment or the Credit Agreement and reference is made to the complete text of the Amendment, which is filed as Exhibit 10.05 to this Annual Report on Form 10-K and incorporated by reference herein, as well as the text of the Credit Agreement and other amendments thereto, which are also filed as Exhibits to this Annual Report on Form 10-K.
PART III
|
| | | | |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item regarding directors is incorporated herein by reference from the 20182021 Proxy Statement, under the headings “NOMINEES FOR ELECTION AT THE ANNUAL MEETING,“Election of Directors,” “CORPORATE GOVERNANCE AND RELATED MATTERS:“Corporate Governance and Related Matters: Audit Committee” and “SECTION“Delinquent Section 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.Reports.” Information required by this Item regarding executive officers is included under “Executive Officers of the Registrant”Officers” in Part 1 of this Form 10-K.
Code of Ethics
We have a written code of ethics and business conduct in place that applies to all our employees, including our principal executive officer, principal financial officer, and principal accounting officer and controller. A copy of our code of ethics and business conduct is available on our website: www.uabiz.com/investors.cfm.https://about.underarmour.com/investor-relations/governance. We are required to disclose any change to, or waiver from, our code of ethics and business policy for our senior financial officers. We intend to use our website as a method of disseminating this disclosure as permitted by applicable SEC rules.
|
| | | | |
| ITEM 11. | INFORMATION ABOUT OUR EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference herein from the 20182021 Proxy Statement under the headings “CORPORATE GOVERNANCE AND RELATED MATTERS:“Corporate Governance and Related Matters - Compensation of Directors,” and “EXECUTIVE COMPENSATION.“Executive Compensation.”
|
| | | | |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference herein from the 20182021 Proxy Statement under the heading “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF SHARES.“Security Ownership of Management and Certain Beneficial Owners of Shares.” Also refer to Item 5 of this Annual Report on Form 10-K, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
|
| | | | |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference herein from the 20182021 Proxy Statement under the heading “TRANSACTIONS WITH RELATED PERSONS”“Transactions with Related Persons" and “CORPORATE GOVERNANCE AND RELATED MATTERS—“Corporate Governance and Related Matters—Independence of Directors.”
|
| | | | |
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated by reference herein from the 20182021 Proxy Statement under the heading “INDEPENDENT AUDITORS.“Independent Auditors.”
PART IV
|
| | | | |
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
a. The following documents are filed as part of this Form 10-K:
| | | | | |
| 1. Financial Statements: | |
| |
1. Financial Statements: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| 2. Financial Statement Schedule | |
| |
| |
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
The following exhibits are incorporated by reference or filed herewith. References to any Form 10-K of the Company below are to the Annual Report on Form 10-K for the related fiscal year. For example, references to the Company’s 20162019 Form 10-K are to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
|
| | | | | | | |
Exhibit No. | | |
| | |
| | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.01 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2016)June 30, 2020).
|
| |
| | Articles Supplementary setting forth the terms of the Class C Common Stock, dated June 15, 2015 (incorporated by reference to Appendix F to the Preliminary Proxy Statement filed by the Company on June 15, 2015).
|
| | |
| | Third Amended and Restated By-LawsBylaws of Under Armour, Inc. (incorporated by reference to Exhibit
3.01 of the Company’s Current Report on Form 8-K filed June 27, 2017)on February 10, 2021).
|
| |
| | Warrant Agreement between the Company and NFL Properties LLC dated as of August 3, 2006 (incorporated by reference to Exhibit 4.1Description of the Company’s Current Report on Form 8-K filed August 7, 2006).
|
| | Securities Registered Pursuant to Section 12 of the Exchange Act. |
| | Indenture, dated as of June 13, 2016, between the Company and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on June 13, 2016).
|
| | |
| | First Supplemental Indenture, dated as of June 13, 2016, relating to the 3.250% Senior Notes due 2026, between the Company and Wilmington Trust, National Association, as trustee, and the Form of 3.250% Senior Notes due 2026 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on June 13, 2016).
|
| | |
| | TermsIndenture, dated as of SettlementMay 27, 2020, relating to the Company’s 1.50% Convertible Senior Notes due 2024, between the Company and Wilmington Trust, National Association, as Trustee and the Form of In re: Under Armour Shareholder Litigation, Case No, 24-C-15-003241.50% Convertible Senior Notes due 2024 (incorporated by reference fromto Exhibit 4.24.1 of the Company's Registration StatementCompany’s Current Report on Form 8-A8-K filed on March 21, 2016)May 28, 2020).
|
| |
| | Credit Agreement, dated May 29, 2014,March 8, 2019, by and among the Company,Under Armour, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent, PNC Bank, National Association, as Syndication Agent, Bank of America, N.A. SunTrust Bank and Wells Fargo Bank, National Association as Co-Documentation Agentssyndication agent and the other lenders and arrangers party thereto (the “Credit Agreement”) (incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed June 2, 2014).
|
| |
| | Amendment No. 1 to the Credit Agreement, dated as of March 17, 2015 (incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed March 17, 2015)8, 2019). |
| | | | | | | | |
No. | | |
| | Amendment No. 21, dated May 12, 2020, to the Amended and Restated Credit Agreement, dated as of January 22, 2016 (incorporatedMarch 8, 2019, by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed January 22, 2016). |
| | |
| | Amendment No. 3 to the Credit Agreement, dated as of June 7, 2016 (incorporated by reference to Exhibit 10.01 of the Company’s Quarterly Report on Form 10-Q filed on August 3, 2016). |
| | |
| | Amendment No. 4 to the Credit Agreement, dated as of February 22, 2018. |
| | |
| | and among Under Armour, Inc. Executive Incentive Plan, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed on May 6, 2013)12, 2020).* |
| | |
| | Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”)Form of Capped Call Confirmation (incorporated by reference to Exhibit 10.1510.1 of the Company’s 2007Current Report on Form 10-K)8-K filed on May 28, 2020).* |
| | |
| | Amendment OneUnder Armour, Inc. Amended and Restated Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.01 of the Company's Quarterly Report on Form 10-Q filed for the quarterly period ending September 30, 2020).* |
| | Under Armour, Inc. Amended and Restated Deferred Compensation Plan (incorporated by reference to Exhibit 10.1410.10 of the Company’s 20102018 Form 10-K).* |
| | |
| | Amendment Two to the Deferred Compensation Plan (incorporated by reference to Exhibit 10.03 of the Company’s 2016 Form 10-K).* |
| | |
| | Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.04 of the Company’s 2016 Form 10-K).* |
| | |
| | Under Armour, Inc. SecondThird Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the "2005 Plan"“2005 Plan”) (incorporated by reference to Exhibit 4.510.01 of the Company’s Registration StatementQuarterly Report on Form S-8 (Registration No. 333-210844)10-Q filed on April 20, 2016)August 1, 2019).* |
| | |
| | Form of Non-Qualified Stock Option Grant Agreement under the 2005 Plan between the Company and Kevin Plank.* |
| | |
| | Form of Non-Qualified Stock Option Grant Agreement under the 2005 Plan between the Company and Kevin Plank (incorporated by reference to Exhibit 10.06 of the Company’s 20162019 Form 10-K).* |
| | |
|
| | |
Exhibit
No. | | |
| | Form of RestrictedNon-Qualified Stock UnitOption Grant Agreement under the 2005 Plan.Plan between the Company and Kevin Plank (incorporated by reference to Exhibit 10.13 of the Company’s 2018 Form 10-K).* |
| | |
| | Form of Restricted Stock Unit Grant Agreement under the 2005 Plan (incorporated by reference to Exhibit 10.0710.08 of the Company’s 20162019 Form 10-K).* |
| | |
| | Form of Performance-BasedRestricted Stock OptionUnit Grant Agreement under the 2005 Plan between(incorporated by reference to Exhibit 10.14 of the Company and Kevin Plank.Company's 2017 Form 10-K).* |
| | |
| | Form of Performance-Based Stock Option Grant Agreement under the 2005 Plan (incorporated by reference to Exhibit 10.0810.16 of the Company’s 20162017 Form 10-K).* |
| | |
| | Form of Performance-Based Restricted Stock Option GrantUnit Agreement under the 2005 Plan (incorporated by reference to Exhibit 10.0910.19 of the Company’s 20142017 Form 10-K).* |
| | |
| | Form of Performance-Based Restricted Stock Unit Grant Agreement under the 2005 Plan.* |
| | |
| | Form of Performance-Based Restricted Stock Unit Grant Agreement under the 2005 Plan (incorporated by reference to Exhibit 10.09 of the Company’s 2016 Form 10-K).* |
| | |
| | Form of Performance-Based Restricted Stock Unit Grant Agreement under the 2005 Plan (incorporated by reference to Exhibit 10.11 of the Company’s 2014 Form 10-K).* |
| | |
| | Form of Performance-Based Restricted Stock Unit Grant Agreement under the 2005 Plan (incorporated by reference to Exhibit 10.12 of the Company’s 2013 Form 10-K).* |
| |
| | Supplement to Restricted Stock Unit Grant Agreements (incorporated by reference to Exhibit 10.01 of the Company’s Form 10-Q for the quarterly period ended September 30, 2014).* |
| | |
| | Form of Performance-Based Restricted Stock Unit Grant Agreement for International Employees under the 2005 Plan (incorporated by reference to Exhibit 10.12 of the Company’s 2014 Form 10-K).* |
| | |
| | Form of Performance-Based Restricted Stock Unit Grant Agreement for International Employees under the 2005 Plan (incorporated by reference to Exhibit 10.13 of the Company’s 2013 Form 10-K).* |
| | |
| | Form of Employee Confidentiality, Non-Competition and Non-Solicitation Agreement by and between certain executives andof the Company (incorporated by reference to Exhibit 10.11 of the Company’s 2016 Form 10-K).* |
| | |
| | Under Armour, Inc. 20172021 Non-Employee Director Compensation Plan (the “Director Compensation Plan”) (incorporated by reference to Exhibit 10.01 of the Company's Form 10-Q for the quarterly period ended March 31, 2017).* |
| | |
| | Form of Initial Restricted Stock Unit Grant under the Director Compensation Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed June 6, 2006).* |
| | |
| | Form of Annual Stock Option Award under the Director Compensation Plan (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed June 6, 2006).* |
| |
| | Form of Annual Restricted Stock Unit Grant under the Director Compensation Plan (incorporated by reference to Exhibit 10.6 of the Company’s Form 10-Q for the quarterly period ended June 30, 2011).* |
| | |
| | Under Armour, Inc. 2006 Non-Employee Director Deferred Stock Unit Plan (the “Director DSU Plan”) (incorporated by reference to Exhibit 10.02 of the Company’s Form 10-Q for the quarterly period ended March 31, 2010).* |
| | |
| | Amendment One to the Director DSU Plan (incorporated by reference to Exhibit 10.23 of the Company’s 2010 Form 10-K).* |
| | |
| | Amendment Two to the Director DSU Plan (incorporated by reference to Exhibit 10.02 of the Company’s Form 10-Q for the quarterly period ended June 30, 2016).* |
| | |
| | Amendment Three to the Director DSU Plan (incorporated by reference to Exhibit 10.22 of the Company’s 2019 Form 10-K).* |
| | Employee Confidentiality, Non-Competition and Non-Solicitation Agreement by and between Patrik Frisk and the Company (incorporated by reference to Exhibit 10.01 of the Company’s Form 10-Q for the quarterly period ended March 31, 2018).* |
| | Confidentiality, Non-Competition and Non-Solicitation Agreement, dated June 15, 2015, between the Company and Kevin Plank (the “Plank Non-Compete Agreement”) (incorporated by reference to Appendix E to the Preliminary Proxy Statement filed by Under Armour, Inc. on June 15, 2015). |
| | |
| | First Amendment to the Plank Non-Compete Agreement, dated April 7, 2016 (incorporated by reference to Exhibit 10.03 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016). |
| | |
| | Statement re: computationList of ratio of earnings to fixed charges. |
| | Subsidiaries. |
| | ListConsent of Subsidiaries.PricewaterhouseCoopers LLP. |
| | Section 302 Chief Executive Officer Certification. |
|
| | | | | | | |
Exhibit No. | | |
| |
| | Consent of PricewaterhouseCoopers LLP. |
| | |
| | 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 | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| 101.SCH | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
___________
|
| | | | |
| * | Management contract or a compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 15(b) of Form 10-K. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | |
| UNDER ARMOUR, INC. |
| | |
| By: | | /s/ KEVIN A. PLANKATRIK FRISK |
| | | Kevin A. PlankPatrik Frisk |
| | | Chairman of the Board of Directors and Chief Executive Officer and President |
Dated: February 28, 201824, 2021
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | | | | | |
/s/ PATRIK FRISK | | Chief Executive Officer, President and Director (principal executive officer) |
| Patrik Frisk | |
| | |
/s/ KEVIN A. PLANK
| | Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) |
Kevin A. Plank | | |
| | |
/s/ DAVID E. BERGMAN | | Chief Financial Officer (principal accounting and financial officer) |
| David E. Bergman | | |
| | |
/s/ ADITYA MAHESHWARI | | Controller and Chief Accounting Officer (principal accounting officer) |
| Aditya Maheshwari | | |
| | |
/s/ KEVIN A. PLANK | | Executive Chairman and Brand Chief |
| Kevin A. Plank | | |
| | |
/s/ GEORGE W. BODENHEIMER | | Director |
| George W. Bodenheimer | | |
| | |
/s/ DOUGLAS E. COLTHARP | | Director |
| Douglas E. Coltharp | | |
| | |
/s/ JERRI L. DEVARD | | Director |
| Jerri L. DeVard | | |
| | |
/s/ MOHAMED A. EL-ERIAN | | Director |
| Mohamed A. El-Erian | | |
| | |
/s/ KAREN W. KATZ | | Director |
| Karen W. Katz | | |
| | |
/s/ A.B. KRONGARDWESTLEY MOORE | | Director |
A.B. Krongard Westley Moore | | |
| | |
/s/ WILLIAM R. MCDERMOTTERIC T. OLSON | | Director |
William R. McDermottEric T. Olson | | |
| | |
/s/ ERIC T. OLSONHARVEY L. SANDERS | | Director |
Eric T. Olson | | |
| | |
/s/ HARVEY L. SANDERS
| | Director |
| Harvey L. Sanders | | |
| | |
Dated: February 28, 201824, 2021
Schedule II
Valuation and Qualifying Accounts
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Write-Offs Net of Recoveries | | Balance at End of Year |
| Allowance for doubtful accounts | | | | | | | | |
| For the year ended December 31, 2020 | | $ | 15,082 | | | $ | 10,456 | | | $ | (5,188) | | | $ | 20,350 | |
| For the year ended December 31, 2019 | | 22,224 | | | (4,066) | | | (3,076) | | | 15,082 | |
| For the year ended December 31, 2018 | | 19,712 | | | 23,534 | | | (21,022) | | | 22,224 | |
| Sales returns and allowances | | | | | | | | |
| For the year ended December 31, 2020 | | $ | 98,652 | | | $ | (431,253) | | | $ | 426,780 | | | $ | 94,179 | |
| For the year ended December 31, 2019 | | 136,734 | | | 180,124 | | | (218,206) | | | 98,652 | |
| For the year ended December 31, 2018 | | 190,794 | | | 247,939 | | | (301,999) | | | 136,734 | |
| Deferred tax asset valuation allowance | | | | | | | | |
| For the year ended December 31, 2020 | | $ | 101,997 | | | $ | 291,887 | | | $ | (5,453) | | | $ | 388,431 | |
| For the year ended December 31, 2019 | | 72,710 | | | 31,926 | | | (2,639) | | | 101,997 | |
| For the year ended December 31, 2018 | | 73,544 | | | 21,221 | | | (22,055) | | | 72,710 | |
|
| | | | | | | | | | | | | | | | |
| Description | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Write-Offs Net of Recoveries | | Balance at End of Year |
| Allowance for doubtful accounts | | | | | | | | |
| For the year ended December 31, 2017 | | $ | 11,341 |
| | $ | 9,520 |
| | $ | (1,149 | ) | | $ | 19,712 |
|
| For the year ended December 31, 2016 | | 5,930 |
| | 23,575 |
| | (18,164 | ) | | 11,341 |
|
| For the year ended December 31, 2015 | | 3,693 |
| | 2,951 |
| | (714 | ) | | 5,930 |
|
| Sales returns and allowances | | | | | | | | |
| For the year ended December 31, 2017 | | $ | 121,286 |
| | $ | 285,474 |
| | $ | (215,966 | ) | | $ | 190,794 |
|
| For the year ended December 31, 2016 | | 72,615 |
| | 179,445 |
| | (130,774 | ) | | 121,286 |
|
| For the year ended December 31, 2015 | | 52,973 |
| | 145,828 |
| | (126,186 | ) | | 72,615 |
|
| Deferred tax asset valuation allowance | | | | | | | | |
| For the year ended December 31, 2017 | | $ | 37,969 |
| | $ | 40,282 |
| | $ | (4,707 | ) | | $ | 73,544 |
|
| For the year ended December 31, 2016 | | 24,043 |
| | 13,951 |
| | (25 | ) | | 37,969 |
|
| For the year ended December 31, 2015 | | 15,550 |
| | 8,493 |
| | — |
| | 24,043 |
|
